The Tax that Would Never Happen

A few weeks ago the European Parliament voted in support of a Europe-wide financial transaction tax. The vote is non-binding, but it marks an important step towards restoring the balance between a European population hit by the financial crisis and a still very unregulated and under-taxed financial sector.

A tiny tax on currency trade and other financial transactions (equities, certificates, derivatives) could help to both regulate the market and raise revenue to help pay for the bailouts of the banking sector, finance global development and tackle climate change.

A tax of between 0.01 and 0.05 percent could raise nearly 200 billion Euros on the EU-level and US$650 billion on a global level. Compare this to the US$32 billion that the United Nations and all its organs and agencies spend annually, or the US$140 billion that constitutes world official development assistance.

The European Parliament is far from the only high-level body that supports a tax on financial transactions. In Europe, the governments of France, Germany, Austria and Spain are supporting the tax. Further prominent business people and economists including George Soros, Warren Buffet, Joseph Stiglitz, Paul Krugman and Jeffrey Sachs are backing the proposal.

The idea of a tax on currency transactions is not new. Economy Professor James Tobin originally proposed such a tax in the early 1970s to decrease harmful currency speculation by throwing “some sand in the wheels” of the markets. Since then, the foreign exchange market turnover has expanded dramatically to over $4 trillion per day. In the meantime, the tax has made it back on the agenda at regular intervals.

For example, after the Asian financial crisis in 1997-1998, economists, NGOs and progressive politicians called for a tax to prevent similar financial crises in the future. The idea remained controversial, however, with strong opposition from large banking centers like Wall Street and the City of London. Even supporters of the tax often expressed skepticism that it would ever gain sufficient political traction.

Then, after the turn of the millennium, global taxes were promoted again during high-level discussions at the UN on how to finance international development. In 2004-2005, French President Jacques Chirac and Brazilian President Luiz Inacio "Lula" da Silva, led a high-profile campaign supporting several kinds of international taxes to finance the United Nations Millennium Development Goals (MDGs).

Partly to minimize opposition, the campaign emphasized the revenue-raising aspects of the taxes and downplayed the vital role taxes can play in steering policies. But, powerful interests like banks and institutional investors kept vigorously opposing taxes on financial transactions and by June 2005 the high-profile campaign of Chirac and Lula had boiled down to discussions on a much less ambitious airline ticket tax.

Perhaps this time will be different. The global financial crisis has turned things on its head. Banks and financial institutions no longer enjoy the same amount of trust or clout. Citizens are questioning the favors and benefits given to the banks and financial institutions that caused the global crisis and governments are having to respond to those concerns.