Tobin or not to bin? Gordon Brown’s apparently sudden conversion to supporting a tax on financial transactions – initially proposed by James Tobin – has, if nothing else, put new energy into the related debates about the banking sector, paying off the costs of the economic crunch, and financing basic social needs. But will it fly? And should it? There are several strong reasons why but there is a negative side that we also need to attend to.
The basic idea is a tax on each international financial transaction. James Tobin’s original notion was to use the tax as one way to moderate financial speculation after the value of the US dollar was de-linked from gold in 1971. He first proposed a 1 per cent tax. After a time he modified his suggestion to a level of between 0.1 and 0.25 per cent. Today, in some treatments (such as by the UK Trades Union Congress and in a study by the Austrian government) the level is put at 0.05 per cent – i.e., one two-thousandth of the value of the transaction.
To begin with, the aim was to slow down the pace of transactions in the international financial system. It would do that by deterring quick speculative trades. But that’s not on the horizon at 0.5 per cent; nowadays, the key attraction is that it will raise money.
Since unimaginably large sums of money are changing hands in currency speculation each hour, even a tiny fraction of the annual total is very big. A 0.05% tax on UK financial transactions would raise between £30 billion and £100 billion a year. The higher number is from the Austrian study and is the estimated revenue even if the overall value of transactions fell by two-thirds from pre-crunch levels.
So there goes the budget deficit and here comes money to cover the bill for adaptation to climate change in developing countries. A 50-50 split? – why not?
Arguments against are pretty weedy. The knee-jerk reaction from the City – omigod it’ll destroy London – is so over the top , it makes you weep. A tax of 0.05 per cent is not going to destroy London. If the banks are that worried, they could reduce the very high commission fees they charge by one two-thousandth of total transaction costs. They wouldn’t notice the difference.
And the banking world should probably be a bit careful exactly how they make the argument. Except for bankers themselves, nobody thinks they are so very wonderful any more. Many bankers seem to have shrugged off any sense of responsibility for the crash of their sector and the consequences, and are happily greeting the return of good times and big bonuses. The rest of the world has not so easily forgotten. Today, the proposition that if some banking activities were to leave London, that would be good for the country and, indeed, good for the City itself is a notion that many people would find worthy of further discussion.
In case the idea of a 0.05% tax ushering in disaster fails to convince, the next objection is that taxing per transaction is not technically feasible. Rubbish – all transactions are logged electronically; the tax can be levied per transaction, or per hour, or per day. It wouldn’t be hard to deduct 0.05% of the value automatically as soon as (in the same few seconds as) the transaction is finalised.
So having tried to have it both ways by claiming that the Tobin tax is either damaging or impossible, the last objection is a bit more serious. The argument is that the tax is not practicable unless everybody does it everywhere.
A bit more serious – but far from convincing. The first question is whether everybody really does have to do it in order for it work? I think not. Were the EU to agree to do it, that would probably be enough for a critical mass. Yes, some companies might shift operations out of the EU’s jurisdiction, such as to Switzerland where some hedge funds are already re-locating some parts of their staffs previously based in London, or to the US or Asia. But the EU is so big in world trade that there would still be masses of money to be made even with a 1/2000 tax. Bankers would moan but governments outside the EU would soon be looking enviously at the revenues rolling in. They would be much more likely to follow suit than not.
So then, might the EU take the tax up? France and Germany already back it as does Austria. Elsewhere support is not uniform but the UK could offer to allocate, say, 0.005% (one twenty-thousandth) to the EU regional development funds as a sweetener and the other financial centres could follow suit.
So that about wraps up the objections. Another one (sort of) came from the Canadian finance minister who said that in his country they want to lower tax not raise it. Yes but most of that discussion is about direct tax on incomes or indirect tax on sales. This is neither. And in many governments, while raising taxes is not the only way to increase revenue, increased revenue is indeed needed in a big way so as to pay down debt and reduce budget deficits. And though the US administration was reported by the Brown-hating UK press as having slapped the proposal down, that is not actually what was said and not what has happened so far.
Arguments for are pretty obvious. With a barely noticeable effect on the level of activity in the financial marketplace, the revenue rolls in. The more governments that do it the better. There is money to pay off the effects of the recession, invest in adaptation to climate change in developing countries, use on other good purposes, and some to lay aside for a future rainy day so the next time the banking sector does a crash and burn spectacular, the emergency rescue doesn’t impose a heavy burden on national finances and tax-paying citizens.
There are three particularly attractive elements here – and a fourth element that I am sure is attractive to Gordon Brown and his advisers.
1. This is bonus revenue: it will not affect economic activity throughout a country in the way that sales, income, payroll, property or corporate taxes do. So it can be used for things that haven’t previously been understood to be necessary.
