Robin Hood’s modus operandi was simple and, thanks to Hollywood, is still universally understood. When the financial crisis tipped the global economy into a steep downturn, the English folk hero was the obvious figurehead for a campaign to make the financial sector pay by taxing its day-to-day activities.
“You can draw parallels between the Sheriff of Nottingham and financial services, and Robin Hood redistributed gains back to those who needed them,” says Simon Chouffot, spokesman for the Robin Hood Tax campaign, which was launched in 2010. But implementing a “financial transaction tax” is far harder than robbing wicked medieval landlords.
Eleven eurozone countries – which include Germany and France and account for about a sixth of the global economy – have ambitious plans to change bankers’ behaviour and raise significant funds for stretched fiscal budgets. But they face fierce opposition from the financial sector, which warns of catastrophic consequences for bank profits and economic growth. In Brussels, momentum behind the plan, which was meant to be effective from January 1 next year, has stalled. Indeed, the disputes have reached such an intensity that it is highly unlikely that the proposals will enter into force without being substantially watered down.
Rather than spotting an opportunity to strengthen London’s position as Europe’s financial centre, the UK – not one of the FTT 11 – is launching legal action because it fears damaging repercussions. “I can’t find anyone in the central banking community who thinks it’s a good idea,” Sir Mervyn King, departing governor of the Bank of England, remarked last week. “I do hear enormous scepticism, even from quarters which are alleged to be behind it.” Germany’s Bundesbank has warned publicly about the damaging impact on markets.
Despite such opposition, proponents of a transaction tax have not given up. Brussels even sees the protests as evidence its proposals will have a real impact. If the amount of “noise” was a gauge, “it looks like the design of the tax was just right”, says Algirdas Semeta, the EU tax commissioner.
“The only thing I haven’t heard so far is that FTT is going to speed up global warming and kill baby seals,” adds Benoît Lallemand at Finance Watch, the Brussels-based public interest lobby. “You want to give it a try because you want the financial sector to serve the economy.”
Two main arguments support an FTT. First, banks should make a bigger contribution to public finances, especially given the cost to taxpayers of bailouts over the past five years.
Second, an FTT would encourage more “responsible” behaviour by traders. The original idea in the 1970s for a “Tobin tax”, named after the economist James Tobin, was to slow foreign exchange markets by throwing in “some sand”. Increasing the cost of speculative transactions would mean that prices would better reflect fundamentals and encourage longer-term thinking.
“The traditional buy side – the real, long-term investors – should not really care about the FTT. The problem is that the sell side has dragged them into excessive trading,” says Mr Lallemand.
In recent years, financial sector activity has accelerated dramatically as a result of computer-driven “high-frequency trading”, in which deals are struck in fractions of a second. The notional value of financial market trades vastly exceeds the value of “real” economic activity. That makes many think that countries would be better off with less trading.
“Suppose just as a thought experiment, the UK took as much as 50 per cent of trades from France and Germany. That may be a disadvantage in the short term, but then you look at what the financial system has done to economies over the past 30 years – it was just financial alchemy,” says Stephan Schulmeister at the Austrian Institute of Economic Research in Vienna. “Longer term, the UK will be the loser because you can’t just live on trading assets.”
FTTs have won some support from business figures such as the billionaire investor Warren Buffett and Microsoft’s Bill Gates, especially when proposed as a way to raise revenues for combating global poverty. They exist already in Taiwan and South Korea. They can also be found in economies that rely heavily on financial services such as Hong Kong, and even the UK, where “stamp duty” – a limited FTT applied to equities – was introduced in 1694. At least $38bn is raised across 40 countries each year, estimates Avinash Persaud, executive fellow at the London Business School.
But Brussels’ proposals, which the European Commission estimates would raise €30bn to €35bn a year, are exceptional in their scope. The aim is to prevent the avoidance that undermined previous European FTTs, such as Sweden’s during the 1990s.
No matter where in the world a transaction took place, it would be taxed if either party were in the FTT zone. Financial products issued in an FTT country would be taxed even if the traders were based elsewhere.
At first glance, the proposed rates – 0.1 per cent on the face value of shares and bonds and 0.01 per cent for derivatives – appear modest. Some activities, including spot currency transactions and initial sales of bonds and shares, are exempt.
But these costs would quickly accumulate when assets were traded frequently. A recent Goldman Sachs study put the cost at a total of €170bn for 42 European banks it surveyed, based on 2012 trading patterns, which would have all but wiped out annual profits. In fact, the tax could cause transaction volumes to tumble. The commission assumes, for instance, derivatives trading would contract 75 per cent.
As a result, the tax would undermine the business models of exchanges and paralyse crucial market operations, the industry says. To find funding or balance books, European finance houses make tens of thousands of transactions daily in the “repo” or “repurchase agreement” market, by which assets such as government bonds are sold temporarily for cash. The new tax could bring it to a halt.
“If the FTT is implemented as currently set out, we won’t have a repo market left at all in the 11 countries covered,” warns Godfried de Vidts, chairman of the European repo council at the International Capital Market Association. “If you stop blood flowing around a body, the body dies. The repo market provides the money that flows around the financial system.”
