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UK Claims Global Support Increasing for Transaction Tax

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We’ve said that a Tobin tax, meaning a tax on transactions, could help both as a financial reform measure and as a tax generator. The logic is that trading, particularly OTC trading, involves costs (periodic taxpayer-funded bailouts) that are not borne by the buyers and seller (ie, they should be paying for rescue insurance as part of their cost of being engaged in a type of business that periodically blows up and forces uninvolved parties to pony up; the transaction tax would be a way to go about doing that). Any such tax would need to be though through carefully (as in plain vanilla, socially productive transactions like foreign exchange would not be taxed heavily, while high margin products with little to no redeeming value like credit default swaps would be taxed heavily.

But of course, who is opposed to such a sensible idea? The US, natch, with its pols bought and paid for by the financiers.

From the Independent:

Proposals for a global transaction tax on banks are “gaining traction”, Gordon Brown claimed yesterday, as Britain sought to push its reform agenda with other G7 economies ahead of rival American plans for regulatory overhaul.

The US is the main obstacle to a so-called “Tobin tax”, which remains popular across Europe as a way of building up a fund to ensure that banks no longer have to call on taxpayers’ cash if they run into problems.

Treasury officials believe President Barack Obama’s suggestion of a “risk-based” levy on US banks to recoup federal aid already spent means that the Americans could be persuaded of the merits of a transaction levy to deal with future crises.

Yves here. The proposed US “TARP fee” is paltry, yet the banks are already clamoring for it to be cut back, so it appears to be yet another Potemkin reform that will be diluted down to nothing. So I don’t think observers can make overmuch of it. Back to the story:

One Treasury official said: “[Mr Obama's plans] address specific problems in the US, where there are large investment banks. They would not be appropriate here. And you have to remember that it was narrow banks such as Lehman Brothers or Dunfirmline Building Society that failed.” This point has been pushed by “universal” banks such as Barclays, which has a substantial investment banking division but did not need to ask the state for financial support. The British Bankers’ Association has also been lobbying on this point. As Lord Myners opened the talks at 11 Downing Street, he said the costs of failures should be “distributed more fairly”, with financial institutions and investors shouldering more of the burden. “There is clearly a strong rationale to charge for the externality caused by the financial sector and financial institutions should shoulder the responsibilities for losses they may face,” he added.

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9 comments

  1. Tim Coldwell

    In early 2008 the City of London proudly boasted that it was responsible for creating $600 billion derivatives contracts per day. London it claimed represented >40% of the world market. I haven’t checked the recent BIS stats but I have a feeling that this is still a popular activity.

    If the rate is still anywhere near the above I find it incomprehensible that finance ministers who desperately need revenues will not aim to apply a stamp duty like tax. This is particularly true for the UK.

    My guess is that ~ $1 trillion could be levied on Wall Street over the same period suggested for the Tarp fee, i.e. ~ 10x without breaking a sweat.

  2. giggity

    I’m fine with a Tobin Tax if it’s for big institutions and banks. I’m not fine with it if it’s going to add yet more transactional costs to the average retail trader with less than a few hundred thousand in equity. Especially someone like me with more like a few thousand in equity :)

    I don’t trade boatloads, but I make enough in a month that between commissions, SEC fees, and cap gains, that about 50% of my profits go to someone else. Or more.

  3. Francois T

    the costs of failures should be “distributed more fairly”, with financial institutions and investors shouldering more of the burden.“

    Why, that is exactly one of the proposals put forth by John Hussman in is latest essay, “A Blueprint for Financial Reform.”

    Require a significant portion of the capital of bank and non-bank financial institutions to be in the form of convertible debt (contingent capital).

    When the assets of a company decline below the value of its liabilities, the only buffer between solvency and bankruptcy in the present system is shareholder equity. For example, if a company has $100 of assets, $95 in liabilities and $5 of shareholder equity, a decline in the value of assets of anything over 5% will make the institution insolvent, even if a large proportion of those liabilities are to the company’s own bondholders. This bondholder capital can only be accessed as a buffer against customer losses if the bonds default or “fail.” Requiring a significant portion of bondholder capital to be in the form of convertible debt would avoid this problem. If the company approached or became insolvent, a portion of bondholder capital would undergo a mandatory and automatic conversion to equity, providing an additional buffer against losses to customers and counterparties, without requiring public funds, and without requiring bond defaults.

    There is more :-D

  4. Jeremy Johnson

    Anything that shrinks the financial sector should be regarding favorably by established players.

  5. Steve in Philly

    You say that trading creates costs for the taxpayers in the form of periodic bailouts, and therefore trading should be taxed to pay for this. What an absurd solution. How about just getting rid of the bailouts? So much easier.

    1. bob

      Brilliant. What about the FDIC?

      What about the bank that holds your state tax dollars? Your paycheck?

      They are all trading.

  6. Jack Parsons

    Why, M. Giggity, it’s so simple: tax (the lack of) transparency!

    Private CDS? Tons of Tobin!
    Dark pool stock transactions? More tons!
    Via the NYSE market-marker system? Little to none.

    No tax policy is neutral. All tax policies (or lack of taxation) affects economic behavior. If you think opacity is bad, tax it!

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