'Robin Hood' tax on bankers could raise as much as UK aid budget

8 November 2010

9 November 2010

New research published today by the Institute of Development Studies (IDS) finds that a worldwide financial transaction tax (FTT) on foreign exchange transactions could raise US$26 billion (£17.6 billion). In the UK alone it could raise US$11 billion (£7.7 billion), roughly the same as the entire UK aid budget. But the evidence does not support the argument that it will reduce market volatility.

As world leaders debate post-crisis plans at the G20 Seoul Summit this week, IDS publishes findings from the first comprehensive review of the feasibility of FTTs. The research finds that a new bankers tax is viable and could raise large sums. A tax on foreign exchange transactions would be most effective if implemented by the key financial centres around the world, but a currency transaction tax could be introduced by individual countries.

The research's author, IDS Research Fellow Dr Neil McCulloch, will tell MPs, non-governmental organisations (NGOs) and civil servants meeting in Westminster today that he believes the Government should design and implement an FTT on sterling transactions. He will claim that the UK should be using the G20 as an opportunity to explore the possibility of coordinating the introduction of similar FTTs with the governments of other major financial centres.

Commenting on the findings, IDS Research Fellow Neil McCulloch said:

"As governments around the world deliberate how to reduce budget deficits, the evidence supports the idea that a financial transaction tax could make a useful contribution. It may not reduce market volatility, as some of its proponents claim, but if designed properly, it will not destabilise markets either.

"There is a real opportunity for the Government to implement an FTT on sterling transactions and explore the possibility of coordinating the introduction of similar taxes with other major financial centres on their own currencies."

Key research findings include:

  • Implementation: Due to changes in the way transactions are settled, it is now much easier for countries to unilaterally introduce certain forms of FTTs. A tax on foreign exchange transactions would be most effective if implemented by the key financial centres around the world, but a currency transaction tax could be implemented by individual countries and by the Eurozone.
  • Impact on volatility: An FTT is unlikely to reduce market volatility as claimed by some campaigners. Despite theoretical models suggesting otherwise, the evidence shows that higher transaction costs are typically associated with more, rather than less, volatility. As a result the rate of the transaction tax should be a small percentage of existing transaction costs to minimise market distortions.
  • Revenue: Applying a 0.005 per cent tax to the foreign exchange market alone might raise around US$26 billion per year (£17.6 billion) worldwide. The revenue potential for the UK would be around US$11 billion (£7.7 billion). Applying an FTT to other markets, e.g. derivatives and OTC markets, is more difficult, but, if successful, could raise much larger sums.

Download the In Focus Policy Briefing - Is a Financial Transaction Tax a Good Idea? A review of the evidence.