By Julio Godoy
Despite the grave financial and sovereign debt crisis sweeping the region, the European Union has once again failed to reach unanimous approval of a proposition made by its executive body, the European Commission (EC), to tax financial transactions in order to reduce speculation and increase state revenues.
British and Swedish rejection of the EC proposal once again condemned the so-called Tobin tax, named after its first advocate, the late U.S. economist James Tobin, to remain a theoretical project with little hope of being enacted.
But under pressure from the French and Austrian governments, and the leading German opposition Social Democratic Party (SPD), ten EU countries agreed to consider the application of the Tobin tax starting in 2014.
The preliminary agreement was reached during a European financial summit late last month, and includes Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovenia, Spain and Cyprus, all of whom pledged to levy a small tax – between 0.01 and 0.2 percent – on all financial transactions, starting in 2014.
The government of Finland also indicated that it might approve the Tobin tax.
Years after a global financial crisis of epic proportions, and following over a decade of debate around the issue, the EU’s inability to pass a common tax on speculation shows the enourmous influence the international finance sector continues to enjoy.
James Tobin, who was honoured in 1981 with the Nobel memorial prize for economic sciences, first published his proposal for a small levy on speculative financial transactions in 1972.
In 1997, in the aftermath of the Mexican and Asian financial crises, the French Association for the Taxation of Financial Transactions and Citizens’ Action (ATTAC), rescued the Tobin tax from oblivion and put it at the top of the agenda to regulate financial markets.
Since then, the tax has been a central theme in academic and political debates, particularly in Europe, so far without any substantial success.
Cautious approval by ten European governments does not mean that the tax will actually be introduced, given that the EU process of approval is extremely cumbersome and time-consuming.
“The Tobin tax in Europe is not for tomorrow,” Margrethe Vestegar, Danish minister of finances, and head of the European council of finance ministers, said at the end of the summit late June.
If at all, the tax will not be put into practice until 2014.
Germany conflicted
Ahead of the June summit, the German SPD put forth an ultimatum: unless the German government agreed to tax financial transactions, the SPD would not approve the proposed fiscal pact – conceived by the conservative government of Angela Merkel to enforce “common” austerity measures across Europe – in parliament.
Under this pressure, the German government finally relaxed its opposition to the Tobin tax, but warned that it would take at least two years to put it into practice.
“The tax won’t be approved in this legislative period,” which ends in late 2013, German minister of finances, Wolfgang Schaeuble, said in a press conference. However, he added that the German government has already budgeted for two billion euros in expected revenue from the Tobin tax for the fiscal year 2014.
Without the SPD support in the Bundestag, the lower house of parliament, the German government would have failed to legalise its blueprint for strict budgetary discipline that it wants to see implemented across Europe in the coming years, in a supposed effort to reduce state deficits and thus solve the sovereign debt crisis.
Failure to pass the corresponding law for the fiscal pact would have meant a tremendous setback for the ‘austerity regime’ conceived in Berlin, which the German government describes as fundamental to restore financial stability across the continent.
“We know that the approval of the Tobin tax in Europe won’t be easy,” according to Andrea Nahles, general secretary of the SPD. “But if the governments of Germany and France, the two strongest economies in the continent, cooperate on this question, they would surely convince those governments still opposing the tax.”
Several new studies suggest that the Tobin tax would not only boost economic growth in Europe, but also substantially increase state revenues.
According to a study by the German Institute for Economic Research, released earlier this month, the tax could generate some 11.2 billion euros in revenues in Germany alone. The study takes into consideration the fact that many banks and investment funds would relocate some of the taxed transactions out of the German financial market.
Another study undertaken by the renowned economists Stephany Griffith-Jones, a professor at Columbia University, and Avinash Persaud, senior fellow with the Caribbean Policy Research Institute, estimated that introducing the Tobin tax in Europe would boost gross domestic product (GDP) in the region by at least 0.25 percent annually.
“Our analysis suggests that the overall positive impact on GDP level could be even higher, as we identify a number of channels through which the tax could encourage a higher level of GDP,” the two economists noted in their paper.
Griffith-Jones told IPS that the tax “would also contribute to reducing the risk of a future crisis. When this is taken into account, you obtain a substantial positive effect on economic growth”.
Additionally, she rejected the repeated argument that such a tax would not be feasible because of evasion or due to its limited application in Europe. “In the past, the same was said about income tax, which is indeed avoided but which still raises a lot of money,” Griffith-Jones stressed.
In the study, the two economists recalled that “one of the oldest and largest financial transaction taxes successfully functions on its own without global imitation” – the so-called stamp duty reserve tax applied in Britain.
Griffith-Jones told IPS, “Since 1986, and before in other guises, the British government has unilaterally, without waiting on others, levied a tax of 0.50 percent on transactions in British equities.”
This tax raises some five billion U.S. dollars per year.
According to the EC’s estimates, released last March, total savings resulting from the introduction of the Tobin tax would amount to 81 billion euros for the period 2014-2020.
European Commissioner for financial programming and budget, Janusz Lewandoski, stressed, “The financial sector does not pay valued added tax (VAT), but has received massive support from taxpayer’s money.”
Therefore, he added, “Taxing the transactions of all financial institutions at rates as low as 0.01 percent is only fair. Furthermore, the estimated revenue that the tax would generate by 2020 can only be welcomed by cash-strapped governments across the EU.”
