The Debate Over a Financial Transactions Tax

The case for a Financial Transactions Tax or FTT has crept in from the margins remarkably quickly. One year ago, the proposal for an internationally co-ordinated “Tobin Tax” on foreign exchange transactions was a dim memory from the early part of the decade. Today, the idea of broadening such a tax to include a far wider range of transactions such as bonds and equities has been endorsed by the top UK financial regulator, Adair Turner; by the governments of Germany and France and many of their European Union colleagues; and even, in a rare social democratic moment, by UK PM Gordon Brown. It is also supported by many international development NGOs and by the International Trade Union Confederation.

The Pittsburgh G20 Summit charged the IMF with looking at how the financial sector might contribute to the cost of financial bailouts, and is holding consultations which might yet put an FTT on the Toronto G20 agenda. I’m not holding my breath given that the idea has been ruled out of hand by US Treasury Secretary Timothy Geithner (and Finance Minister Flaherty), but the adamant opposition of Wall Street and Bay Street and the City of London to taxation and regulation just doesn’t have the same political purchase it it used to. Certainly progressive economists have an opportunity to push a good proposal forward.

The basic idea of a transactions tax is to raise money by levying a low rate of tax (usually put at 0.05 to 0.5%) on financial sector activities which are seen to be of limited utility or even damaging to the real economy. Keynes called for a tax on equities trading to reduce the froth of short-term speculative behaviour which had noting to do with real investment. Tobin wanted to give greater weight to economic fundamentals and to central banks when it came to the setting of interest rates in the world of opportunity for speculation opened up by floating exchange rates. A low transactions tax, it is argued, has little or no impact upon useful, longer term transactions, but limits noise trading and very short-term “in and out” speculation. Progressive economists who have advocated a FTT (notably Dean Baker of CEPR and Robert Pollin of U Mass Amherst) believe that it would reduce speculation and volatility, without interfering with normal and useful activities including stock and currency trading and even hedging for legitimate purposes. That view has been endorsed by Stiglitz and Krugman.

Until quite recently, many countries did tax some financial transactions. The UK still levies a 0.5% tax or stamp duty on equity trades which raises a useful 0.2% of GDP and does not seem to have strangled the golden goose of the City of London. Most proponents think it is possible to levy low taxes even in the face of tax and regulatory arbitrage. But the case for an international co-ordination of transaction taxes in a world of deregulated and competitive financial markets is clearly very strong.

To my mind, there is a strong case for a globally co-ordinated FTT. But there is also a need for a bit more clarity on goals and designs.

It is unclear to me if an internationally co-ordinated FTT means all countries levying the same taxes at the same rates on the same sets of transactions – or some loose co-ordination of national initiatives. The lion’s share of revenues under the first formula would go the to the US and UK which account for the majority of equity and forex trading.

Under any FTT, as with all sin taxes, there will be a tradeoff in setting the rate between revenue generation and discouraging sinful behaviour. The FTT has come up for discussion for the excellent reason is that it is a good way to raise money – effectively levying bank fees on bankers who deserve to be hit for their past and current excesses and to recoup the cost of bailouts. We are on weaker ground to suggest that a very small tax will have a huge impact on speculation and market volatility. It will probably help, but reigning in financial excesses will also require much more government regulation of financial markets.

There is a need for clarity on what an FTT would cover beyond currency, equity and bond trading. To my mind it would be useful to tax commodities markets as well to help curb some of the wild price gyrations we have seen in, for example, the oil markets. It would be useful to tax derivatives trading as well, but that can only be done if all such trading is done through organized markets rather than “over the counter.”

There is also a need for more clarity on where the money should go. The Economic Policy Institute in the US have called for an FTT to fund a new Obama stimulus program. Others want to pre finance past and (potentially) future bank bail outs. Many NGOs see Tobin taxes and FTTs as a means to fund global poverty reduction and climate change initiatives. It might be useful to mobilize around the goal of spending half of the proceeds domestically, and another half internationally.

