Global Policy Forum

Brown Calls for Global Transaction Tax


By Laurence Norman and Joe Parkinson

November 7, 2009

The Group of 20 leading economies should consider applying a global financial transactions tax to pay for the cost of future banking crises, Prime Minister Gordon Brown said Saturday.

Mr. Brown said G-20 members should discuss whether they need some kind of "insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transactions levy."

However he conditioned his proposal with warnings that agreeing a levy would be difficult

Indeed, US Treasury Secretary Timothy Geithner said his government wouldn't support that approach.

"A day-by-day financial transaction tax is not something we're prepared to support," he said in an interview with Sky News.

The US isn't alone, finding an ally in the Russian government.

"I'm quite skeptical about such taxes," Russian Finance Minister Alexei Kudrin said. "Gordon Brown is well known as the person who has been raising taxes all the time."

Canadian Finance Minister James Flaherty said a transactions tax was "not particularly attractive."

In the past, the UK has leaned against the idea of a what is known as a Tobin tax, which would use the proceeds of a financial-transactions tax to provide funds to developing nations.

However, Mr. Brown's proposal more closely resembles a deposit-insurance plan, in that the fees gathered from the levy would be placed in a fund that would be drawn on should banks once again need state support to survive. The G-20 governments said at a summit in Pittsburgh in September they would look at this area, tasking the International Monetary Fund with preparing a report for options on "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."

Mr. Brown said that report would come in April and that any action on a possible tax was unlikely to come for some time after that, UK officials signaled. Mr. Brown himself faces a tough battle for re-election by June 2010.

Mr. Brown said there needs to be a "better social contract" between banks and the rest of society.

"It cannot be acceptable that the benefits of success are reaped by the few, while the costs of failure are borne by all of us," Mr. Brown told finance ministers and central-bank heads from the G-20. "We need to consider if we need to go further in terms of mitigating costs to the rest of society."

Mr. Brown said Britain wouldn't adopt such a plan "unless others move with us together."

He also said the tax would have to be "non-distortionary to avoid damaging reductions in liquidity, inefficient allocation of capital and the temptation of avoidance."

And any tax must not undermine efforts to stabilize the financial system and that the contribution from the financial sector must be "fair" and "measured."

"I do not in any way underestimate the enormous and difficult practical and technical issues that will need to be overcome," Mr. Brown said.

The Bank of England estimates that in the US, the UK and the euro zone, state support for the banking systems has totaled $14 trillion, or a quarter of global economic output.

France has been among the most prominent supporters of a financial-transactions tax, with French Foreign Minister Bernard Kouchner recently proposing a levy of 0.005% on transactions. He said such a tax could raise around 30 billion euros ($44.5 billion).

French Finance Minister Christine Lagarde Saturday repeated her government's support for a tax on transactions.

Over the last century, bank failures have become increasingly expensive for taxpayers, and short of war pose the greatest threat to the solvency of governments.

If it could be enforced, a levy on transactions would help build up resources to pay for future crises, the cost of which could threaten to bankrupt some governments.

"A global .. tax could make a useful contribution to reducing the risk of future financial crises, and sharing the costs more fairly," said Julian Jessop, an economist at Capital Economics.

But bankers said a transaction tax wouldn't be enforceable.

"You would have to get every country in the world to agree to it," said Angela Knight, chief executive of the British Bankers Association. "It assumes that financial transactions will stay the same, that there will be no innovations or changes. Practically, it wouldn't operate."

And the UK's main opposition party accused Mr. Brown of "chasing headlines."

"Instead of empty headline grabbing announcements, Gordon Brown should focus on the crisis we are living through now which he helped to create, which means businesses are folding and insolvencies rising at record rates," said a spokesman for the Conservative Party.



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