Technology | 2009.12.14
Now let's tax transactions | Stephany Griffith-Jones
A currency exchange levy would work politically and morally for a debt-ridden, post-crisis world
A global financial transactions tax may have seemed a utopian dream in the past. This was surprising, given that on a national level many countries have successfully implemented financial transactions taxes. Indeed, one of the most effective to date is the UK stamp duty on transactions of stocks and shares, which has raised significant tax revenue for many decades without reducing significantly the activity of the stock market. Many other countries have implemented similar taxes, either on domestic financial transactions or capital inflows.
Resistance has been greater in the past to an internationally co-ordinated tax on financial transactions, often described as a Tobin tax. However, the mood has changed dramatically since the global financial crisis. Several important players have openly backed it, including the French, German and Brazilian governments; and several parliaments, like Belgium\'s, have passed legislation to facilitate its implementation. Importantly, Adair Turner, chairman of Britain\'s Financial Services Authority, the regulator of the City of London – the world\'s largest foreign exchange market – has openly backed such a tax , as has the FSA chief executive, Hector Sants . Particularly significant is the fact that Gordon Brown clearly supported a global financial transactions tax as a valid option in the lead-up to the recent G20 meeting.
The reasons are clear. First, even a very small tax – say, of 0.005% – on all foreign exchange transactions of the major currencies, would generate a large amount of tax revenue, estimated at over $30bn a year. Governments, especially in developed economies, have vast public deficits and debts as a result of costly bailouts of their financial system and other effects of the crisis. They are therefore keen to raise taxes, especially those that would not be paid by most of their voters. Preliminary studies show that the largest burden of a financial transactions tax would be borne by a very small group of very rich people, who make large investments in institutions such as hedge funds, which trade currencies frequently. For a government like Britain\'s, which in its pre-budget report will have to grapple with the issue of reducing future public deficits in a way that does not hurt ordinary citizens, a global financial transactions tax is an attractive option.
Second, both the private and the public sector have difficulty in funding sufficient investment, particularly after the financial crisis. However, the need to expand finance for investment in low-carbon technology, especially in developing countries, is increasingly urgent. The planet really cannot wait. Providing such additional finance to developing countries for clean technologies would not only slow down climate change directly, it would also facilitate greatly the deal that should be agreed in Copenhagen between developing and developed countries to include meaningful limits on carbon emissions.
To help fulfil both objectives, an international financial transactions tax could be agreed by the governments whose currencies are most widely traded. Half of the proceeds could be kept by the country whose currency is being taxed, to reduce its budget deficit – thus replacing less desirable increases in other taxes or reductions in essential government spending, such as in health or education. The other half of the proceeds could go to an international fund to finance efficient investment in climate change mitigation in developing countries.
A third reason for a financial transactions tax, especially on foreign exchange transactions, is that it is increasingly easy to implement. The greater centralisation and automisation of the exchanges\' and banks\' clearing and settlements systems – as well as the greater standardisation that will imply far more derivatives transactions settled on exchanges after the financial crisis – make the collection of such a tax much easier. It also makes avoidance of payment more difficult and less desirable, as the established settlements system would offer safety for such transactions.
This is a win-win proposal, through which many would gain and very few would lose. It would show that governments can design and adopt rational solutions that favour their citizens, now and in the future. If the financial sector supports such a proposal, it will improve significantly its rather battered image, given the harm it is seen to have caused. An international transactions tax could help restore the trust in markets and governments, now undermined by the global crisis. But above all, it is economically and morally the right thing to do: the international financial transactions tax is clearly an idea whose time has come.
For more information, please visit
http://www.guardian.co.uk/commentisfree/[...]-tax-climate-change-investment
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