Tobin tax is in the air

Decades after John Maynard Keynes, and then James Tobin proposed the idea of a levy on financial transactions, and several years after the European left began clamouring for its introduction in the wake of the global financial crisis, the tax could soon be implemented across a group of nations for the first time.

Prospects for the tax, which would serve the dual purpose of discouraging risky transactions and raising funds, have brightened once again, after nine (and possibly 10) European nations expressed their intention earlier this month to go ahead with the plan, under the EU’s so-called “enhanced cooperation procedure”, which allows a group of EU countries to create binding laws within their own territories so long as at least nine members sign up to it.

It’s a procedure that has already been used successfully by EU nations, in areas such as standardising rules governing divorce procedures across 14 nation states, and a patent system that Italy and Spain did not sign up to.

At the most recent Euro zone summit last Thursday and Friday, the French President, Mr Francois Hollande, even suggested such a tax could be put in place by the end of the year.

MAJOR STEPS FORWARD

Mr Hollande’s timetable is probably on the optimistic side. Still, it’s important to acknowledge the progress that has been made.

Getting to this point has been a long, and twist-ridden process: the European Commission which had once been reluctant to bring in an FTT if not globally implemented, last September set out its proposals for just such a tax: covering 85 per cent of transactions that take place between EU institutions from 2014 — a 0.1 per cent levy on bond and share transactions and a 0.01 per cent levy on derivative products (though not public or private capital raising or foreign exchange transactions).

The tax could raise around 57 billion euros a year (Rs 4,00,000 crore), it estimated. And while the European Parliament endorsed the proposals, finance ministers from across the region seemed to reach an impasse in March, after a meeting resulted in little agreement, except that there were a number of nations that opposed it vehemently unless brought in at an international level.

Britain (which already has a stamp duty on stocks), Luxembourg and the Netherlands lie in this camp, while Sweden’s opposition stems from its own disastrous experiences with a badly-designed transaction tax in the 1980s and 1990s.

Now, however, a number of factors are propelling the tax forward slowly, highlighting the complexities of Europe’s policy-making processes and the huge role that domestic politics and bargaining plays, in which policies move forward and which get shoved into a shelf.

Over in Germany, the opposition SPD and the Greens made their support for the European Stability Mechanism (the new 500 billion euro European rescue fund which comes into force in July) in the German Parliament contingent on moves forward on the FTT.

BARGAINING CHIP

It is one reason why the German Chancellor, Ms Angela Merkel, who needed (and eventually got) a two-thirds majority in Parliament to approve the bailout scheme this past Friday, has been so determined to press ahead with the measures.

It’s a similar situation in Austria, where the opposition Green Party has exerted pressure on the ruling coalition government over the ratification of the ESM.

Interestingly, the country has already included expected revenues for the transaction tax in its 2014 national budget.

And ahead of this past Thursday and Friday’s European leaders summit in Brussels, the Italian Prime Minister, Mr Mario Monti, strongly hinted that in return for supporting the FTT, he wanted other signs of enhanced cooperation, and in particular, measures to reduce the nation’s borrowing costs.

“The FTT has very much been about politicking, a bargaining chip — a football that is being kicked around,” says James Goundry, a Euro Zone analyst at IHS Global Insight in London.

Crucial impetus for the tax has also come from France, where Mr Hollande appears even more enthusiastic than his predecessor (whose support for the FTT surprised many, but was most likely linked to domestic pressures).

At the Rio + 20 Summit earlier this month, Mr Hollande pledged to push forward with the tax, and to use some of its proceeds for global development objectives.

Quite how this development ambition — ensconced in Tobin’s original idea — will go down with the other nations remains to be seen.

The issue of how the funds would be used remains one of the big “unknowns” in the FTT debate: the European Commission has been keen for some of the funds at least to go towards the region’s central budget, with the remainder going back to the national budgets of participating nations. Others have been pressing for the tax to be used towards growth strategies in stricken European nations.

SUPPORT FOR MOVE

Yet whatever its struggles, it does seem to strike a chord with the European public — one reason why European leaders have been so in favour of it. And in an interesting development earlier this month, 52 financial professionals from the US and Europe, including asset managers, and former Morgan Stanley, Goldman Sachs executives, signed a letter of support for the tax.

“These taxes will rebalance financial markets away from a short term trading mentality that has contributed to the instability in our financial markets,” they wrote, pointing to the various types of transaction taxes already in place in countries from India to the UK and Switzerland. “A modest transaction tax will actually improve the functioning of markets.”

Those who believe its impact would be minimal because of the limited number of joiners, are mistaken, given the way the FTT is currently being conceived, argues Stephan Schulmeister, a prominent Austrian economist who has published several papers on the tax.

“Financial transactions in the London market place for which the orders stem from France or Germany, would lead to taxes being payable in Germany and France and increase pressure on the UK, which would be unhappy with transactions happening in their jurisdictions leading to tax receipts in other countries,” he explains.

Setting aside the issue of how the proceeds would be used, Prof Schulmeister argues that a tax would send a very important message about Europe’s direction going forward — which makes its long-term consequences far more crucial than any immediate tax revenue gains.

“It would be part of a change of economic policy towards the financial system. The strength of Europe lies in this real sectors and this past shift towards ‘financialisation’ has weakened the continent. The FTT is a crucial part of a gradual change in direction.”

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