The Pope, EU and USA want a Tobin Tax … surely it’ll happen?

There’s been this thing called a Tobin Tax mooted for a while now.

Before we get into the whole thing, what is the Tobin Tax?

“A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another.”

The idea is to place a nominal tax – let’s say 0.05 percent of any transaction – on all dealing in financial market securities globally.

There is a global call for such a tax, and a gradually increasing global response.

I’m writing it about it today because the whole thing came back to a head when the Church weighed in on the argument and said this was a good thing.

This was sparked by an opinion piece by the UK’s Archbishop of Canterbury, Rowan Williams, writing about the Vatican’s proposals for financial reform in the Financial Times on Monday.

The Vatican's report was released last week.  Written by the Pontifical Council for Justice and Peace titled “Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority” (you can read the full text here), it’s recommendations include notes about ring-fencing routine banking from casino banking (the Vickers thing); the recapitalisation of banking using public sources, and more; but one key area it zeroes down into is a transaction tax on trading.

The Vatican’s words are that there should be “taxation measures on financial transactions through fair but modulated rates with charges proportionate to the complexity of the operations, especially those made on the ‘secondary’ market. Such taxation would be very useful in promoting global development and sustainability according to the principles of social justice and solidarity. It could also contribute to the creation of a world reserve fund to support the economies of the countries hit by crisis as well as the recovery of their monetary and financial system.”

The Archbishop added his voice, stating that “a comparatively small rate of tax (0.05 per cent) being levied on share, bond, and currency transactions and their derivatives, with the resulting funds being designated for investment in the ‘real’ economy, domestically and internationally. The modest rate of taxation conceals the high levels of return that could be expected (some $410bn globally on one estimate).”

This has the backing of many heavyweight figures in business and the arts, including George Soros, Bill Gates and Ian Curtis.

The latter coined the phrase “Robin Hood Tax”, which has been a campaign running for almost two years to get this off the ground.

There’s also support from within the government, with Andrew Tyrie – Chair of the Treasury Select Committee which recommends bank reforms – saying we should do this.

The European Union has also recommended  its implementation, with the proposal of a financial-transaction tax that would take effect in 2014 and raise about €57 billion ($78 billion) a year.  these proposals are going forward and are likely to be implemented as a Directive to all member states in the near future.

America agrees and has made similar recommendations for such taxation, and the UK already has one.

From the Government’s very own website:

“When you buy UK shares you pay a tax on the transaction. This is called Stamp Duty Reserve Tax (SDRT) for 'paperless transactions' and Stamp Duty for transactions using a stock transfer form … you pay Stamp Duty Reserve Tax on paperless transactions for UK shares at a flat rate of 0.5 per cent.”

So surely this is a no-brainer, isn’t it?

No.

According to George Osborne, the UK Chancellor, there is no global agreement on this tax.

I don’t agree with him on this, as I think there is global agreement on the concept of applying such a tax, as demonstrated.  There is just no agreement on the tax level.

For example, according to Bloomberg, “while the EU proposal would apply a tax of 0.1 percent on trades of stocks and bonds, the U.S. tax would be ‘about three basis points’ or 0.03 percent.”

And there’s the rub.

Everyone wants to tax the banking system, they just don’t want to lose their banking assets and, whilst different nations apply different tax levels, banks will use taxation arbitrage to ensure they get the best rates possible.

This means that the banks will locate and be attracted towards the lowest tax systems, or zero tax systems … after all, note that I haven’t mentioned China, Russia or Canada in this piece.

That’s because these G20 members oppose the idea. 

So Tobin won’t work.

Move on and find another plan.