The Time Has Come for a Global Financial Transactions Tax

After ceding to pressure from NGOs around the world, the International Monetary Fund opened up its process of investigating the possible impacts of a global Financial Transactions Tax (FTT). NGOs working on finance and development issues are currently preparing written commentaries and will be participating in face-to-face meetings with Fund officials to advocate for the implementation of the tax. The possibility of turning the vision of Keynes and Tobin into concrete financial policy is now more palpable than ever. Civil society must keep up the pressure.

The proposal to levy a tax on transactions in financial markets is nothing new, with roots dating as far back as the Great Depression when none other than John Maynard Keynes suggested a general transactions tax be imposed on Wall Street in order to curb volatility. In the 1970s, when the world once again was faced with economic unrest, this proposal was expanded and refined by economist James Tobin to focus on problems related to currency speculation and drastic exchange-rate fluctuations.  After falling out of the spotlight for another decade, the call for a global “Tobin Tax” or Financial Transactions Tax (FTT) reemerged in the context of the Asian financial crisis in the late 1990s, and has been forefront on the agenda of civil society organizations concerned about the social and economic effects of unfettered finance ever since. In the context of the ongoing economic crisis, which has dramatically highlighted the necessity for a global FTT, new opportunities for enacting such a tax are unfolding.

The concept behind the FTT is simple – through imposing a very small levy on trades in stocks, bonds, options, credit default swaps, and other more complex derivatives, speculative short-term trades will be discouraged, thereby stabilizing markets and also generating needed revenue for governments. A scaled-down version of the FTT is already in force in countries such as Great Britain, which has levied a 0.25% “stamp tax” on certain transactions involving shares and securities passing through the London Stock Exchange since 1986, and has raised over US$ 30 billion a year just through this partial measure.

The attractiveness and practicality of this measure is now becoming evident to more and more governments, reeling from the effects of the current financial crisis and hit by massive amounts of debt stemming from the bailout packages offered to save the very speculators that led the way into this economic chaos. Due to this, at its most recent meeting in Pittsburgh, the G-20 gave a mandate to the IMF to prepare a report on possible policy options available so that “the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system”, and one of the options being currently investigates is that of an FTT. Several global leaders, such as British Prime Minister Gordon Brown, are already throwing their enthusiastic approval behind the measure, while the European Union as a whole issued a call to the IMF to consider implementing a FTT at its Summit in December 2009.

Apart from this influx of support, the FTT still has quite a few detractors, including most notably the US Treasury Secretary Timothy Geithner. These critics claim that a FTT would reduce liquidity in markets, penalize middle-class investors, and reduce market efficiencies. However, it can be shown that the effects of the tax will only register on assets that are already very liquid, thus only marginally decreasing the amount of liquidity in the market as a whole. In addition, impacts on small-time investors will be minimal, as provisions on the FTT are being established to exempt trades by pension funds and certain mutual funds, which are the main vehicles through which the middle class invests their money. And it is difficult to be concerned about the possibility of market efficiencies being reduced, as the crisis has so painfully proven how these so-called “efficiencies” cannot guarantee economic stability and prosperity, and instead only creates loopholes in which unproductive speculation is allowed to flourish.

Despite these criticisms, the global movement advocating for a FTT is currently growing in strength. Rooted in the work of ATTAC, a movement founded in the late1990s by anti-globalization activists in France in favour of implementing a “Tobin tax” on a global scale, the international campaign for a FTT now includes trade unions, human rights organizations, and anti-poverty groups. Some initial successes have already been registered – for example in Germany, a coalition of civil society organizations (including members of the Social Watch Germany network such as Global Policy Forum Europe, WEED, and Bread for the World) have collected over 60,000 signatures on a petition that calls for the German Parliament to debate the introduction of such a tax. In the United States, the broad based Americans for Financial Reform campaign has succeeded in promoting the issue of the FTT with policymakers and in the mass media, encouraging even the New York Times to pronounce in favour of the tax in its January 26 editorial.

It is also worth mentioning that, after ceding to pressure from dozens of NGOs around the world, the IMF has opened up its process of investigating the possible impacts of a global FTT to civil society participation. Organizations working on finance and development issues, including those of Watchers such as the North-South Institute in Canada and the Center of Concern in the USA, are currently preparing written commentaries and will be participating in face-to-face meetings with Fund officials to advocate for the implementation of the tax. It is hoped that these interventions will lead to a positive recommendation by the IMF when it presents its comments on the feasibility and desirability of a FTT at the next G-20 Leaders´ Summit in June of this year.

It is obvious that many challenges still remain before a FTT becomes a global reality. Support for the measure has been mainly concentrated in Europe, with few developing countries (or civil society organizations based in developing countries) voicing their explicit approval of the tax. There is also a concern that the FTT could be implemented as a merely temporary measure, specifically mandated to generate funds to pay off the public debt incurred by financial-sector bailout packages, instead of it being conceived as a policy that can lay the groundwork for a more thoroughgoing restructuring of the global financial system. Notwithstanding, the possibility of turning the vision of Keynes and Tobin into concrete financial policy through the enactment of a FTT on a worldwide scale is now more palpable than ever, especially if civil society can keep up the pressure on a national and international level.