The commission plays down fears of fewer transactions reducing liquidity. “Liquidity is not an end in itself. It does not mean the more, the better,” says Manfred Bergmann, the senior commission official known as “Mr FTT” “Some people say, ‘this is the end of the markets … it is the end of the world’. We are saying, ‘well, we don’t think that when the turnover declines by 15 per cent the market will be less efficient’.”
But financial analysts worry about the cascading effects of the tax, especially in bond markets, where prices are less volatile than in equity markets. “For some non-FTT investors, this may be the tipping point between wanting to invest in FTT zone countries and not being exposed at all,” says Hans Lorenzen at Citigroup.
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It is not just bankers who are alarmed. German industrial companies have warned about an increased cost to transactions essential for their businesses – as well as the impact on company pension fund returns. Even among the 11 countries that have backed a European FTT there are fears it would drive up borrowing costs, already painfully high in southern Europe. Including sovereign debt is “a major concern”, says Ferdinando Nelli Feroci, Italy’s EU ambassador. “We cannot afford the risk of a situation whereby the tax … leads to a situation where yields on sovereign debt may rise.”
There are a host of technical headaches, too. Because the tax would be liable wherever assets from FTT countries are traded, Europe would be relying on authorities elsewhere. Opponents question how effective tax collection would be when, say, US or Japanese banks traded German equities.
Washington staunchly opposes the tax and Congress could retaliate with a law to ban US financial groups from paying it. The tax is “unbelievably objectionable”, says Kenneth Bentsen, president of the Wall Street lobby group Sifma, adding that it is unclear whether European authorities have the right to collect it.
As a result of these problems, few in Brussels expect the FTT to be implemented as currently envisaged; privately banks are being told as much by some eurozone officials. The biggest faultline is between those countries that have a domestic transaction tax and those that do not. France and Italy, for instance, each want their own tax to become the eurozone standard. Both would be less ambitious than the commission proposal.
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Brussels argues that safety in numbers gives the 11 a chance to go for a bolder tax that raised more revenue. But the commission’s objective of covering “all markets, all actors and all instruments” is being tested to breaking point by demands for opt-outs.
Special treatment for the repo market seems inevitable, either through exemptions or much lower tax rates. The dilemma in Brussels is that a less ambitious UK-style “stamp duty” would hit retail products such as equities while sparing the complex derivatives that are the FTT’s main target. “They are searching for a graceful exit but it isn’t easy to find,” says one senior EU official.
“The wonderful irony is that it is the UK which has the best example of an FTT,” says Prof Persaud. “Low transaction costs in finance are good – but zero is not desirable. There is a middle road with a low tax that raises modest revenues but does eliminate some of the excesses.”
All eyes are on Germany, which has no stamp duty. Its original zeal has waned. German officials privately raise technical questions about implementation. “We are just beginning this discussion. It is not a major concern to be very frank,” Wolfgang Schäuble, Germany’s finance minister, admitted recently.
In Brussels, technical discussions continue but no big political decisions are expected before September’s federal elections in Germany. Should a grand coalition emerge between Chancellor Angela Merkel’s centre-right Christian Democratic Union and the pro-FTT Social Democratic party, the FTT negotiations might resume in Brussels with a vengeance.
In Brussels, no outcome is being ruled out, and some kind of “Robin Hood tax” could still emerge. “It has dawned on everyone that this is difficult, risky,” says one senior official involved in the talks. “But we have to do something. We’ve said too much.”
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James Tobin: The spiritual father of taxing day-to-day activities
The spiritual father of transaction tax is Professor James Tobin, a US economist who 40 years ago proposed a levy to “throw some sand in the wheels of our excessively efficient international money markets”, writes Philip Stafford.
Like the European Commission, he was responding to a period of great instability in financial markets. In 1972, the world was still coming to terms with the collapse of the Bretton Woods international monetary system when the US no longer allowed the dollar to be converted into gold.
Big currencies were allowed to float but the derivatives that investors use today to hedge risk had yet to take off fully. Futures markets were still largely regional and focused on commodities.
In the absence of global monetary and fiscal integration, Prof Tobin suggested a tax on cash trades in an effort to curb speculation and wild swings in important currencies. That would improve trading terms for the world’s poor. “Speculation on exchange rates … have serious and frequently painful real internal economic consequences,” he said.
Prof Tobin acknowledged his debt to John Maynard Keynes, who had proposed the imposition of a small transactions tax on all stock exchange dealings as far back as 1936.
But many current proposals have crucial differences from Tobin’s ideas. His preoccupation was foreign exchange – a market absented from European plans.
Prof Tobin, who went on to win a Nobel Prize, argued that it would be an “internationally agreed uniform tax”. In the eurozone, however, only 11 out of the 27 member states are pursuing his recommendation.
Moreover the professor distanced himself from some protesters.
“I have absolutely nothing in common with these anti-globalisation rebels. They’re misusing my name,” he told Der Spiegel in 2001, the year before his death.