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 â€œTobin Taxâ€ 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. Iâ€™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 doesnâ€™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 â€œin and outâ€ 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 â€“ or some loose co-ordination of national initiatives. The lionâ€™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 â€“ 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 â€œover the counter.â€
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.