Humouring Gordon Brown

On 6-7 November 2009, at St. Andrews in Scotland, the G-20 finance ministers and central bankers, “representing around 90 percent of the world's wealth, 80 percent of world trade, and two-thirds of the world's population”, were told by British Premier Gordon Brown that “it was time to consider a global financial levy, such as a tax on transactions or an insurance fee, to build up a "resolution fund" as a buffer against future bailouts. Banks needed "a better economic and social contract" that reflected their responsibilities to society. Any measures must be implemented by all major financial centers, Brown noted” (IMF Survey Online, 23 October).

The IMF Survey Online goes on to say: “The IMF has been working on suggestions for such a levy and plans to have some initial ideas by its Spring Meetings in April, to be held in Washington.” Was Gordon Brown so eloquent and convincing, then, winning over the attention and consideration of IMF officials and World leaders, wearing his Saviour of the World hat?

Absolutely not. IMF Managing Director Dominique Strauss-Kahn told reporters the IMF was considering several options for the G-20 to look at. "We can't go on with a system where some individuals take risks that finally all taxpayers, like you and me, have to pay for.” But he added in the same breath: “The financial industry has made such big innovations that it is probably impossible to find a transaction tax that will not be avoidable by potential taxpayers. So it will be based not on transactions but on something else." “He made it clear that there was no consideration of a currency transactions tax.” Brown was engaging in a familiar behaviour pattern - pretending an activity was at his instigation, and displaying his trademark ineptness in mis-representing others' activity.

Of course. In 1972 James Tobin first suggested a tax on financial transactions, with the dual purpose of reducing their size and volatility, and raising funds to finance investment and growth in less developed countries. He originally envisaged a tax rate of 1% on all foreign exchange transactions, but later reduced it to 0.1% to 0.4% (still a tidy sum if it worked, considering that the volume of financial transaction is of the order of ten times world GDP). At that time it might have been possible to introduce it effectively in economies that were still relatively closed to financial flows. Then the UK still had even a dual exchange rate, one for current transactions, and one for investment carrying an investment premium; an individual or company based in the UK could only invest abroad by borrowing from the holders of investment sterling and paying them back in the same sterling.

Given the very high degree of financial globalization today, such a tax could only be global: it is sufficient for one country not to introduce the tax, for that country to attract the bulk if not all of the global financial turnover thus offering the entire world the opportunity to avoid it. The trouble is that there are no global governance institutions that could institute it or enforce it globally. And even if the tax was genuinely introduced as a global tax, it could be avoided by transactions taking place in cyberspace: the argument that a tax levied at a small rate would be preferred to a tax-free but less secure transaction no longer applies today: financial transactions in cyberspace are much more secure than they used to be, and any large transaction can be fragmented into a large number of small sequential transactions, each taking place after all the earlier fragments have been successfully executed, in such a way as to minimize any associated risk. Internet is another country. Moreover, the objective of reducing the size and volatility of financial transactions might require, in times of turbulence, much higher tax rates than a fraction of a percentage, higher than any conceivable insecurity premium of unofficial market channels, again leading to tax avoidance. It is no accident that James Tobin ended up practically disowning his tax.

Moreover, as Charles Goodhart argues: “most serious advocates of a Tobin tax admit that it would have the effect of raising both the volatility and the costs of financial markets in the long run.” [Goodhart has a better idea and recommends “a tiny tax imposed on every individual addressee in an internet message, payable by the sender, and collected by the server from the sender. ... First, it would kill spam. Second, it would make senders think who really needs to receive the message. Third, the internet, being so much cheaper than any other current message service, would remain the preferred channel of communication, so the tax base would be immobile. Fourth, and most important, it would be a significant source of revenue.” Eurointelligence, 26-11-2009].

Dominique Strauss-Kahn said there were two possibilities for a financial sector tax, including a "possible windfall tax for 2009, a one shot thing." The other would be a more long-term tax, at a rate which could be inversely proportional to the degree of bank regulation in each country. “We don’t want an extra-simplistic solution that will not be effective. I am very pragmatic: I would prefer a second best solution we can all implement."

So the Gordon Brown inspired tax will be a transaction tax which “will not be based on transactions but on something else”. Which is par for the course for a democratic leader who has not been elected as such democratically, and a Labour politician who has not based his policies on Labour values and electoral promises.

There are two very good reasons for Dominique Strauss-Kahn not to have rejected Brown’s "extra-simplistic solution that will not be effective" outright. First, in English it is considered “rude” to say No, a restatement of one’s different view is preferred. Second, contradicting a madman only encourages him.