2. It is therefore ideal as a way of paying for climate change: I have blogged before on the ill-understood enormity of the bill for adaptation to climate change. One thing I have never understood in the debate about how to finance adaptation has been the emphasis on using carbon trading or other proposals such as a tax on airline and shipping fuels. It’s as if the climate question is a system and you want revenue and expenditure to be all within the system – like a road tax or toll charges that are only used to pay for upkeep of the roads. I see no reason to limit the sources of revenue in that way because I very much doubt that carbon trading will ever raise enough to meet the bills. The one visible attraction of keeping the financing mechanism within the climate system is that it is then cost neutral for taxpayers – but that’s hardly a decisive argument if it doesn’t produce enough money.
And now here with the Tobin tax is an alternative – no burden on the ordinary tax-payer and able to raise more money, more transparently and more efficiently than carbon trading. (That doesn’t mean there is no advantage in carbon trading; we should do it and use the revenue from it but we don’t have to depend on it as the prime source of financing for adaptation.)
3. And it will reconstruct the relationship between the banking sector and citizens because we will at last all see some real social utility in the sector.
And the fourth specifically Gordon Brown type reason is that he has come up with it before the Conservatives. It’s a neat bit of intra-UK politics. If the Conservatives oppose this tax, they will be vulnerable to the charge that they are cosying up to their friends in the City; on the other hand, agreeing to the tax will mean the Conservatives following Labour’s lead on an important economic question. There will be a way out of this conundrum; in politics there always is. But for the moment, this easily understood tax could let Brown put the Conservatives on the back foot on a couple of big issues.
But it is not all benefit; there are hidden costs. Exactly the feature of the tax that is so appealing is also a downside: it’s easy money. When governments are not accountable to taxpayers for their state income (e.g., when there are huge oil royalties), they are very often not accountable to their citizens for anything. It wouldn’t go that far in the UK but the very ease of securing the additional revenue might lead to irresponsible behaviour.
The most likely form of irresponsibility in a democracy is to spend too much too quickly. Watch how Norway uses its oil revenue. Very little is used for current spending; when I was living there I remember a newspaper reporting that oil’s contribution to current expenditure in that year’s budget (2002) was equivalent to one hour’s pumping time. But successive governments have had quite difficult case to make that oil money should not be used for today but rather hoarded for tomorrow. Plenty of voters can accept the argument that it would be OK to spend just a bit. But they are Norwegians and very responsible and sober so they don’t ultimately vote on the basis of that temptation. In other countries, voters might not be so social-democratic in their approach or so Lutheran.
It is easy to foresee the Tobin tax being regarded as a cornucopia by every good cause and special interest.
- The political cost of the Tobin tax could be the ultimate market-isation of the political process. Forget values and ideology; the whole thing will be about dishing out the money.
- Meanwhile the social cost could be felt in the deepening inertia of social movements; why bother volunteering to help with anything when the government can crank out another Tobillion or two to address any problem. And wait for the backlash from those social groups that lose out in the shell-out because they lack the networks and articulacy with which to get their point across.
- And the economic cost could be stagflation – inflation from spending too much too quickly on too many projects, or from a populist reduction in personal taxation, and stagnation out of what used to be called ‘Dutch disease’ because of the deadening impact of natural gas revenues on the Dutch economy in the 1970s and 1980s.
The prospect of some or all of these negative consequences of adopting the Tobin tax is, to my mind, a significant risk and the most serious objection to it. Fortunately, I think there is – at least for the EU – a fairly straightforward solution.
Simply lock agreed spending priorities in place through legislation. In the EU, legislation once agreed and absorbed in the acquis communautaire is not easily changed. A multi-national, multi-actor, multi-government agreement is by definition harder to shift than the decision one parliament took last year. This would lead to a good, solid debate about what the priorities should be; then they get carved in stone.
For individual governments it may be harder to have this degree of confidence that a Tobin tax could provide its benefits of increased efficient revenues without serious side-effects. For that reason, it might be best for the whole package to be locked in through international agreement.
The G20 could take the lead in putting it together. Thus, despite their surprise on 7 November, Gordon Brown chose exactly right in putting the idea to the meeting of G20 finance ministers that weekend. Shame the ground wasn’t prepared better but that’s Brown’s way and once the idea is out there, it’s out there and we can all have a think about it.
So, what do we reckon for spending priorities? Given the extraordinary costs of the banking bail-out, and the urgent need to get big money into funding adaptation I go for three:
- One-third of revenue to bring down budget deficits and pay off national debt;
- one-third to put aside in a special fund in case the banking sector crashes again;
- and one-third to contribute to meeting the costs of adaptation to climate change in developing countries.
One last point: If there is extra insurance for future failure by the banking sector, that needs to be matched by increased monitoring and control of the sector’s performance. It is often said that when car safety belts became mandatory in the UK, drivers felt safer and enough drove faster so the number of deaths in motor accidents remained about the same. Insurance to cover banks’ failures could perversely release more irresponsibility by the banking sector. Thus the need for more monitoring and control, which could also be paid for out of the one-third of Tobin revenues devoted to protecting ordinary people from banking failure.