Have Gordon Brown, Nicholas Sarkozy, Angela Merkel and other EU leaders dropped their support for a Tobin tax, or will they press home the idea in the near future? This question is crucial, particularly now that there are widespread plans for ‘budget cuts’ amongst EU member states, including possible rises in VAT in the UK.

A Tobin tax would be a far fairer and more effective money-spinner than raising VAT. In our pamphlet ‘In place of cuts’ prepared for the UK ‘Compass’ group, we listed a financial transactions tax (FTT) as one of the recommended measures. The Tobin tax is merely a special form of FTT: it’s a currency transactions tax or CTT. Such a tax was first suggested in 1971 by the American Keynesian economist, James Tobin, and was designed to slow the volume of  speculative currency dealing by traders – what Lord Turner has recently termed ‘socially useless’ activity.

The Bank of International Settlements (BIS) estimates that in 2007 the world’s yearly currency transactions totalled US$800tr (that’s fifteen time world GDP, or nearly a quadrillion dollars) of which 80% is purely speculative. Of this total, foreign exchange trade in euros is estimated to be worth nearly US$300tr (€210tr) per annum. The sterling trade is worth £34tr – far less than dollar or euro transactions but still a vast amount of money (sterling is the fourth most traded currency). A 0.1% tax on sterling transactions would raise £34bn per annum, or the equivalent of about 2.5% of UK GDP – and that’s based on a tax rate of £1 per £1000, one-tenth the rate originally proposed by Tobin.  A 0.1% tax on euro trading would raise over €200bn a year.

Why Not?

The usual argument against a Tobin tax is that all countries must agree to it if it is to work; ie, that if Britain alone imposed it, all sterling traders would move to Switzerland or the Caymans. There are two answers to this. First, Britain already has a form of FTT: the stamp duty on share dealings is 0.5% per trade – five times 0.1% – and share dealers have not fled the country. Secondly, even if the sterling trade migrated, this objection has been overtaken by technology. Sterling trades today take place on computer screens, and these can be monitored wherever they are physically located. Most important, for a currency trade to take place there must be an official settlement: unless the tax were paid, authorisation would be withheld and the trade could not take place.

Exactly the same logic holds for the euro. A City foreign exchange brokerage firm, INTL Global Currency, has already run successful trials of a CTT software program which tracks computer-based foreign exchange trading wherever it takes place.

Another objection is that a Tobin tax alone would not achieve its objective of deterring risky economic activity. Again, there are at least two replies: first, one can experiment with variable rates for different types of trades. Secondly, a Tobin tax could be complimented by a new bankruptcy regime requiring unsecured creditors and other counterparties to be forcibly and swiftly converted into shareholders, until the failed institutions are adequately recapitalised.

It’s quite feasible

In short, a Tobin tax on sterling, dollar, euro, yen or other currency transactions is perfectly feasible. Clearly, a CTT levied on all currencies would raise vast sums – according to a recent Austrian government study, a tax of just 0.05% would raise US$700bn per annum, enough to meet the Millennium Development Goals with ease. In the case of sterling, a CTT – combined with other tax reform – would cover the UK government’s future structural budget deficit; ie, the average deficit over a business cycle, even assuming (as one must) that future growth will be sluggish and therefore the budget deficit deeper. Most important, it could pay for a Green New Deal; ie, a major programme to stop global warming!

We need a Tobin tax. A temporary tax on bankers’ bonuses is simply not enough. Why should ordinary citizens be made to pay for the financial sector’s gambling debts? After all, currency speculation is just another form of gambling. The UK’s tax on bankers’ bonuses is a small step in the right direction, but we need far bolder measures. If Britian and other EU member states have the courage to seize this opportunity, it could lay the basis for genuine economic sustainability.