Return of the financial transactions tax

Embassy Magazine, Feb. 16, 2011

By John Jacobs

In spite of Canada's attempt to bury it at the Toronto G20 meeting, a tax on financial transactions is back on the global agenda and gaining momentum.

French President Nicolas Sarkozy has pledged to use his term as chair of the G20 to reform the global financial system and curb the speculation that contributed to the economic crisis. At the top of his agenda is an international financial transactions tax (FTT) to fund the fight against poverty and climate change.

Rather than long-term employment and productivity-increasing investments in, for example, research and development, technology and machinery, investors opted for short-term returns by speculating on everything from commodities, such as food and energy, to currencies, equities and derivatives. The result was a volatile economy driven by speculative bubbles which led to the worst recession in more than half a century.

In the wake of the recession brought on by financial speculation, the G20 assumed the task of resuscitating the global economy. Simply rebooting the economy to its pre-recession configuration will not do. We need innovative financing measures that rebuild the world economy on a more stable, just and environmentally sustainable footing.

While the idea of a tax on international transactions, along the lines of a Tobin tax, has been around since the 1970s, the global financial crisis has made it more necessary that ever.

But governments have been forced to look over their shoulders to anticipate the response of financial markets to public policy initiatives. This has shifted the policy focus from what is good for the economy and society, such as investments in economic infrastructure, environmental protection and global anti-poverty strategies that create jobs, to what is good for financial markets.

Our economies are increasingly dominated by financial capital that operates beyond the reach of regulation and taxation. Finance is already globalized and pubic policy needs to catch-up. An FTT would levy a small surcharge in the range of 0.05 per cent on all international trades in stocks, bonds, currencies and derivatives.

The tax would barely be noticed on each transaction, but given that the size of financial transactions in the global economy is about 74 times as large as world GDP, significant amounts of money could be collected. At a tax rate of 0.05 per cent, a global FTT would raise annual revenues of approximately US$650 billion.

The cost will be borne largely by institutions that make short-term speculative transactions that are flipped in a matter of days, hours and seconds. Ultimately, a tax on international financial transactions encourages productive investments and ensures that banks and financial institutions pay their share of the costs associated with developing the global economy.

The FTT is also at the top of the G20 agenda because the governments of industrialized countries need to recover the US$877 billion they have spent to bail out private financial corporations. Moreover, governments are coming up short in financing international development, poverty alleviation and climate change mitigation at a time when the need for these initiatives has become critical. The FTT would provide access to massive untaxed flows of capital and thereby enable governments to keep international commitments and improve public finances.

The FTT is an idea whose time has come. It is backed by political leaders, including the presidents of France, Germany and the former prime minister of Britain. Leading economists have come out in favour, as have financiers. Taxes on the financial sector have been successfully implemented in various jurisdictions, including Britain and Brazil. Environmental and anti-poverty organizations are actively promoting the FTT as the "Robin Hood Tax."

Financial institutions are, not surprisingly, opposed to the tax and the federal Conservative government has so far rejected it due to its general aversion to taxation of any form. But the economic crisis and urgent global needs demand that we move beyond special interests and ideology to a pragmatic approach to regulating global finance and the development of a sustainable global economy.

The Canadian government should reconsider its opposition to the tax lest Canada be left behind as other countries take the lead in putting their finances back in order.

John Jacobs is program officer at the Halifax Initiative Coalition, which was formed in 1994 to monitor and push for the reform of international financial institutions.