Don’t laugh: this tax could fix the world

US Treasury boss Timothy Geithner and Wayne Swan should take a ‘Robin Hood’ tax seriously. AAP

Something remarkable has happened: 1000 economists have agreed with each other.

In Washington, civil society groups will present a letter signed by 1000 economists from 50 countries to the annual G20 finance ministers meeting.

They’re calling for a “Robin Hood tax” on financial institutions, which, like the legendary English outlaw, would take from the rich and give to the poor.

By placing levy of between 0.005% and 0.05% on a variety capital market transactions, this tax could raise up $500 billion annually.

The economists say the tax could also serve to limit market speculation and simplify many of the more arcane types of financial instruments – including those that spurred the global financial crisis.

Taxation regimes around the world have not kept pace with development in markets, and it is clear that the time is right for the introduction of a financial transaction tax (FTT).

Transaction transformation

The past few decades have seen revolution in the way financial markets operate – a revolution that has been hidden from most of us.

When people think of what causes financial assets to be traded, most think of humans making decisions – an investor deciding to invest in mining company shares or a trader betting the Aussie dollar will rise against the US dollar.

Yet an increasing proportion of market trades in sophisticated markets are ultra-short-term and computer-generated.

According to the International Monetary Fund, in 2009 algorithmic, or computer-driven, trading accounted for at least 60% of the volume of equity market trading in the US, 30 to 40% of European and Japanese equity trading and 40% of US futures trading.

This high-frequency technical trading is driven and executed by computer programs aimed at exploiting minor price fluctuations. Thus, a substantial proportion of financial market activity is now measured in seconds or less.

Assets are often bought, held and sold in only seconds. No human mind is brought to bear on these individual trades, and the underlying real economic value of the asset being traded is almost never a factor in the trading.

This is a problem. Speculative bets have become the tail wagging the dog of the real economy.

This becomes clear when we look at the big picture. Gross domestic product is the sum of transactions that take place in the real economy. Global financial transactions were 75 times global GDP in 2007, up from 15 times in 1990.

The ratio here in Australia was 98 prior to the GFC, and is 81 today.

Mad money

Forty years ago, most international money flows went to pay for the import of goods and services, as is intuitively sensible. Today, over 75 times as much money flows between countries to invest in stocks and bonds than to pay for tangible goods or services.

We have an economy in which financial market activity has become an end in itself, and a major source of corporate profits for the banks.

The core function of financial markets is to give capital to those who can use it best. To make things or provide services, corporations need capital, just as they need staff, electricity, water, transport and other resources.

However, most financial activity today doesn’t deal with allocating capital to those who can put it to good use. Most activity is speculation.

Forty years ago, gambling was confined, by law, in our society to the racetrack, to two-up games on Anzac Day, and to the odd starting price bookie.

Most financial market activity wasn’t gambling. Some was, but relatively little.

Today, more than half of what happens in financial markets is no different from punting on the ponies, except that the stewards governing the process are less rigorous.

Tax solution

This shift towards highly complicated and risky markets is what inspired 1000 economists to actually agree on the need for a financial transactions tax.

A FTT is a tiny tax on all wholesale capital market transactions, of somewhere between 0.005% and 0.05%, in other words, between one-half and five basis points.

It is tiny tax, but because of the scale of modern financial market activity, it would raise somewhere between $75 and $500 billion annually (and these figures assume a large dissuasive effect of the impost).

Civil society is campaigning vigorously for this tax around the world, and has had a considerable impact in Europe. But the issue has had very little attention in Australia.

Civil society groups want the tax because it is a potential source of funding with which to tackle global poverty and climate change adaptation.

If governments in developed countries do adopt such a tax, they will do so primarily because it is a way to repair their balance sheets, which were damaged by the GFC, and to accumulate funds so that the future financial sector bailouts will be funded by the sector itself, not taxpayers.

The 1000 economists want the tax because, in the words of the letter to be presented today: “The financial crisis has shown us the dangers of unregulated finance, and the link between the financial sector and society has been broken. It is time to fix this link and for the financial sector to give something back to society.”

The economists know that this tax is the nearest thing we’ll ever get to a free lunch. It is a tax that will help calm excessive speculation, and thereby assist financial markets to fulfil their core roles more effectively and make the financial system less unstable and crisis-prone.

It is a tax that is worth imposing for these reasons alone. So it is a tax from which the revenue is a pure bonus.

A more stable and efficient global financial system is in the interests of us all.

A source of revenue with which to assist both developed and developing nations is much needed. The signs to date suggest our government will not support this initiative. This is deeply regrettable.

Humanity cannot afford to turn its back on such a transformative idea.