As the Tax Justice Network notes on its blog, Germany's Finance Minister, Peer Steinbr?ºck, has just written this:
"Citizens are aware of the hundreds of billions of euros and dollars used to prop up banks. Bonus payments in the financial sector now go hand in glove with massive job losses in the real economy.
The political answer to this crisis must encompass more than improved regulatory regimes, risk-management strategies, and capital requirements. How governments handle the burden-sharing between Wall Street and Main Street will determine social cohesion, market stability, and political leaders’ reputations for years to come."
And what are the details of his plan?
"A global financial-transaction tax, applied uniformly across the G20 countries, is the obvious instrument to ensure that all financial-market participants contribute equally. German Foreign Minister Frank-Walter Steinmeier and I suggest the G20 take concrete steps toward implementing a tax of 0.05 per cent on all trades of financial products within their jurisdictions, regardless of whether these trades occur on an exchange. Retail investors could be exempt."
TJN just signed a letter endorsing this idea, and it follows statements in support of it from Britain's chief regulator, and from France's Foreign Minister, Bernard Kouchner.
Note that Steinbr?ºck's proposed tax rate, at 0.05%, is ten times greater than Kouchner's, at 0.005%. So how much would this new proposal raise?
"Based on calculations by the Austrian Institute for Economic Research, such a global tax at 0.05 per cent could yield up to $690bn a year, or about 1.4 per cent of world GDP. This tax would not unduly burden financial-market participants, yet it would raise a significant amount of money to finance the costs of the crisis."
Phew! (We presume that figure refers to what would happen if the tax prompted no change in behaviour.) And we like the end of Steinbr?ºck's article:
"There is a clear-cut case for a global financial transaction tax: it would be just, would do no harm, and would do a lot of good. If there is a better idea for fair burden-sharing, let’s hear it. If there isn’t, let’s have this tax now."
Hat tip to TJN
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Not sure that I have understood exactly how this would work, but it seems a very good idea.
Would some de minimise figure apply ? After all, 0.05% on £1,000 is just 50p so at what point does collecting the tax and paying it over exceed the amount of transaction tax involved ?
Collected entirely electronically
marginal cost = almost zero
And non payment anywhere in the world would result in loss of banking licence anywhere else in the world and a fine of 100 times tax evaded
Should work
Can’t argue with that. Seems to be a no brainer.
Err, reality check.
How exactly is it possible to raise $690bn a year without someone being harmed? Who will pay it? The answer is the big investors around the world. In other words, pension funds.
So the suggestion is that $690bn a year be taken out of pension funds.
Or have I missed something?
who is going to collect and manage that tax? and how it is going to be distributed among countries?
Billy
Let’s agree to have a world tax authority…
And we apportion on the basis population weighted inversely by income per head
R
Mad
Not all big investors are pension funds
Many of us think trading harms pension funds – there is certainly no indication it benefits them
So if volatility on their trading is reduced they will win – and the City will lose – who are someone quite different but who currently plunder the future benefit of pensioners for their current gain
Real investors win from this
Society wins from this
Financial services loses
Which is what we want
does a world tax authority imply a uniform legal system, police force, military etc?
Of course not
We have European tax – VAT
We do not have an EU legal system, police or military
but VAT is collected by individual states not a single tax authority, it has different local rates, discrepancies in implementation etc.
and if it should be allocated on the basis of income/size of population then the totalitarian china would get all the cream.
I look at people
People in China are living in poverty – very real poverty
What’s wrong with relieving that?
Richard,
I know this is a radical thought, but doesn’t China have vast global reserves that it could use to relieve poverty within its borders?
And why does the UK give money in aid to India when India has the money to develop nuclear weapons and a space programme.
The problem in most parts of the world (sub-saharan africa excluded) is not a lack of money but a failure of nation states to alleviate poverty before embarking on totemic, nation-building projects.
not going to get $690bn out of my pension pot – Gordon has already run off with most of it, and trashed the value of what was left. Perhaps it is time to migrate to China?
i don’t know if it is possible to dictate to the chinese government how the funds acquired by this tax should be utilised. and may be this tax would help iran to finance their nuclear program? who knows?
