Something remarkable has happened: 1000 economists have agreed with each other.
In Washington, civil society groups will present a letter signed by 1000 economists from 50 countries to the annual G20 finance ministers meeting.
They’re calling for a “Robin Hood tax” on financial institutions, which, like the legendary English outlaw, would take from the rich and give to the poor.
By placing levy of between 0.005% and 0.05% on a variety capital market transactions, this tax could raise up $500 billion annually.
The economists say the tax could also serve to limit market speculation and simplify many of the more arcane types of financial instruments – including those that spurred the global financial crisis.
Taxation regimes around the world have not kept pace with development in markets, and it is clear that the time is right for the introduction of a financial transaction tax (FTT).
Transaction transformation
The past few decades have seen revolution in the way financial markets operate – a revolution that has been hidden from most of us.
When people think of what causes financial assets to be traded, most think of humans making decisions – an investor deciding to invest in mining company shares or a trader betting the Aussie dollar will rise against the US dollar.
Yet an increasing proportion of market trades in sophisticated markets are ultra-short-term and computer-generated.
According to the International Monetary Fund, in 2009 algorithmic, or computer-driven, trading accounted for at least 60% of the volume of equity market trading in the US, 30 to 40% of European and Japanese equity trading and 40% of US futures trading.
This high-frequency technical trading is driven and executed by computer programs aimed at exploiting minor price fluctuations. Thus, a substantial proportion of financial market activity is now measured in seconds or less.
Assets are often bought, held and sold in only seconds. No human mind is brought to bear on these individual trades, and the underlying real economic value of the asset being traded is almost never a factor in the trading.
This is a problem. Speculative bets have become the tail wagging the dog of the real economy.
This becomes clear when we look at the big picture. Gross domestic product is the sum of transactions that take place in the real economy. Global financial transactions were 75 times global GDP in 2007, up from 15 times in 1990.
The ratio here in Australia was 98 prior to the GFC, and is 81 today.
Mad money
Forty years ago, most international money flows went to pay for the import of goods and services, as is intuitively sensible. Today, over 75 times as much money flows between countries to invest in stocks and bonds than to pay for tangible goods or services.
We have an economy in which financial market activity has become an end in itself, and a major source of corporate profits for the banks.
The core function of financial markets is to give capital to those who can use it best. To make things or provide services, corporations need capital, just as they need staff, electricity, water, transport and other resources.
However, most financial activity today doesn’t deal with allocating capital to those who can put it to good use. Most activity is speculation.
Forty years ago, gambling was confined, by law, in our society to the racetrack, to two-up games on Anzac Day, and to the odd starting price bookie.
Most financial market activity wasn’t gambling. Some was, but relatively little.
Today, more than half of what happens in financial markets is no different from punting on the ponies, except that the stewards governing the process are less rigorous.
Tax solution
This shift towards highly complicated and risky markets is what inspired 1000 economists to actually agree on the need for a financial transactions tax.
A FTT is a tiny tax on all wholesale capital market transactions, of somewhere between 0.005% and 0.05%, in other words, between one-half and five basis points.
It is tiny tax, but because of the scale of modern financial market activity, it would raise somewhere between $75 and $500 billion annually (and these figures assume a large dissuasive effect of the impost).
Civil society is campaigning vigorously for this tax around the world, and has had a considerable impact in Europe. But the issue has had very little attention in Australia.
Civil society groups want the tax because it is a potential source of funding with which to tackle global poverty and climate change adaptation.
If governments in developed countries do adopt such a tax, they will do so primarily because it is a way to repair their balance sheets, which were damaged by the GFC, and to accumulate funds so that the future financial sector bailouts will be funded by the sector itself, not taxpayers.
The 1000 economists want the tax because, in the words of the letter to be presented today: “The financial crisis has shown us the dangers of unregulated finance, and the link between the financial sector and society has been broken. It is time to fix this link and for the financial sector to give something back to society.”
The economists know that this tax is the nearest thing we’ll ever get to a free lunch. It is a tax that will help calm excessive speculation, and thereby assist financial markets to fulfil their core roles more effectively and make the financial system less unstable and crisis-prone.
It is a tax that is worth imposing for these reasons alone. So it is a tax from which the revenue is a pure bonus.
A more stable and efficient global financial system is in the interests of us all.
A source of revenue with which to assist both developed and developing nations is much needed. The signs to date suggest our government will not support this initiative. This is deeply regrettable.
Humanity cannot afford to turn its back on such a transformative idea.
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Comments (13)
Tim Rivett
(logged in via Facebook)
There was a scam that's been run a couple of times in various banks that involved an insider skimming the odd cents off every transaction. Although it was such a small amount per transaction, the sheer number of transactions managed by the bank meant that it added up to a couple of million dollars in the end. The actual customers performing the transactions never noticed, as at most they'd lose a single cent in a transaction. The banks noticed, because the scale of the scam was such that it was…
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David Collett
(logged in via Twitter)
It would be good if they (whoever put the letter together) could have shown how to define what transactions are speculative and those that are not. It would be great to have a clear picture of exactly who is speculating on the $AUD and how they do that including what would be different if they stopped doing that. Most countries would probably be somewhat open to the idea of a small transaction tax that reduces the volume of speculative transactions on their own currency. Those Asian countries that…
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Jessie Wells
(PhD student at University of Queensland)
A financial transactions tax could cover some or all types of transactions, such as foreign currency exchanges (e.g. already in place in Brazil and South Africa), shares (already in place in the UK), or all shares, bonds and derivatives (e.g. as in Thailand and India).
