The Robin Hood tax

Before Christmas the European Council joined Gordon Brown in encouraging the International Monetary Fund to include a "global financial transaction levy" among the options it is examining to raise revenue from banks and the rest of the finance industry.

This followed the request from the G20 meeting in September that the IMF evaluate "how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system."

To be imposed almost universally, a currency transaction tax would need only the active co-operation of the authorities that oversee the principal reserve currencies, the US dollar, the euro, the pound and the yen.

Because the tax's small direct costs would be concentrated in financial sectors, its impact would be redistributive in a progressive way across nations.

It would also be a source of funds for "global provenance," which means that all or a substantial proportion of the revenue should be allocated under global authority. The national authorities collecting the tax would keep a share, but the revenue would have to be distributed globally in proportion to each country's financial transactions.

The global financial crisis has transformed this debate. The Bush and Obama administrations and many European governments were compelled to launch massive rescue strategies for financial institutions, so electorates are demanding ways of making financial institutions pay the cost.

"It would be timely for the government to take a serious look at the proposal and participate in international discussions."

Chancellor Merkel, President Sarkozy and Prime Minister Brown have all spoken in favour of looking seriously at a financial transaction tax.

On its own, a tax of this type would not resolve the crisis, of course. But it could play an important role in raising funds to pay for the bail-outs. Unlike a currency transaction tax or a Tobin tax, which just covers currency transactions, a financial transaction tax would cover all kinds of financial assets such as shares, bonds, securities and derivatives, both domestically and for cross-border transactions.

Technically a financial transaction tax could be levied easily and at very low cost since all such transactions occur through electronic platforms. A simple electronic tag would automatically collect the tax, and such taxes already exist in a number of countries.

In the mid-nineties the Labor government in Australia supported a study of the Tobin tax, but the Rudd government does not seem to have taken the issue up yet - despite the fact that the prime minister attending the G20 meeting in Pittsburgh that agreed to refer the need to raise funds to pay for the bank rescue packages to the IMF.

It would be timely for the government to take a serious look at the proposal and participate in international discussions. It would be entirely appropriate for Australia to apply to join the Leading Group on Innovative Finance for Development and to attend its next meeting, in Santiago, at the end of January at least as an observer (four other countries are already observers).

The proposal does generate opposition from many bankers, though not all. When I asked Marshall Carter, CEO of Boston's enormous State Street Bank, in 1995 what he thought of the idea he was unfazed, saying "Oh, we would just pass it on to our customers'. But there is strong support and it is growing. Adair Turner, Britain's top financial regulator, called last August for a tax on financial transactions as a way to discourage 'socially useless activities'.

American Nobel economics laureate Paul Krugman argues that a financial transaction tax "would be a trivial expense for people engaged in foreign trade or long term investment; but it would be a major disincentive for people trying to make a fast buck (or euro, or yen) by outguessing the markets over the course of a few days or weeks."

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