Mad
That is an issue, of course
But stopping those follies won’t solve poverty
$690 bn could
Richard
Umm, can anyone tell me what the total profits of the global financial system are?
Larger or smaller than $690 billion a year?
Tim
My latest research suggests something like 15% of world GDP
That means more than $10 trn pa
The tax gap on this is, I estimate about $800bn
This tax seems to fill the gap quite nicely
Richard
wonder how you would go about measuring world GDP? Perhaps GWP would be a better name.
Richard,
your numbers don’t intuitively make sense.
I don’t know where you get your data from but in the US corporate profits are (or at least were) about 10% of GDP. I think financial profits were about half of this. Therefore I would find it extremely unlikely that globally profits from financial firms would be 15% of world gdp, given the lower penetration of financial services ex US.
The capitalisation of global stock markets about $40 trillion- I doubt that financial services profits would be as much as 1/4 of that.
I would guess that the number is closer to $1tr, in which case $690bn would wipe out 70% of profits, in which case you wouldn’t raise that amount because people wouldn’t trade as much/ alter their behaviour.
The debate on the transaction tax shouldn’t be about tax raising, it should be about the benefits derived from socially useless over trading outweigh unintended costs of implementing it such as a higher cost of capital.
Will
Us data exceeds 15%
US data is 10% for public corps
All corps exceeds 15%
So 15% is fair
Tim did not ask what profits of finance corps and anyway the distinction is pretty meaningless in many cases
What $1 tr is is unclear to me
If you’re saying that’s the profit of worldwide financial services there is no logic in your own argument
I agree behaviour change would alter the take – these were not my numbers
I suspect the actual take would be quite a lot lower – but still plenty enough to fund the millennium development goals
Well I agree that the question Tim asked was a little unclear.
I interpreted it as the profits of all financial firms globally- banks insurance companies etc (in a normal year). My intuitive feeling is that there is no way that these numbers add up to 15% of GDP, because total US corporate profits are about 10% of GDP. (even if its 15% non financial corporations account for a great deal of this, and corporate profit %of gdp is lower outside the US) I am happy to be persuaded otherwise, and it would be great if you could share your research on how you got to 10 trillion as a blog post with a bit more detail.
GDP is $69 trn – WB, Un and IMF all converge on that
I say 15%
Your US figure (check the data) excludes private companies
UK figure is in excess 20% but pre interest
Post interest is about 15% – source ONS
So I think $10 trn is fair
Happy to be persuaded its not – but let’s be clear – all GDP is guesswork
R
“Umm, can anyone tell me what the total profits of the global financial system are?”
That was my question.
This was your answer Richard.
“My latest research suggests something like 15% of world GDP”
Umm, no. Absolutely not. Not a chance, not a snowflake’s chance in hell.
I might just about believe that the financial sector is some 15% of global GDP but that too sounds extraordinarily high.
But profits are 15% of GDP? Finance sector profits are 15% of GDP? Seriously?
You really want us to try and agree that adding up the profits of the banks and trading houses we reach a figure of $10 trillion?
Please Richard, pull the other one, it’s got bells on it.
I note I wasn’t the only one who reckoned you mis-specified your question
And what, anyway, is the global financial system is not an integrated whole?
In which case my answer has credibility which you cannot approach Tim
OK, so I’ve gone and looked. 15% is way, way too high.
http://www.bea.gov/newsreleases/national/gdp/2009/txt/gdp2q09_2nd.txt
We have, for 2006, financial sector profits (not including the Federal Reserve Banks which make money from seignorage) of 414 billion against a GDP of 13,398. For 2008 we have 243 of GDP of 14,441.
This gives us, as a percentage of US GDP, financial sector profits os, at the peak of the cycle, some 3.1/3.2 % of GDP. As the crisis revealed itself, 1.7%.
