Why has the Tobin Tax gone mainstream?

November 11, 2009

     By Duncan Green     

So the Tobin Tax finally went large at the G20 finance ministers’ meeting last weekend. Gordon Brown supported a financial transactions tax to repay some of the costs of the bailout and provide extra cash for development and climate change action, and a predictable backlash promptly consumed the finance pages. I won’t rehearse the press coverage (try Heather Stewart or Larry Elliott in the Guardian for that). My question is ‘why now?’ Alex Evans on the Global Dashboard blog has a nice discussion on the apparent conversion of the UK government. More generally, what light can a ‘how change happens’ analysis shed on all this? One useful change framework on these kinds of shifts in public thinking is the ‘3I’ model of ideas, interests and institutions.

Ideas: first, and most obvious, is the Tobin Tax proposal itself, which has 

James Tobin

James Tobin

bubbled away on the margins of the debate for 3 decades, in no small part thanks to some dedicated campaigning and thinktankery from a coalition of NGOs such as War On Want and Stamp Out Poverty.

But the recent evolution of the idea has also improved its chance of success. Tobin’s original idea of a relatively high (1%) tax to throw ‘sand in the wheels’ of financial speculation was always less convincing than the role of the tax simply to raise cash. A 1% tax would not curb major speculative raids on currencies, and raising it even higher during periods of volatility (as advocated by the Spahn tax variant) is actually just capital controls dressed up as a tax. Now the tax is discussed largely in terms of its fund-raising potential – a much more plausible aim (have you ever actually tried killing two birds with one stone?). At the same time, the tax has been expanded in scope to all transactions, not just currency trades (hence the switch to the more forgettable ‘financial transaction tax’, or FTT)

The wider shift in ideas provoked by the crisis has also helped, leading to a  rebalancing of the financial sector’s rights and responsibilities and the eclipse of ‘just leave it to the market’ thinking.

Interests: The conversion of financial sectors from political asset to liability has driven a wedge between governments and banks, as a recent FT article argued. Governments faced with a huge fiscal hole have to cut spending, borrow or raise tax – and politically the more invisible the tax (in terms of voters), the better. The FTT fits the bill.

The financial sector is predictably vociferous and dismissive and remains a formidable opponent, as we’ve seen from the row over bonuses – this battle is only just beginning.

Institutions: Whether the shift from G8 to G20 is a driver of the new interest is less clear – all the political support has come from old G8 countries such as Germany, France and now the UK. Has anyone seen anything about what China and India say on the proposed tax?

What is clear is that the slowly accreting system of global governance in areas such as climate change and overseas aid is generating massive new financial commitments (see Larry Elliott article on this) and a number of governments, led by France since the Landau Commission of 2004, have been seeking new ways to raise the cash.

The counter-arguments are looking threadbare, but are being trotted out nonetheless.

1. ‘It only works if every financial centre participates’ (not so – are banks really likely to up sticks and move over a 0.005% tax?). Even Larry Elliott fell for that one. You need a critical mass, for example the major centres of Europe, but not everyone.

2. ‘Even if you corral the US, Europe and Japan, it will just drive the financial institutions offshore’ – same argument applies. It may have been true at 1%, but not at half a basis point.

3. ‘It’s just too difficult to police, due to computerization.’ The post 9/11 international effort to track and crack down on terrorist funding pretty much nailed that one, and you hear this line less often than during the last major burst of interest during the Asian financial crisis of 1997-8.

So what happens next? The Pittsburgh G20 tasked the IMF with reporting back to the next G20 (in Canada in June 2010) on ‘the range of options countries have adopted or are considering as to 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.’ After Pittsburgh Nicholas Sarkozy and Angela Merkel were clear in the press that the study would look at Tobin taxes, but the IMF seems to have other ideas. Its head, Dominique Strauss-Kahn, responded to Gordon Brown’s speech at the weekend by repeating his long-held position that a Tobin tax is “a very old idea that is not really possible today” – DSK appears to be going way beyond his brief in trying to close down the debate before it has begun.

In general, there will be battles over feasibility, desirability and scope (if the tax shows any sign of being adopted, the financial sector’s plan B is likely to include keeping it to as narrow a range of financial transactions as possible). Should it be introduced, there is no guarantee that any of the cash raised will be spent on climate change or development, rather than paying down the massive debts incurred by bailouts in the rich countries.

And of course, there is always the danger that if green shoots prove genuine, the tax will return to the intellectual wilderness, as it did after the Asia Crisis. But the level of interest is far greater than in the late 90s, and has reached a far higher level of political leadership, so it feels like this is really game on for a big new source of cash. And as we know from campaigns on debt relief, access to medicines etc etc, they always say no. Until they say yes. And then claim they supported the idea all along.