Some call it the Robin Hood Tax, others call it the Financial Transaction Tax, others just call it a really good idea. This tiny tax could take $400,000,000,000 out of the pockets of the bankers that got rich by crashing the economy, and use that money to stop domestic service cuts and help the people who are suffering the most from climate change, but did the least to cause it. This 0.05% tax would also help to stabilize the economy, by preventing high speed trading (done mostly by computers all on their own). Help us make this piece of common sense into a common practice.
What is a financial transaction tax (FTT)? FTTs are a small tax on the purchase/sale or transfer of the four main financial asset classes: equities, bonds, foreign exchange and their derivatives. The European Commission proposes a tax rate of 0.1% on equities and bonds and 0.01% on derivatives. The Leading Group suggests a 0.005% tax on foreign exchange.
Why an FTT and why now? The costs of the financial crisis have been huge. As of the end of December 2009 the amount spent on bank bail-outs by advanced G-20 economies was equivalent to 6.2% of world GDP – $1,976 billion (IMF, 2010). Yet in Europe and the US, it has been ordinary citizens who have borne the costs with job losses and cuts to public services. In developing countries, who also did nothing to cause the crisis, the cost has been far more severe with funds for health, development, infrastructure and climate change being cut or suspended. The Financial Transaction Tax (FTT) is today a widely discussed policy option that would generate substantial new revenue from the currently under–taxed financial sector – helping to redistribute some of the money from those who caused the financial crisis to those who had the least to do with it but are suffering its effects the most. An EU-wide FTT (excluding currency) would generate €57 billion a year and an FTT covering all asset classes and rolled out across all developed countries would generate almost $300 billion annually. Whichever way you do the calculations we are talking about substantial revenues that could make a real impact on significant development, health and climate change challenges, alongside offsetting the social and economic impact of austerity. Importantly, the FTT would also help to regulate markets, curbing speculative market behavior and short-termism, and instead encourage more sustainable and equitable long-term economic performance. Yet despite this, and the growing international support for the FTT, opponents continue to peddle a series of ‘myths’ concerning its impact. The following key points detailed below can aid discussion and answer questions and help dispel these myths.
1) How would revenue from FTTs be spent?
Country campaigns working for FTTs sometimes differ in emphasis between how exactly they would want revenues to be spent. However, there is broad consensus that revenue raised through an FTT should be spent internationally on combating poverty, climate change and health challenges in addition to protecting public services and jobs at home.
2) FTTs would not be passed on to ordinary people – they would be progressive
The FTT will be paid, first and foremost, by the principal buyers/sellers of financial assets – banks and other financial institutions, such as hedge funds, whose clients are often high-net-worth individuals. Ordinary people, by and large, do not trade assets such as bonds and derivatives and therefore will not experience the impact of an FTT. In contrast, it is businesses, who are constantly trading as opposed to making a one-off purchase as an investment, rather than individuals who will consequently pay the most in tax from an FTT. The greater the frequency of the transactions, the greater the tax bill. Most particularly, the FTT will have an impact on High Frequency Trading (HFT), which is regarded as a good outcome by many economists who believe HFT is disruptive and risky and should either be regulated against or considerably reduced in size. The IMF has studied who will end up paying FTTs, concluding that they would be “quite progressive”. This means they would fall on the richest institutions and individuals in society, in a similar way to capital gains tax. This is in complete contrast to VAT, or sales tax, which falls disproportionately on the poorest people.
3) Financial institutions can afford to pay – it is only fair that they pay their share
In 2008, a report by respected research institution, McKinsey, revealed that banks profits per employee are 26 times the average for all other sectors. Before the recession, global hedge fund profits were $300 $600 billion per annum, while bank profits were around $800 billion per annum and expected to double within ten years. It is also worth noting that the financial sector is currently under taxed. For example, according to the European Commission, the sector enjoys a tax advantage worth approximately €18 billion a year due to its exemption from VAT. The huge profits of the financial sector, coupled with its tax advantage, is one of the reasons the financial sector ought to, and can afford to be, taxed more.
4) FTTs would reduce speculation and casino-style high frequency trading (HFT) – leading to more stable financial markets and higher long-term economic growth.
Some argue that beyond raising lots of cash, FTTs will reduce market volatility by discouraging High Frequency Trading. HFT enables traders to trade ahead of predicted orders and make huge gambles on small changes in product price that exist for only a short period of time. By increasing the costs of speculative trading, a well-designed FTT could reduce this destabilizing effect that HFT has on the market. According to new research by leading economists Stephany Griffiths-Jones and Avinash Persaud, published in March 2012, the stabilising effect of an FTT would help reduce the risk of future crises and lead to significantly higher long-term growth. They conclude that an EU wide FTT would increase GDP by 0.25%.
5) FTTs do not need to be global to work – ftts are commonplace and can be implemented unilaterally or by a coalition of the willing, without an exodus of financial institutions
Unilateral FTTs already exist in countries like Brazil, South Africa, India, the United Kingdom and the United States raising substantial amounts of revenue. This proves beyond doubt that unilateral FTTs, with no international agreement, are perfectly feasible in practice. A good example is the UK’s FTT on share transactions, which raises in the region of $5billion for the finance ministry each year without a significant loss of business from the UK. Brazil currently taxes transactions of various assets at varying rates raising $15 billion in 2010. Moreover, in a March 2011 working paper, the IMF confirms that FTTs “do not automatically drive out financial activity to an unacceptable extent”.
6) FTTs would be simple and inexpensive to implement.
FTTs are simple to implement because of the almost complete automation of financial transactions. One of the lessons learnt from the more than 40 FTTs that have been implemented, either permanently or temporarily, around the world is that collection costs are low. For example, the UK government’s FTT on shares (the Stamp Duty) costs only 0.21 pence per pound to collect. In contrast, income tax costs 1.24 pence and corporation tax 0.76 pence per pound collected.
7) Major international organisations and many high profile political and economic leaders support FTTs
The FTT has gained substantial backing over the last two years. Extremely prominent advocates have declared support, not least the founder of Microsoft, philanthropist, Bill Gates, whose report to the G20 Leaders in November 2011, specifically recommended FTTs. Other big names include: George Soros, Al Gore, Ban Ki Moon and Kofi Annan. The FTT was endorsed in 2011 by 1,000 leading economists, including Nobel prize winners Joseph Stiglitz and Paul Krugman, and 1,000 parliamentarians from 30 countries. Momentum built up through 2011 and at the G20 Summit, Argentina, Brazil, France, Germany and South Africa declared their support. Presently, there is a strong initiative for an FTT in Europe. FTT legislation has been tabled by the European Commission (EC) and 9-EU countries are pushing for this to be fast-tracked: France, Germany, Spain, Italy, Portugal, Greece, Austria, Belgium and Finland. France has been prepared to put its money where its mouth is by passing unilateral FTT legislation in February 2012 modelled on the UK’s stamp duty on shares.