12 comments

  • Taxing stock trades isn’t a tax wall street idea, it’s a tax main street idea. Anytime you or me want to buy or sell a stock we’ll get SLAMMED with the tax. They say 0.25% is small. It would be if it was on profits. That’s the key, it’s not. It’s on the dollar value of shares bought.

    Want to know how huge this “little” tax is?

    To buy & sell 1000 shares of Walmart, you’d have to pay the government $272.50. That’s on TOP of capital gains tax if you profit. If you lose money, you don’t have to pay capital gains, because there werent’ any gains, but you’d still have to pay $272.50 for the fact that you invested in a stock. That’s outrageously huge.

    Obama, Geithner, Pelosi, & Frank have already gave it thumbs down too. It’s that fringe defazio who brings it up every single year for the past quarter century to get some press. The guy is a joke. He spoke on the floor the other day blasting his own party’s President. LOL

  • I’d love to see your “Main Street”, pearson; does it have gates on either end?

  • Hey JAck, taht is precisely the effect it is supposed to have. If you want to buy Wal-mart shares- you are hoping for a long term pay off- the tax cuts off the short term pay off.

    I hate to break this to you Jack, but an economy based upon speculation, is an economy ready for the dust bin of history. Think of the last 1000 years and tell me any economy that could survive more than a a couple or more decades based upon short term speculative behaviour.

    Now days it is not even the humans that are the trend setters of day traders and other such speculative forces- they are the CPU trading algorithms driving such irrationality.

    How in any stretch of anyones imagination can one posit speculation as a means to survival.

    Sorry but it just is no longer an affordable luxury- having a whole pile of blood sucking entities hanging off the productive wealth generating capacity of our economy.

    Time to pull the teat from the short term speculators mouth before these “investors” do even more damage. Sure the new milk will be a little different tasting but after a long day of long term investments in productive assets actually being at work and producing real outputs, that milk will soon taste all that much better.

    A culture of speculation is a waste and that $275 is not as costly as you think- imagine what the destructive cost of having these short term speculative powers at the helm of decision making over the past couple decades has been. Just look at the public bill they just rang up bailing out financial sectors of across the globe. It is but fictitious value and no society can endure such destruction at the center of the machine.

    paul t.

  • If you have $50,000 of stock to trade $272.50 should be much, unless you are trading it everyday, which it the kind of thing this tax is supposed to discourage.

  • Another way to modify behaviour to encourage long-term holding (for taxable investors, anyway) would be to have a capital gains inclusion rate varying by the amount of time the investment had been held – say 75% for overnight holds, scaling down to 25% for a five-year or longer hold. It wouldn’t help change behaviour for pension funds or hedge funds, though.

  • I think RCP hits it on the head. What we want is to change behaviour or refocus time horizons so that long term holding of any given asset class is encouraged. Something like the tobin tax is a start but as RCP suggests changes to the capital gains tax regime would make more (behavioural) sense. BUT, this would have to bean international accord or it won’t work (the capital gains tax regime that is).

    Unfortunately Flaherty has made it clear he has nothing but an obstructionist agenda for the upcoming g-7: this is not a knock against him per se, given that Finance almost always does the bidding of the CDN banks. Buried all the way up in the northern winter we know popular protest has no chance of re-focussing or re-framing the agenda. And given the head of the BOC is a former G&S man we can almost predict what he is pressing for. The Americans are split as is Europe to some extent.

    So being a gambling man I say what we get is more of the same: the appearance of oversight, a couple of platitudes and a financial sector that is by-and-large addicted to, and rewarded for, short-term, high-risk return masquerading as financial innovation (albeit sold much more conservatively but as destructively structured none-the-less).

    Anyone want to bet against me? The wager is a scotch of my choosing.

