“Tobin tax” strongly opposed by the UK financial services industry
James Tobin’s proposal for a tax levied at a very low rate on all financial transactions in order to throw “sand in the wheels” of what he saw as “speculative” financial transactions was first made in the 1970s. The idea was resurrected as the financial crisis took hold in 2008, as a means of limiting what Lord Turner termed the “socially useless” nature of many trading activities between financial institutions such as banks and hedge funds.
The European Commission yesterday announced its proposals for a Tobin tax. The Commission’s press release states that:
“The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU. The exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts, at a rate of 0.01%. This could approximately raise €57 billion every year. The Commission has proposed that the tax should come into effect from 1st January 2014. “
Two justifications for the tax are advanced by the Commission:
“First, to ensure that the financial sector makes a fair contribution at a time of fiscal consolidation in the Member States. The financial sector played a role in the origins of the economic crisis. Governments and European citizens at large have borne the cost of massive taxpayer-funded bailouts to support the financial sector. Furthermore, the sector is currently under-taxed by comparison to other sectors. The proposal would generate significant additional tax revenue from the financial sector to contribute to public finances.
Second, a coordinated framework at EU level would help to strengthen the EU single market. Today, 10 Member States have a form of a financial transaction tax in place. The proposal would introduce new minimum tax rates and harmonise different existing taxes on financial transactions in the EU.. This will help to reduce competitive distortions in the single market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises. The financial transaction tax at EU level would strengthen the EU’s position to promote common rules for the introduction of such a tax at global level, notably through the G20.”
This “financial transaction tax” is of course opposed by the financial services industry and, in the UK, seen as a potential threat to the City of London. The US administration has made it clear that it will not introduce a similar tax. However, some momentum is building for a Tobin tax – in addition to the Commission’s proposals, Bill Gates will be presenting a report on the subject to the G20 meeting in November 2011. And London’s adamant opposition is put in perspective by John Plender in the Financial Times today:
“…Yet this [opposition] overlooks the fact that Britain already has a financial transactions tax – stamp duty – in place since 1694. This has signally failed to prevent London’s ascendancy in international finance. A reduction in financial trading volumes might anyway be no bad thing. The huge increase in bank balance sheets over the past two decades is primarily the result of the growth of trading between financial institutions, as opposed to lending to businesses and households. The social utility of much of this activity has been rightly questioned and trade in structured products has, as we know, been a systemic catastrophe.”
The European Commission has a new webpage containing material supporting its proposal.
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