Gary Kent argues that the global financial crisis makes the case for a Tobin Tax even more compelling.
Some ideas are nurtured for decades before they shoot to prominence usually to the surprise of those who have long advocated them. This could be the fate of the Tobin Tax, originally devised by the American Nobel Laureate James Tobin in the early 1970s to rein in short-term speculative trading and “throw sand in the wheels of global finance,” as he put it.
In the 1990s it was embraced by War on Want and others but was generally seen as marginal or utopian. It has now been given an astonishing boost by a very unlikely figure, Adair Turner, the chairman of the Financial Services Authority, in an interview with Prospect. Turner’s comments have caused a furore in the City but he is sticking to his guns.
French President Sarkozy says he will propose global taxes and caps for bank bonuses at the G20 summit later this month.
I first came across Tobin myself in the mid 1990s when the Commons Library was asked how much a tax on the flight of capital could raise – the Conservatives had just introduced a tax on airline passengers. The amount was so much one wouldn’t know what to do with the proceeds. This seemed ideal – a tax on the very few that would raise billions for the many.
To be fair, Tobin’s original aim was the stability of the international trading system rather than raising revenues. Since then, however, there has been a huge upsurge in the scale of international currency speculation, which requires some stabilisation and allows fundraising for socially useful purposes.
Before Mrs Thatcher lifted all exchange controls the traveller was restricted, from memory, to taking just £50 out of the country and this was recorded in their passports.
Now about a trillion dollars is traded every day. Someone once said that this sum was equivalent to the size of the Empire State Building, or maybe several of them.
Some on the left have objected to taxing speculation because it legitimises the trade – a tax on sin – and is reformist tinkering.
However, backers of the tax saw how speculation wreaked massive damage on many economies, regardless of the strength of their fundamentals, and how jobs and livelihoods were capriciously destroyed by currency traders only interested in making a fast buck.
One former trader says that he decided to sell or buy depending on whether the cranes outside his office were pointing east or west. This seems apocryphal but is still a telling indictment and campaigners have sought to minimise it rather than waiting for the system to be overthrown.
The Tobin Tax has had major support in France, including from President Mitterand, and it’s enjoyed support from smaller European governments too. It was also very nearly adopted by the European Parliament.
A delegation from War on Want, plus Labour MPs and MEPs (and myself) visited a Treasury minister to press the case, but they were not then biting.
Over the last decade, the rough edges of the proposal have been smoothed and the idea finessed by War on Want and others in the Stamp Out Poverty coalition, which campaigns for additional sources of finance to bridge the massive funding gap needed to bring the world’s poorest people out of poverty.
They have published research by the economist Rodney Schmidt that advocates a currency transaction tax of 0.005%, which would raise about £20bn a year.
The issue has been kept on the parliamentary agenda for a decade with occasional meetings and motions. Labour MP Dave Anderson tabled a Commons motion on the issue in April which briefly outlines the case for the tax.
“That this House notes that the global financial crisis has made meeting the Millennium Development Goals by 2015 significantly more difficult and requires a substantial new source of revenue; further notes that recent moves to end the secrecy of tax havens signals a willingness to redraw rules in the financial world; recognises that the foreign exchange market has continued to grow and that market volume now exceeds $1,000 trillion a year; believes that it is an anomaly that currency transactions are exempt from taxation since all other parts of the financial market have attracted transaction duties in recent years; endorses the proposal for a currency transaction levy at a rate of 0.005 per cent, which is high enough to yield potential revenue of about $33 billion a year but too small to alter market decisions; further believes that this measure affords little scope for avoidance since this market is fully electronic, and collection automatic; recognises that a precedent for a currency transaction levy has been set by the UNITAID international drug purchase facility, which is mainly funded by aviation levies that are collected nationally and pooled internationally; and strongly recommends that the Government supports consideration of a currency transaction levy at the forthcoming G8 Summit in Italy where large-scale financing instruments will be discussed under the auspices of the International Health Partnership.”
This has attracted 45 supporters from the three major parties and two smaller ones. Shirley Williams has also been a keen supporter for many years and used to know James Tobin.
The usual argument against Tobin is that it would require international agreement to make it work and that this won’t be forthcoming. However, Will Hutton has put his weight behind Turner’s “bombshell” which he says “would reduce the volatility, volumes and general craziness while striking at excess bank profitability and huge bonuses” and also be “a nice source of income to finance global public good ranging from poverty alleviation to health”.
Hutton rightly suggests that such a tax is practicable because: “Settlement systems are ever more centralised, making evasion harder. Politically, western governments have given 10 trillion dollars’ worth of support to their banking systems. They can, like Sarkozy, just tell their banks to comply with the tax or else lose government guarantees and access to liquidity. None of the world’s top 20 banks would dare refuse.”
Avinash Persaud (chairman of Intelligent Capital, chairman of the Warwick Commission and a former banker) recently wrote in the Financial Times that “financial transaction taxes are not only commonplace, but have become easier to enforce” and the real question today is not their feasibility but their desirability.
He reminds us that most foreign exchange transactions are now settled in one place, the London-based CLS Bank, and concludes, “if transaction taxes were levied in these centralised settlement systems, they would be very expensive to avoid”.
He adds: “It is hard to argue that anything is not feasible today after governments have engaged in whole-scale bank nationalisation and credit guarantees, pushed budget deficits into double figures, become the buyer of last resort of assets they would not normally touch with a barge pole and threatened to legislate against private sector pay. Where there is a will there is a way.”
Will Hutton suggests political benefits too: “But just imagine how electrifying it would be if Gordon Brown made a speech along Turner’s lines, proposed a royal commission to assess what kind of financial services industry Britain now needs and committed himself to trying to find international consensus on a Tobin tax. Intellectually, the case is unanswerable. Politically, it would define the last months of his prime ministership.”
A Tobin-type tax is not a panacea by any means but could increase the stability of global markets and raise revenues for reducing poverty and tackling environmental damage.
I suggest that campaigners link up with think tanks and unions to work out how to turn this old idea into a new campaign that would, with other iconic issues, lift the morale of the Labour movement in the relatively few weeks left before the General Election.
With ministers, MPs and MEPs, they could give traction to a Tobin-type tax and the possibility of global markets providing some of the tax base for global social democracy.