John Christensen of the Tax Justice Network and I were musing on the state of the world yesterday when it occurred to us that now is the perfect time to introduce a financial transaction tax.
These taxes are often called Tobin taxes after James Tobin, the man who first suggested one. The principle is easy. A Tobin tax would be charged on all trade of currency across borders. As Stamp Out Poverty say:
Currency trading is the largest market in the world, worth £400,000 billion per annum. This is fifty times greater than the total value of all goods and services traded globally each year. Trade in sterling alone accounts for £34,000 billion per year. A sterling stamp duty at a rate of 0.005% would raise in the region of £2 billion a year. A co-ordinated transaction tax levied on the four major world currencies – dollar, euro, yen and sterling -would yield revenue of approximately £16 billion annually.
Note the tax rate for this currency transaction tax: 0.005%. That’s tiny. And look what it could contribute to global poverty. The argument always used against it was that it would restrict liquidity in the financial markets. Curiously the markets seem quite capable of doing that themselves right now. The tax might have had exactly the opposite effect: it might have restricted excessive flows and so helped create stability.
But good whilst such a tax would be, that’s not the form we had in mind. There is another alternative: that’s a financial transaction tax. Few have tried this: Brazil did form 1993 to 2007 when the opposition parties killed it, largely because the tax was used to fund social programmes they disagreed with.
This tax was charged on all bank transactions in Brazil at 0.38% of their value – that is well under a penny in the pound in the UK. It has been argued that the tax was economically inefficient. I am not sure I can agree. It raised $22 billion a year. But it did so ingeniously. Because every bank account was subject to the tax, and therefore had to be declared by the banks for this purpose there was also real evidence that tax evasion of other taxes reduced as a result, which was a massive secondary benefit of the arrangement.
The UK is a bigger economy than Brazil. Brazil has a GDP of $1.849 trillion with a GDP per head of $9,500. The UK has a GDP of $2.13 trillion at $35,000 a head. There is another difference as a result: the UK has a deeper penetration of banking within the economy.
Now suppose that bank transactions were taxed. Of course some transactions would move to the black economy: but no more than do so to avoid VAT and income tax at much higher rates already. A lower rate of tax might therefore be charged and a higher yield might result.
What could be done with that? First of all a proper investor protection scheme could be funded. Second, the loans now being taken to fund the banking sector could be repaid earlier. Third, tax evasion would be harder. And the investment we need to build a new, greener, more stable and carbon friendly economy could be paid for. We’d all win, and the overall tax rate might be lowered for honest people.
And the cost of managing it would be low: it’s a simple charge on a bank statement.
It’s an idea whose time might have arrived. What better than charge those who use bank accounts most to pay for the cost of bailing out the banks that they need?