French and German finance ministers are meeting this week to discuss the details of a joint proposal on how an EU wide financial transaction tax (FTT) could be implemented. They will then put forward their proposal to other EU member states at the beginning of September.

In recent months, there has been a notable shift in the debate around FTTs. Discussions amongst European policy makers are no longer focused on whether or not a FTT is viable, but on the question of practical implementation. Much of the detail has yet to be worked out, and politicians and officials continue to grapple with some challenging questions such as:

• who would bear the initial cost of the tax?
• where would the proceeds from the tax be directed?
• what impact would the tax have on market volatility?

Many of these questions have been explored in a new IDS report, The Tobin Tax: A Review of the Evidence launched in June this year. At the launch of the report in Brussels, the report’s author, Dr Neil McCulloch, outlined some of the key findings from the research.

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).