GLOBAL KNOWLEDGE FOR GLOBAL CHANGE

New research finds bankers tax is viable and would raise US$25 billion

14 June 2011
The dealing floor of the London International Petroleum Exchange, which deals in futures and options for oil and gas. Photo: Mark Chilvers/Panos

14 June 2011

New IDS research launched today finds that a Financial Transaction Tax (FTT) could now viably be implemented across Europe. The evidence suggests it is unlikely that such a tax would stabilise financial markets, as some campaigners claim, but it is unlikely to increase volatility either.

Ahead of next week's meeting of EU Finance Ministers and with the publication of the EU Impact Assessment of FTTs imminent, experts from academia, the financial sector and policy making circles are gathering in Brussels today for a high-level debate on whether a FTT can help plug the funding gap caused by the financial crisis.

The event launches a new report, The Tobin Tax: A Review of the Evidence, which is the first comprehensive review of the feasibility of FTTs. The review finds that a worldwide FTT on foreign exchange transactions could raise US$25 billion. In the UK alone it could raise US$11 billion (£7.5 billion), roughly the same as the entire UK aid budget.

The report's author, IDS Globalisation Team leader Neil McCulloch said:

"In an environment in which the governments of most of the world's financial centres are faced with making large spending cuts, this evidence of a significant source of currently untapped revenue cannot be ignored. It seems clear that a FTT is implementable, both at a European and national level. With increasing political support for such a tax amongst EU leaders, it is time for policy makers and the financial sector to take these proposals far more seriously."

Key research findings

  • 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: A 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$25 billion per year worldwide. The revenue potential for the UK would be around US$11 billion (£7.5 billion). Applying a FTT to other markets, e.g. derivatives and OTC (Over the Counter) markets, is more difficult, but, if successful, could raise much larger sums.
  • Who will end up paying? There is general agreement that wholesale traders would bear the initial cost of the tax. In the long run, a significant proportion of the tax could end up being passed on to consumers (i.e. owners of capital).

Report launch

Viable solution or impossible dream? The case for and against a Financial Transaction Tax is being held on Tuesday 14 June 2011 at the Residence Palace, Brussels.

It is hosted by the Institute of Development Studies, CIDSE, Oxfam International and CONCORD.

Speakers include:

  • Anni Podimata MEP
  • Mr Philip Kermode (DG TAXUD)
  • Max Lawson, Oxfam Great Britain
  • Ian Harrison, Association for Financial Markets in Europe
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