Press Responses: June 9, 2010

Financial transaction tax is no bank tax

By Fraser Reilly-King
Published June 9, 2010
Big banks can finally breathe a sigh of relief.

This past weekend, Canadian Finance Minister Jim Flaherty managed to rally China, Brazil and South Korea behind him at G20 meetings in Busan, South Korea, and put those pesky discussions about a global bank tax to rest.

Instead of discussing a bank tax at this month's summit, the G20 agreed to "develop principles reflecting the need to protect taxpayers, reduce risks from the financial system, protect the flow of credit in good times and bad, taking into account individual country's circumstances and options."

This allows Germany, France and the UK to implement their respective versions of a national tax that will ensure taxpayers don't end up footing the bill for future financial bailouts. But for all intents and purposes, this conversation is over.

Flaherty's rationale for opposing the tax made sense. Pointing to Canada's own exemplary banking system, Flaherty and former prime minister Paul Martin highlighted the importance of robust financial sector regulatory reform ahead of any measures to help recoup the costs of past bailouts or insure against future ones. Effective reforms would preclude the need for such bailouts, the logic goes.

Flaherty also pointed to the fact that this started off as a credit crisis, and to the extent that our banks and financial institutions were well regulated, we avoided the brunt of this financial crisis. As a result, we didn't have to bail out our banks. So why would we punish our banking sector with a global tax whose intent is to pay for the shortfalls of the banking system in other countries.

Finally, the purpose of this tax was to help establish an insurance fund to ensure that future bailouts would come from the banks instead of the taxpayer. Flaherty pointed to concerns around the "moral hazard" associated with such a scheme—incentivizing the banks to be even riskier and more reckless in their behaviour since they know they have a safety net.

But while that conversation may be over, there is an even more pressing one that needs to begin. The G20, in particular Minister Flaherty, needs to consider not just the financial impacts of the crisis, but also the economic ones. Banks aside, how do we bail out the rest of the world?

An additional 89 million people are now living below the poverty line as a result of the economic crisis, and another 34 million are unemployed compared to 2007.

In September, the United Nations will be holding a high-level meeting to review progress on the Millennium Development Goals—a set of goals and indicators for making progress on development. And while the Canadian focus on child, newborn and maternal health may help get those two of the seven MDGs back on track, the other five may not be so lucky. Some estimates put us US$180 billion annually short of being able to achieve all the MDGs—150 per cent more than current global aid budgets.

Similarly, this November and December, attention will be turned to COP-16 in Mexico and a second attempt to reach a conclusion on a post-2012 agreement on climate change. To ensure goodwill for these talks, developed countries were supposed to fast-track $30 billion to developing countries over the next three years. Canada has yet to pay its share.

Reaching an agreement is just the beginning of the story. We will still need to find the $170 billion necessary to tackle climate change mitigation and adaptation.

And did I mention Canada's aid budget is set to flatline in 2011?

Sounds daunting, but there is a solution.

It is called the Financial Transaction Tax or Robin Hood Tax, and it would impose a small tax of 0.05 per cent on financial transactions traded between financial institutions involving stocks, bonds, foreign exchange, and derivatives.

If implemented globally, it could generate around $650 billion annually—half of which we think should be used to help countries achieve the MDGs and fight climate change. And if implemented just in New York, London and Frankfurt, it probably wouldn't fall much shorter of that mark.

Unlike the proposed bank levy, the FTT would tax transactions between financial market actors and not overall bank assets, making it more difficult to pass the incidence of the tax on to consumers. Furthermore, the tax is expected to fall predominantly on large hedge funds and investment firms engaged in speculative transactions, all of whom have clients who can afford to pay the tax. And even if you did end up paying, we are asking for 50 cents on every $1,000 you trade. (Your stockbroker wants $30!)

Finally, thanks to advances in the electronic age, even the International Monetary Fund has admitted that from an implementation standpoint, the tax is completely feasible.

Be quick to dismiss it if you like. It is a tax after all. But if not the FTT, then what other innovative mechanisms for financing development and climate change does the Canadian government—or the opposition parties for that matter—propose we pursue?

Thought so.

Fraser Reilly-King is the co-ordinator of the Halifax Initiative, a coalition of development, environment, faith-based, human rights and labour group. It is the Canadian presence for public interest education and action on International Financial Institutions, namely the World Bank and the IMF. HI is also a member of the Robin Hood Tax campaign. The views expressed are his own.