Are financial sector profits as a %ge of GDP likely to be higher or lower in the US than other countries? Higher than some, certainly. Higher than most (except perhaps those with outsized in relation to domestic economies like the UK and Switzerland perhaps).
OK, so let’s take that as being what the global level is, even though we are pretty sure it will be lower.
(And do also note that Richard is insistent that some of these profits are not “real”. They are reflections of not accounting for risk properly so Richard should be arguing that the “real” numbers are lower than this).
Hmm, so, if even on these generous estimates we translate US levels of profits across global GDP and we also accept that they’re all real profits, not phantasmal, then global profits from hte financial sector are, taking that percentage and the $69 billion figure for global GDP, umm……$2.2 trillion to $1.17 trillion.
Whichever of those figures we take as being representative (peak of the cycle or running into the downside of it) I would suggest that sucking $690 billion a year out in tax would indeed be a burden. Even that it might “unduly burden” financial sector companies.
Adding taxes amounting to 59% of profits ain’t going to be something that people just don’t notice.
Tim
Have you ever read a set of bank accounts?
And do you really think that only banks trade?
Go do some real world research, I suggest
And note I never once said bank profits were 15% of GDP – I said profits were
Richard
“This tax would not unduly burden financial-market participants”
Well, umm:
“And do you really think that only banks trade?”
Given that we know the vast majority of financial transactions are indeed speculation (you’ve mentioned it here, secondary trades are vastly larger than primary capital raising for example) then we do indeed know that the vast majority of a tax upon “financial market participants” will fall mainly on financial sector companies, not industrial companies who happen to make a, say, foreign exchange transaction.
If financial sector companies are, say, 90%, or 95% of all financial sector trades (not unrealistic numbers as you yourself have said) then it will be those financial secotr companies that at least initially bear the burden of this tax. Comparing the tax to their profits thus seems reasonable.
Initially Tim
Initially?
Forgotten your favourite incidence
Just admit it – you’ve gotten your knickers in a twist
This is a proposal. $690bn is not my number. It seems to ignore behavioural consequences of which there will be some, no doubt
But the real issue is the one you ignore: the trades themselves are harmful in this case
This tax tackles that
You can’t see that wood for your nit-picking amongst the trees
I guess that reveals all your qualities as a microeconomist
Richard
“Initially Tim
Initially?
Forgotten your favourite incidence”
No, the “initially” is there specifically and precisely because of incidence.
“Just admit it – you’ve gotten your knickers in a twist ”
Yup, something that tends to happen when I see fools propose something that will make us all poorer.
“This is a proposal. $690bn is not my number.”
True, but you have above supported the idea, even put forward numbers which attempt to justify it.
“It seems to ignore behavioural consequences of which there will be some, no doubt”
Also true. Which is why the “initially”.
“But the real issue is the one you ignore: the trades themselves are harmful in this case”
Ah, no, that is something you have to prove, not simply either assert or assume. Please do attempt to do so. Take as your example the wheat futures market. Please do show how the vastly larger speculative part of that market harms anyone. Do note that the tax being proposed would indeed be levied upon such speculative transactions in wheat futures and options. Do also take account of Adam Smith’s writings upon the subject of wheat merchants. There’s nearly a whole chapter of Wealth of Nations on it.
Just to give you a hint: speculators move prices intertemporarily. This is a good thing, not a bad thing.
“I guess that reveals all your qualities as a microeconomist”
As I’ve pointed out several times around here and many times in other places. I do not pretend to be an economist, whether of micro or macro. I am an interested amateur no more.
My formal training in economics is exactly the same as your’s Richard. A degree in Accounting and Economics, your one was from Southampton I believe, mine from the London School of Economics.
Tim
But unlike you I relate my comments to the real world – not one of fantasy created on blackboards who long ago you studied and I by and large ignored, having perceived how harmful their ideas were.
as you well know I was not discussing grain futures. And it so happens I see little merit in them. They are a mechanism for extracting value from the market. I know the farmer who grows wheat in the field behind my house. Who takes it to the local mill. Where as often as not he makes a loss.
