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Financial Transactions Tax

Financial Transactions Tax

Jubilee Australia is delighted to be coordinating a broad alliance of development organisations, green groups, think tanks, unions and faith communities to bring the Robin Hood Tax down under.

Australian groups involved include: Jubilee Australia, Oxfam, World Vision, ActionAid, Catalyst, AngliCord, Uniting Justice, Justice and International Mission Unit of Synod of Victoria and Tasmania UCA, Oikoumene Foundation, AFTINET, Search Foundation, TEAR, Australian Manufacturing Workers' Union, Australian Education Union, Australian Council for International Development, Australian Nursing Federation.

A global phenomenon, the Robin Hood Tax, is a suggested “tiny tax” on financial transactions that could raise hundreds of billions of dollars every year to go toward charitable causes. Globally, it is supported by UK Prime Minister Gordon Brown, French President Nicolas Sarkozy, billionaire Warren Buffett, economist Jeffrey Sachs, along with actors Bill Nighy, Sienna Miller and Emma Thompson, among many, many others.

The magic of the Robin Hood Tax is that it is just a tiny tax on financial transactions. It would not affect high street customers at an everyday level. It would not require everyday Australians to donate money. It would only affect the bottom line of financial institutions—and only an infinitesimal part of that bottom line.

The most recent financial crisis has opened up opportunities for long-term change, like this proposal to implement a tax on financial transactions. Jubilee believes the time for transformational change has come.

 

The case for a financial transaction tax

Economic justice advocates around the world came together to ensure that we didn't lose opportunity to learn lessons from the 2008 Global Financial Crisis. They decided that one significant step towards reigning in markets that had spiralled beyond worth in the real economy as well as raising much needed funds for national deficits and international finance obligations was to mount an international campaign for a financial transaction tax—aka a Robin Hood Tax.

 

Administratively practicable

Over the last few decades more than 40 countries, including Australia, have implemented some form of FTT either on a permanent or temporary basis2. The UK stock exchange, one of the world’s largest, has a small tax on share transactions. The rate of this tax, 0.5%, is ten times higher than the average proposed tax rate for FTTs, and yet the UK stock exchange remains one of the largest in the world—investors have not been deterred. Argentina, Brazil, China, India, Indonesia, South Africa and South Korea also tax sale of company shares3. Whilst Sweden's attempt to impose a FTT in the 1980s was not successful due to poor design, lessons learnt from the successful UK imposition of stamp duty on stocks demonstrate that an appropriately designed system will avoid investor flight4.

All international transactions are operationalised by central foreign exchange settlement systems such as SWIFT, and therefore are traceable and ultimately taxable5. Compared to other tax regimes, a FTT can be efficiently collected at the point of trade as has been demonstrated in Japan and the UK 6. Furthermore, a study from the North-South Institute has found that a Currency Transaction Tax (CTT) of 0.005% would not be disruptive to exchange rate volatility (see Schmidt 2007).

The International Monetary Fund concurs FTTs are administratively practicable7. FTTs are difficult to avoid or evade, given the tax can be captured at the point where deals are settled via centralised settlement systems. The tax would be collected by the government responsible for operating a trading zone. For example, taxes collected on the Australian Stock Exchange would be collected by the Australian Government, and would be an additional source of revenue for the government, to ensure domestic as well as global benefit.

 

Potential to raise significant revenue

The exact amount levied from a FTT depends on the size of tax and exclusions. However, a number of estimates exist: The UN Secretary-General’s Advisory Group on Finance (the AGF) reports that between US$2 and 27 billion could be raised by a FTT annually by 20208. The Austrian Institute for Economic Research estimates that a mid-range tax rate of 0.05% on financial transactions would raise annual revenues of $US650 billion9. Schmidt (2007) estimates that a 0.005% Currency Transaction Tax on the four major currencies (US$, Yen, Euro and Pound Sterling) would raise over US$33 billion per annum. Another US study has estimated that between US$117 and $353 billion could be raised annually through differentiated tax rates for different markets10. The IMF (2010) has stated estimates of $200 billion could be raised annually by a 0.01% FTT.

Imposition of a FTT is likely to dissuade some transactions and, therefore, an accurate prediction of the potential yield is not possible. However, if a 0.05% FTT was collected on Australian “over-the-counter” and exchange traded market transactions between 2005-06 and 2008-09, it would have raised $48 billion (calculations Professor Ross Buckley, University of NSW, Jan 27 2011).

 

Increase market stability by reducing incentives for high frequency speculation

Incredible growth of financial market trading in recent years had led to the situation where the volume of financial transactions is now many times higher than nominal world GDP. While in 1990 financial transactions were 15 times higher than GDP, they are now 73 times higher11. The volume of foreign exchange transactions is around 70 times higher than world trade—almost entirely due to the enormous boom in derivatives market. It is generally accepted that the size of the derivatives market today allows speculative trading to far outweigh its use for hedging and insurance purposes.

Additionally, the speed of financial transactions has increased which has led to a tendency for commodities, exchange rates and stocks to fluctuate without converging towards underlying trends. Instead of improving the efficiency of markets in the 'price discovery process', the increased speed of trading exacerbates trends of asset prices and increases price volatility12. This excessive liquidity (trading activity) in the market increases volatility, as evidenced in the increased boom and bust cycle we have experienced in the Global Financial Crisis (GFC). Short-term transactions encourage price runs and ‘noise trading’, both of which contribute to instability in the global economy. These would be reduced by a FTT as the tax would be an economic disincentive to rapid trading. Price runs would become less pronounced and the boom and bust cycle that we have seen in recent years should become less pronounced.

While Australia's economy and banking sector were largely protected by the impacts of the GFC, on presentation of the 2011-2012 budget, Treasurer Swan stated that national revenue “[l]osses built up during the global crisis are larger and lingering longer” as a result of a subdued global economy13. Tax receipts are expected to be $15 billion lower than at the 2008-2009 budget, a $45 billion downward revision in 2011-2012/14. This clearly indicates that whilst impacts of the GFC have been far worse in other countries, Australia is not immune to the volatility of global markets and would benefit from increased market stability.

 

International political and economic support

The FTT has strong support in key European Union Constituencies. French President Nicolas Sarkozy and German Chancellor Angela Merkel and her Finance Minister are championing the proposal at the G20 and within Europe. The French and German governments won agreement at the Eurozone Heads of State meeting in March 2011 to proceed with implementing a collaborative FTT. Also in March, the European Union Assembly was reported to have delivered a landslide vote in favour of the EU Commission passing legislation for a Financial Transaction Tax. In May 2011, Finnish Finance Minister and Deputy Prime Minister Jyrki Katainen declared Finland's support for a European FTT.

Former British Prime Minister Gordon Brown has also announced his support, and the UK Government has recently agreed to support a FTT if internationally implemented. Two US members of congress have tabled bills to introduce FTTs in the US in 2010, and House Speaker Nancy Pelosi has publicly endorsed the tax.

In April 2011, a thousand economists from 53 countries wrote to G20 Finance Ministers who are meeting in Washington to urge the adoption of a FTT. Economists wrote, “The financial crisis has shown us the dangers of unregulated finance, and the link between the financial sector and society has been broken. It is time to fix this link and for the financial sector to give something back to society.”

Take Action

  1. Add your support to the Robin Hood Tax campaign in Australia
  2. Download our lobbying pack (briefing notes and lobbying asks) and talk to your local member about FTT

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