A smart tax, on so many levels

James Tobin had a very, very good idea. So good, in fact, they named it after him. And that’s the Tobin Tax. It’s a small tax with very big potential. And best of all, it’s a damn good idea, in that it’s a tax that places a levy on socially, financially or economically non-productive (or even destructive) activity.

The Tobin Tax was proposed back in 1972, shortly after the break-up of the Bretton Woods fixed-exchange-rate system. The idea was to place a tax on foreign currency transactions that would shield national governments from having their economies at the mercy of speculators. a tax on financial transactions. The reason you may not have heard of it is that it exists in theory alone.

The reason for this is not hard to fathom: the world’s bankers, fund managers, stockbrokers and the super-wealthy elite they primarily serve make one seriously formidable lobby group against any kind of reform that could in any way, no matter how tiny, dent their profitability.

Lord Turner, chair of the UK’s Financial Services Authority (FSA) threw the – fat – cat among the pigeons this August when he publicly championed the idea of a levy on financial dealings to curb the power of the City of London. Tobin didn’t see the main purpose of his tax as being about curbing financial transactions. Rather, it should lead to greater economic stability.

The financial crash of the last 12 months has seen Keynsian economics being taken out of its decades-long mothballs. Tobin now too seems to be firmly back in vogue. “If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit”, said Turner.

Here’s where Turner starts to get really interesting: “If increased capital requirements are insufficient I am happy to consider taxes on financial transactions – Tobin taxes. Such taxes have long been the dream of the development economists and those who care about climate change – a nice sensible revenue source for funding global public goods.”

The scale of transactions in the world’s foreign exchanges almost beggars belief – an annual average of $912 trillion. An extremely modest transaction tax of, say, one tenth of one per cent, would yield around $90 billion a year, which is almost exactly the entire amount that needs to be transferred from the rich world to developing countries to allow them to both reduce emissions and adapt to the impacts of climate change.

Today’s Irish Times features a 6-page broadsheet supplement dedicated to promoting spread betting. As the front page quote sells it: “One of the major attractions of spread betting is that it’s tax-free”. Spread betting is, in the purest sense, gambling on the markets. Bizarrely, all “winnings” are free of tax, including capital gains, income tax or stamp duty.

You then take punts on all manner of things – will the FTSE go up, will the price of such and such a commodity go down, pretty much anything with an element of uncertainty, which, in the financial markets, means pretty much everything.

While the entire supplement is one great big ad promoting spread betting, “The secret diary of a spread better” on the back page actually gives a glimpse into the mad, mad world of financial gambling. The unnamed author (based on some inside information) bet against the share price of a particular company. “The market duly opened at 8am and immediately the price went down by about 20p. If I had walked away, I could have pocketed a profit of £20,000, but I decided to go to work …confident the price would continue to go down”.

It didn’t. By the time he got home, he had lost £35,000. That’s real money, hard cash. For most people, £35,000 could well be your entire year’s salary, either before or after tax, and this individual lost that much over the course of a day in an arcane series of electronic transactions.

This, in microcosm, is the greed-fuelled craziness that has crashed the global financial system, yet this completely reckless activity unlike, say, aids for disabled children, is completely tax, VAT and duty free.

The Tobin Tax won’t put a stop to this kind of psychotic gambling, but it will mean that at least some good can come from it. A company called Ethical Currency has recently become the first foreign exchange broker in the world to voluntarily ringfence 0.005% of all its transactions into a single pot that will go to the Global Fund, set up to fight Aids, TB and malaria.

Of course, the banksters and brokers will tell you this will never work, companies will just relocate offshore. That can be readily fixed by imposing a penalty rate on all transfers to tax havens, or simply to levy the Tobin Tax wherever the transaction occurred.

Last month German chancellor Angela Merkel tried and failed to get agreement among EU leaders to take the Tobin Tax idea to the G20 summit. The idea also found favour with Commission president, Manuel Baroso.

Another, this time utterly unexpected initiative emanated from Germany earlier today. The news report was headlined ‘Rich Germans demand higher taxes‘. Yes, that’s not a misprint. A group of 44 wealthy Germans have signed a petition lobbying for a special 5% wealth tax, which they say could raise 100 billion euros over two years.

“The path out of the crisis must be paved with massive investment in ecology, education and social justice,” they say in the petition. Those who had “made a fortune through inheritance, hard work, hard-working, successful entrepreneurship, or investment” should contribute by paying more to alleviate the crisis.

One signatory, Peter Vollmer, said he was supporting the proposal because he had inherited “a lot of money I do not need”. He said the tax would be “a viable and socially acceptable way out of the flagrant budget crisis”. Step away from the barricades! I think I see a stampede of Irish multimillionaires heading to march on the Dáil demanding a new super-tax for themselves. Sorry, my mistake, they were actually heading for BT2.

ThinkOrSwim is a blog by journalist John Gibbons focusing on the inter-related crises involving climate change, sustainability, resource depletion, energy and biodiversity loss
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3 Responses to A smart tax, on so many levels

  1. Bill B. says:

    Nice one, John. Hadnt heard of the tobin tax, sounds like a great idea, but presumably everyone’s got to agree it, so, just like aviation and shipping, it ends up tax and duty-free because of its supposed “international” dimension. Still, did I read somewhere that obama support some kind of tax on financial trades.

    You’d need someone the size of the US behind this to make it happen, but as I said, great idea, great to see it being at least kicked around. Bill

  2. “Bizarrely, all “winnings” are free of tax, including capital gains, income tax or stamp duty.

    Good point.
    Even if there was a capital gains tax involved,
    there’s the question of why tax on work is greater than tax on capital gains anyway – seems to be the same regardless of traditional political leanings in a country, it’s the same in Sweden for example.

  3. John Deegan says:


    Totally agree with you. I have long thought that a tax on share purchases should be on a sliding scale so that the longer you hold a share the less you pay. If you keep them over 12 months the tax would be zero going from say 10% if sold within one month of purchase.
    This would get rid of those who are simply gamblers and who distort the real market. A tax on all short term financial transactions would make traders look at the longer term which has been totally lost in today’s markets. However its not going to happen with the power wielded by the Financial Institutions over the elected representatives around the world. Looming energy shortages and with increasing costs, the power of these finance houses will dissipate over the coming years as energy will replace finance as the real source of wealth. We will see these people of finance as people of straw who have sucked the real economy dry for the last 200 years.

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