Speculative transactions can sometimes be targeted by qualitative measures directed to specific types of transactions (e.g. we need reforms to regulate or ban some of the super-complex financial instruments).
However for most types…
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Craig S Wright
(PhD; Adjunct Lecturer in Computer Science at Charles Sturt University)
A tax on Bonds will simply make these more expensive and decrease corporate investment. Less growth, fewer jobs and lower overall tax revenue.
Basically a perverse effect and unintended consequence.
Bob Constable
(logged in via Facebook)
Obviously this tax will never be seriously considered as the people/governments currently speculating will be both the people who would have to impose the tax and the people who would pay it. Don't forget the rich get richer and the poor get the blame.
Mat Holroyd
(logged in via Twitter)
"The economists know that this tax is the nearest thing we’ll ever get to a free lunch."
Not so sure about that. The money comes from somewhere. If you think speculators are harmful, fine, that's your judgement. But to say the tax is a "free lunch" sounds to me like you are suggesting no one is going to be hurt, which I think conflicts with the estimation that $75-$500 billion annually that was going to group X will now go to group Y.
If you can prove that group X won't be hurt, I'll buy you lunch.
Michael J. Lew
(Senior Lecturer, Pharmacology at University of Melbourne)
Why would it matter if X was open to some 'hurt' if the magnitude of the hurt was demonstrably small? An additional impost of 0.005 to 0.05% would be entirely negligable in any transaction that already pays tax. It is significant for transactions that currently avoid taxation.
Craig S Wright
(PhD; Adjunct Lecturer in Computer Science at Charles Sturt University)
This is per transaction, and not as seems to be suggested less than a percent total.
Salami slicing attacks (as Tim Rivett notes) against banks are just small amounts again and again and these add to large amounts as well. This is what it is, a new form of theft and redistribution.
Next, it will hurt everybody as the banks and traders will still make money, they will incorporate this and pass the cost along. They will not take a lower profit, so the clients of the bank still suffer and these are going to be those who can afford it least.
The competition for large corporates is strong. Banks will make deals for these clients and the profit margins will be made from large numbers of smaller clients (small business and the consumer).
So, at the end of the day, this form of tax hurts the small player far more. A belief that it does not is simply delusional.
Craig S Wright
(PhD; Adjunct Lecturer in Computer Science at Charles Sturt University)
"An additional impost of 0.005 to 0.05% would be entirely negligable in any transaction that already pays tax. It is significant for transactions that currently avoid taxation."
Not once, but over and over. It is not negligible and it is small amounts that all add up. Hiding the sources does nothing to stop this being a drain.
Andrew Hack
Business Analyst and Full-Time Law Student UNDA (logged in via email @gmail.com)
The $75-$500 bil has to come from somewhere though!!!
The trick with this one is that while only charging fraction of a percentage it makes up in the quantity of transactions taking place.
The funny thing is that on one hand Ross talks about how much money it will raise to help the poor, but on the other hand he says that he wants to curb what is in his opinion negative behaviour. You can't have your cake and eat it too. You can't curb the bad behaviour AND reel in large revenues at the same time.
What will occur is these businesses will move overseas and tax havens will spring out in Singapore, Hong Kong and Zurich. That is how things work.
When you tax something you get less of it. When you subsidise you get more of it.
When you tax productivity you get less productivity.
Michael J. Lew
(Senior Lecturer, Pharmacology at University of Melbourne)
Such a tax seems like an excellent idea to me. Is there are reason that it needs to be introduced by lots of coutnries at the same time? It seems to me that if it is set at a low level there will be little chance that it will affect narional competitiveness in anything other than the undesirable short term speculative trading.
Jessie Wells
(PhD student at University of Queensland)
It's not essential for many countries to introduce an FTT simultaneously, but would be more beneficial from the perspective of calming globalised markets and generating useful revenue.
From the individual countries' perspectives, simultaneous application across groupings such as the EU and G20 could make it easier for each country and quell any (probably unfounded) fears of capital flight to other financial centres.
As the letter from 1000 economists notes:
"The UK already levies a tax on share transactions of 0.5%, or ten times this rate, without unduly impacting on the competitiveness of the City of London."
Several other countries already have taxes on some transactions (e.g. foreign exchange transactions), including Brazil and South Africa.
So we have logic, ethics, precedents....
Andrew Hack
Business Analyst and Full-Time Law Student UNDA (logged in via email @gmail.com)
It does not generate revenue. Taxes simply redistribute, they do not create wealth.
What happens is that affected firms in London will simply relocate to places like Hong Kong or Singapore that do not implement it and the 'revenue' will be lost. They will have even less.