Financial Transaction Tax (FTT), Tobin Tax, Robin Hood Tax are all different names for the same Medusa-esque idea that just won’t die until its head is cut off. The stage was set prior to the G20 Summit in Cannes by French host president Nicolas Sarkozy to discuss adoption of a global FTT. The only problem was that there has never been international buy-in for an FTT.
In fact, there was very strong opposition as recently as a year and a half ago in the lead-up to the Toronto G20 Summit in 2010. Jim Flaherty, Canada’s finance minister, spent an inordinate amount of time lobbying his peers before the summit to convince them that it was an all-around bad idea. To no one’s surprise, the leaders disagreed about the FTT and no global consensus was reached. Suffice it to say, consensus will never be reached about FTT adoption. Instead, it will be introduced in various forms in different countries, but will fail.
The financial community will spend a lot of time and energy lobbying governments in the countries where they do business in order to convince them that it is a bad idea. It will be an incredible waste of time and resources.
If one looks at the major financial centres around the world, one can easily deduce what would happen if such a tax was introduced in some countries and not others. In Europe, there were lengthy discussions in Brussels on November 8-9 after Sarkozy signalled, at the end of the G20 Cannes Summit the previous week, that Europe may go ahead with an FTT to be a global leader. With the United Kingdom and Switzerland – both outside the euro zone – rejecting it outright, the discussion was pushed back to the spring 2012.
Talks even touched on an FTT in the euro zone and not in all 27 members of the European Union. Imagine what would happen to the financial industry in smaller countries such as Ireland or Italy? Already in dire straits, how would it survive and not simply migrate to London? In the United States, Democratic senator Tom Harkin and Democratic representative Peter DeFazio have introduced a financial transaction tax bill in their respective chambers.
But the Republicans have opposed an FTT in any form right from the start, and even President Barack Obama came out against it at the G20 summit. Although it will fail, firms will have to spend time lobbying their representatives. Canada, too, is strongly opposed to any form of an FTT, but would welcome any migrating business. With its financial centre in the same time zone as New York plus a sound financial system, currency at almost par, over 200 inter-listed stocks and technology that already connects most U.S. firms to its markets, Canada is waiting in the wings to offer a cheaper alternative. Likewise, China has been trying to increase its international relevancy for years…and opposes an FTT.
Proponents, the European Commission and Non-Governmental Organizations such as Oxfam and the Bill & Melinda Gates Foundation to name a few, have been touting the FTT as a means of garnering revenue for development projects. If countries fell behind in their development assistance when times were good, would countries really direct this newly found money to aid in a time of crisis? Behind closed doors, Europe has already admitted that it could ‘really use the money’.
Recent studies that estimate the amount of possible revenue generation do not take into account the loss of liquidity from increased trading costs. Diminished liquidity leads to widening spreads, which in the end harms the retail public – – the very same people who are calling for an FTT and who, according to defenders, will be protected from speculators by such a tax. The retail public will also be handed the bill for increased trading costs even if their direct transactions are excluded. With banks having to recapitalize to adhere to Basel III requirements and increased capitalization for globally systemic financial institutions, profits will surely decline in the short term.
This would lead to a decline in dividends paid to shareholders, as well as overall tax revenue for governments. The financial industry provides a large contribution to national GDP and an FTT would only amount to biting the hand that feeds it. Undoubtedly, the industry needs to take some responsibility for the current global climate, but beating it into submission with an FTT after all the new rules and regulations and associated costs of compliance would produce outcomes opposite to those the G20 leaders championed at Cannes: financial stability and growth.
Lida Preyma is director of capital markets research at the University of Toronto’s Munk School of Global Affairs. She attended the G20 Summit and offered her services to Traders Magazine as a contributing writer.
