Moving from ‘whether’ to ‘how’ in the FTT debate

Inclusive Economy22 Jun 2011Neil McCulloch

Last Tuesday, a workshop in Brussels launched the new IDS Research Report, The Tobin Tax: a review of the evidence, which I co-authored with Grazia Pacillo. What I found remarkable about the Brussels gathering, was that the tone of the debate has changed. The question is no longer, ‘Should we have a FTT?’ but instead, ‘How can we implement a FTT in a way that makes sense?’ In other words, not whether, but how? (click here for audio and presentation from the event.)

There are four things that still need to be done to make a FTT a reality.

First, as the key note address by Anni Podimata MEP stressed, there is a clear need for political leadership, both within the EU and by the G20. There is now a lot of evidence that the tax is feasible. Even the IMF, who oppose the tax, acknowledge that it is technically feasible (see IMF 2010). When I have spoken privately to senior bankers and financial market actors they all agree that, in principle, it can be done. A clear political statement from the G20 that it will be done would force the academics, policymakers and the industry into the same room – to sit down and seriously work through the mechanics of implementation.

Second, we really do need to sort out the technical details. Although our Research Report shows strong evidence that a FTT is feasible, there are still a lot of technical details that need to be worked out in order to turn the idea into a reality. How, for example, do we prevent the tax migrating to offshore jurisdictions? How do we prevent it from distorting markets? How do we stop the markets from ‘re-engineering’ financial instruments to avoid the tax? These are legitimate and important questions that need serious answers.

Third, we need to know who will end up paying this tax. Rodney Schmidt of the North-South Institute pointed out that who pays the tax will depend on the detailed structure of the market. However, the evidence from similar taxes suggests that it will be highly progressive, even if the costs of the tax are passed onto consumers of financial services.

Finally, we need to know that the money will be used for something useful. Max Lawson from the Robin Hood Tax Campaign argues that it should be earmarked for poverty reduction and measures to counter climate change, both at home and abroad. National treasuries hate this idea. But politically it is attractive, since it provides a way for politicians to punish the financial sector for the crisis and use the proceeds to tackle the key challenges we face. Working out the mechanics of how to do this will be tricky – as Philip Kermode, from the European Commission reminded the audience, 93% of the revenue would accrue to 3 member states – getting them to agree to share it will be a challenge.