Who pays for the ‘market’? We do through tax subsidies where wealth of ordinary people is transferred to traders. Do the farmers get it? No.
Is that a good thing? No.
Is it an argument to cut subsidies? maybe. Is it an argument to cut the volatility of the trade? Definitely. That’s the one element who has not interest in the grain at all, merely taking a rent off society. If a tax does that its good news.
Debate over Tim. Go waste your time elsewhere.
Good grief Richard: If you’re going to try and tell us all how financial markets should be run then it really is incumbent upon you to find out what futures are, why people use them and the value that they provide to the larger society.
“And it so happens I see little merit in them. They are a mechanism for extracting value from the market.”
Try saying that the next time you’re talking to anyone in The City, or at the World Bank, the IMF, wherever financially literate people gather. You’ll be laughed out of the room. It’s a display of quite gobsmacking ignorance.
“Is it an argument to cut the volatility of the trade? Definitely.”
Guess what: when the US banned onion futures trading (at the request of then Congressman Gerry Ford) volatility of onion prices *went up*.
Futures do the following: they disperse risk, move risk from producer and consumer to speculator, move prices intertemporarily. These are all thinks we like to happen.
Good grief, Adam Smith provides pages about grain merchants which explain the whole idea in nice simple language and he’s only been in print 233 years, about time you tried reading it.
Time and again you reveal your own ignorance Tim
IMF and World bank are still mainly Washington Consensus – and little has caused more harm. So many there will disagree with me? I’ll take it as a badge of honour.
Adam Smith did not describe futures markets as we now have them – and 233 is time for a little learning to have developed in the meantime
And note I talked volatility of trade, not prices
Reality – futures do not do at present do what they say on the tin any more than CDOs did
So get back to your books Tim. let those of us who have understood the real thing deal with that
And also accept this: I’m not saying ban futures: I am saying stop the speculation in them. Not the same thing at all
Richard
“IMF and World bank are still mainly Washington Consensus – and little has caused more harm.”
So why were you so overjoyed at presenting a paper there at the World Bank?
“And also accept this: I’m not saying ban futures: I am saying stop the speculation in them. Not the same thing at all”
Futures are speculation. That’s exactly what they are. That’s why we have them in fact, so that people can speculate. Good grief!
Tim
a) Because it gave me a chance to say why they have been wrong to date – which some there are accepting
b) You’re wrong: futures trading for the commodity is one thing, trading contracts in the commodity is something quite different, as you well know. There is a massive difference
Richard
“You’re wrong: futures trading for the commodity is one thing, trading contracts in the commodity is something quite different, as you well know. There is a massive difference”
No, you’re really going to have to explain that one to me. A future is a contract for the commodity. What is this difference that you’re trying to make?
Damned baffling those things called derivatives, aren’t they Tim?
I’m not baffled about what a future is (nor an option, a CDO, a CDS or even a CDO squared): I think you’re baffled about this difference you’re tring to make between a “futures trading for a commodity and trading contracts in the commodity”. Which is why I asked you to explain it.
A future is a contract for a commodity in the future. So what is the difference you’re trying to point at here?
The ignorance displayed by Richard Murphy here provoked a genuine laugh! Bravo
So when I sell my grain forward on the markets, cos I think the price is going to fall, and I’d like to lock into the current price, I’m going to have to pay another tax? Great. Just what I need. Way to go brainiac.
Jim, when those who receive the minimum wage work a full week, they have to pay tax on what they earned. Why should a speculator be more privileged?
Carol,
Can you explain why agreeing to sell a product you produce at a pre-agreed price is speculating? I would have thought if you know that you will be producing say 1,000 tons of grain in september it makes sense to agree to sell it to somebody in advance at an agreed price. Or do you think that all producers should only be able to make contracts for immediate delivery.
And remember, the tax will end up being paid by the people that use the product. And poor people eat bread too.
Mad, as you well know, the majority of dealers in all financial instruments are speculators not producers. A small percentage tax on transactions will not be a major cost to the latter.