The battle lines have been drawn. In the “for” trench, you’ve got Nicolas Sarkozy, Angela Merkel, Rowan Williams, Bill Gates and George Soros. Facing off against them, staring down their guns, are Barack Obama, David Cameron, Boris Johnson, George Osborne and the IMF. Ed Balls is in no-man’s land, flitting between camps, but refusing to lend unconditional support to either. Contention over the Tobin tax (named after Nobel Prize-winning economist James Tobin, who first proposed it, and also known as the Robin Hood tax) looks unlikely to go away.
It appears as though Britain will be cut adrift from mainland Europe on the issue, with the European Commission, backed by regional powerhouses France and Germany, looking to implement a European-wide financial transactions tax (FTT) that will see a levy placed on all trades. France plans to impose a 0.1 per cent tax later this year, which it hopes will raise €55 billion (£46 billion) a year for its dwindling coffers, regardless of who wins the upcoming presidential election. The German finance minister Wolfgang Schauble has hit out at his British counterparts. “We will wait 20 years before doing anything if we wait for the last island on this planet,” he was recently heard to sneer.
It’s easy to see why the issue is so divisive. The benefits of a Tobin tax are manifold in theory, so let’s look at a couple of the most frequently listed. Across the world, £940 billion is traded in currency alone every day. A tax on each of these trades – no matter how minuscule – would raise huge amounts of capital for the jurisdictional treasury, and that’s before we’ve even considered the other tradable securities that could be taxed (equities, bonds, and so on). The money could be reinvested in the economy or (as some idealists have hoped) distributed among the less fortunate – hence the Robin Hood tag. Oxfam has said that an average tax of 0.05 per cent (half the rate France are introducing) on “all financial transactions could raise in the region of $400 billion, or six times global aid levels”.
Supporters of the tax have claimed it will lead to less speculative trading, which, in turn, will help stabilise the markets. The Asian financial crisis of the late 1990s is often referred to in this context. The crash has been widely blamed on speculative trading – hot money was flowing through the southeast Asian currency markets and when a rumour that the Thai baht was about to crash started spreading, investors pulled out, taking their money with them and draining the currency of its value. The contagion spread across the region and north into Japan and Korea, dragging them into recession. If there were a tax on transactions, its supporters argue, investors would be reluctant to trade speculatively, meaning such catastrophes will be less commonplace.
Two sides to every coin
The FTT’s detractors have lambasted it as being idealistic and ill-conceived. According to the Adam Smith Institute, a free market thinktank, the levy would create a £25.5 billion hole in the UK’s finances. London is by far the largest financial centre in Europe in terms of transactions completed. While it can be feasibly argued that it would stand to inherit more tax revenue than any other European hub, it also stands to lose out the most, too. Last year, the chief executive of interdealer broker ICAP, Michael Spencer, said his company would pull out of the UK if the FTT was introduced. Similar warnings have been shot across the Treasury’s bow from all sectors of the City. If companies are taxed for financial transactions in London but not in, say, Singapore, then surely it would make sense for them to relocate? The fear, then, is that a Robin Hood tax would lead to a mass exodus of financial firms from London. Says Sam Bowman, head of research at the Adam Smith Institute: “An EU Financial Transaction Tax would be killing the goose that lays the golden eggs.”
In France, Nicolas Sarkozy has been subjected to similar warnings from the likes of Société Générale but has pushed ahead with his plans. His opponent, the socialist François Hollande has vowed to pursue similar tactics if he wins this spring’s election. It’s been suggested that Sarkozy is courting populist votes, rather than emulating Sherwood’s finest but FTT supporters are unconcerned about his motives. But given the negative rhetoric emanating from Downing Street, it’s unlikely they’ll see any such progress on these shores.