  • If I were a drinking man I would put a bottle of Highland Park the best single malt around! But I gave that up years ago, but I do believe you are right, we won’t see much maybe a bit more window dressing than what you suggest but not a lot more. There will be a lot of talk of more drastic behaviour, but it will not happen. In fact I bet if the whole thing melted down again, you still would not see much. Maybe if it melted down two more times, you might see something. So I think the bet would have to focus on – how many more times would the finical sector have to melt down in the say the next 5 years before change would occur that would be meaningful.

    I wonder, it was only just 400 years ago that lending money was almost a criminal activity. No we have people with leveraged investing basically trading with nothing and making lots for doing nothing, and when they lose big they just wait for the public to bail them.

    Only a totalitarian capitalism could justify this and maintain itself without much change.

    Doesn’t seem to matter who you put in “power”, the rules stay the same- a very serious problem for countries declaring themselves democracies.

    So back to the bet- I say the financial sector would have to melt down in a similar manner as in the fall of 2008 twice in the next 5-7 years before any change would be seriously contemplated.

    pt

  • The IMF is looking at this issue, and soliciting input from NGOs:

    “Dear colleagues,

    We are sending you this interesting article, for your information:

    The IMF is requesting comments regarding its work on the financial sector tax. A broad consultation is on the way to receive input from experts and observers, and a series of meetings with CSOs will be planned in the coming weeks.

    Read the whole article: http://www.imf.org/external/np/exr/cs/news/2010/CSO112.htm

    If you have questions about this article or any other IMF topic, please don’t hesitate to contact us.

    With kind regards,

    IMF Civil Society Team
    International Monetary Fund
    700 19th St. NW
    Washington, DC 20431

  • “IMF Civil Society Team”

    Yet another oxymoron.

  • you beat me to it Travis!

    darn.

    Also wanted to add into the mix the Obama plan for big banks in the US. Maybe we will see some reform in the heartland of capital.

    I wonder how the big banks in Canada feel about this focal point of Obama and his thoughts on limiting the size on big banks.

    Does it make Canadian banks nervous?!

    Oh no- I can hear the ground swell again from the Canadian banks- but we weathered that financial meltdown so much better, because we were big banks so why would anybody want to question us?

    I wonder out loud how much we actually sank into these banks ensuring their survival- and I am not counting the ongoing pillaging that the banks do with user fees, that the US banks have simply never been able to harvest as a source of income. However, if I truly were to do a proper accounting, one would have to factor in several billion dollars over a few years that have kept our banks in a quite handsome monthly allowance.

  • “Does it make Canadian banks nervous?!”

    They do not do nervous…smug but never nervous. Why be nervous when finance routinely cow tows, when you write the bank act and have it signed into law pretty much unmolested, and the BOC operates by moral suasion.

    Both Flaherty and Carney (formerly of Goldman Sachs) have indicated they intend a rather obstructionist agenda for the upcoming G7 meeting. I once thought I might be too cynical but it turns out reality is more cynical then I could have ever imagined.

    It is hard not to come to the conclusion that we have a ruling class that is secure and untouchable and a democratic state which is nothing more than the old Marxist functionalist rendering: but a committee of the bourgeoisie. It is bad when when functionalism can come nearly that close to the truth.

  • Round 2:

    Dear colleagues,

    A second round of comments, as of January 24, 2010, has been posted for your information: http://www.imf.org/external/np/exr/consult/2009/index.htm

    The IMF is requesting comments regarding its work on the financial sector tax. A broad consultation is on the way to receive input from experts and observers, and a series of meetings with CSOs will be planned in the coming weeks.

    Read the whole article: http://www.imf.org/external/np/exr/cs/news/2010/CSO112.htm

    If you have questions about this article or any other IMF topic, please don’t hesitate to contact us.

    With kind regards,

    IMF Civil Society Team
    International Monetary Fund
    700 19th St. NW
    Washington, DC 20431
    USA
    Tel: +1-202-623-9400
    Fax: +1-202-623-6220
    Email: ngoliaison@imf.org
    Web: http://www.imf.org/civilsociety

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