Backgrounder: Robin Hood Tax

The G20 is considering a new sort of global tax, known as the Robin Hood Tax or Financial Transaction Tax (FTT).

Trillions of dollars are traded by banks and other financial institutions every day – in fact, the value of these financial transactions is 75 times global GDP.  Indeed, at just 0.05% (that is fifty cents on every thousand dollars), the FTT would generate nearly $650 billion per year. That is six times the current global level of development assistance.

What exactly would be taxed?

The Financial Transaction Tax would apply to all transactions between institutions involving stocks, bonds, foreign exchange, and derivatives (including trade of futures and options related to stocks, interest rate securities, currencies, and commodities). It would be the transaction that would be taxed, with the amount based on the value of what is being traded.

As currently proposed, it would NOT cover retail banking – that is, ordinary consumer transactions like payments for goods and services, pay cheques, currency purchases and cross-border remittances. Nor would the tax apply to any ‘off-exchange’ bilateral arrangements between two parties that take place outside of the financial system’s regulatory oversight.

How would it work?

The money would be collected in major centres where financial trading takes place. Thus, the key players are the US (home of the NY Stock Exchange) and the UK (London Stock Exchange). Collecting the tax where the trading occurs could be automated and inexpensive using the electronic settlement systems already in place. Furthermore, given the extent to which these transactions are computerized, and with a newfound drive to make all contracts enforceable and transparent, implementing the Robin Hood Tax would not be difficult.

How much money is involved, and how will the revenue be allocated?

Depending on the tax rate, it could generate between $60 billion (with a tax of 0.005%) and $650 billion (with a tax of 0.05%) annually.

As the proposal currently sits, the revenue generated by the Robin Hood Tax would be divided between global and domestic priorities. Half of the money would be allocated to global public goods – particularly, development assistance aimed at achieving the Millennium Development Goals and climate financing to help developing countries cope with climate change. The other half would be kept by rich country governments to spend on domestic priorities.  This revenue sharing is viewed as necessary in order to obtain the support of G8 and G20 finance ministers.

How do we know it will work?

Something similar to the FTT has been in place in a number of countries. In the UK, a 0.5 per cent tax on share transactions raises $5 billion a year. Although this tax is much higher than the global FTT proposed, it has not damaged the London Stock Exchange, nor have traders simply moved elsewhere as some predicted would happen. In the US a small transaction tax funds the Securities and Exchange Commission. Belgium’s FTT raises $300 million a year.

Will this help fix the global financial system?

The FTT may help curb some of the wildest of speculative trading, but it is fundamentally a means of raising additional funds for poverty eradication and tackling climate change, not a remedy for the ills of the financial system.

Won’t banks simply pass on the cost?

It would be difficult for banks to pass on the cost of the FTT to the consumer because the kinds of commercial banking transactions subject to the FTT are a number of steps removed from ordinary consumer transactions. As with all taxes there is a risk of it being passed on, but the risk here is certainly no higher than other forms of taxation, and probably lower.

How do we know that revenue will be directed towards development and climate adaptation?

We have to insist on it. Rich-country finance ministers may be inclined to spend any additional revenue on easing deficits. With unified action across the world, we can hold them to using a large proportion of the money to fund aid and climate adaptation.

Who supports it?

This idea has more political momentum than ever before. France, German and the UK support it. Hundreds of economists favour it, including Nobel-prize winner Joseph Steiglitz. Already, thirty-seven leading Canadian economists have signed a letter to Finance Minister Jim Flaherty urging him to support the Robin Hood Tax. Aid and anti-poverty organizations world-wide have been working for the FTT. Columbia University poverty expert Jeffrey Sachs is another supporter. Media, including the New York Times, Le Monde, The Mail, and The Guardian have come out in favour of the FTT. Even financial big-wigs Warren Buffet and George Soros have got behind it.

Isn’t this just the Tobin tax all over again?

The Financial Transaction Tax is like the Tobin tax augmented. The Tobin tax was a hefty (0.5%) tax on currency transactions only, proposed by economist James Tobin in the 1970s. The intent was to curb excessive speculative trading in currencies.

What are the competing proposals?

The G20 are considering two competing proposals from the US and Germany. The US proposal aims to recoup bailouts offered in 2008.This levy on the country’s largest banks is essentially retroactive - to pay for bailouts already incurred. The German version would tax all banks for a special fund to pay for future bailouts.

There is also the Tobin-like Currency Transaction Levy (CTL), which would apply only to wholesale buying and selling of the world’s four major currencies. The CTL would tax at a rate of only 0.005%, which might be more palatable for opponents of the more comprehensive Financial Transaction Tax, and would certainly raise much less money.