The enormous burden of a tiny tax
After the financial crisis of 2008, European economies were plunged into recession. Thousands lost their jobs and social welfare was cut as austerity began to bite. But the financial institutions – widely blamed for causing the crash due to their risky lending and trading practices – were bailed out using taxpayers’ money and banks continued to award themselves enormous bonuses.
The unfairness of this scenario resounded loudly across Europe. Traders needed to give something back. But how?
One solution could be a financial transaction tax (FTT), more commonly known as a Tobin Tax or Robin Hood Tax by campaigners in the UK. The basic idea is to generate money from the financial services industry by placing very small taxes – usually less than one percent – on the sale of certain financial products such as securities, bonds and derivatives.
The European Commission (EC) – which published a report last September outlining the impact of introducing an FTT– estimates that up to €57 billion could be raised through their proposed model, money that could be reinvested into society while discouraging the risky trading behaviour that helped bring about the financial crisis in the first place.
But while public support for the measure has been growing, the Danish government remains hesitant to support it. Last week, both prime minister Helle Thorning-Schmidt and the economy minister, Margrethe Vestager, expressed concerns that an FTT would dampen growth and lead to thousands of lost jobs across Europe.
Vestager justified her position using numbers supplied by the EC in their report in September. They admitted that introducing an FTT in Europe could lead to a drop in growth of up to 1.76 percent. From this, Vestager extrapolated that 400,000 people could lose their jobs, including 5,000 in Denmark.
But according to the EC, Vestager’s take on their impact assessment was not balanced.
“When we see the type of figures that have been in the Danish press lately, we see that our Impact Assessment is being read completely out of context,” EC spokesperson Emer Traynor told The Copenhagen Post.
“When assessing the impact of the FTT in a balanced way, we must also take into account the effect that the new revenues will also have on growth and jobs. So, if the revenues are intelligently recycled into the economy, for instance by investing them in public services, then there would be no negative impact on growth and jobs at all.”
Traynor added that an FTT would also correct the financial service industry’s tax advantage, due to their VAT exemption, while also disincentivising risky behaviour on the markets.
“We believe that the FTT will encourage the financial sector to redesign their business models so that they are more focused on the real economy, which has not always been the case over the past decade,” Traynor said.
But even if an FTT is introduced, there’s no guarantee it will raise any money. Traders can simply move outside of the EU, destroying the market the FTT was supposed to tax. Because of this, many argue that an FTT only makes sense if it is global.
“It’s a general principle that if you tax something, and people can move away from the tax, then often people do,” Vestager, told The Copenhagen Post. “The more easily you can move away from tax, the more risky it is to tax it. That’s the reluctance now.”
High-frequency traders – who employ rapid turnover rates when buying and selling stocks to make a profit – will probably be most affected by an FTT, but they are not the only people whose livelihoods will be affected. According to the Danish Banker’s Association, Finansrådet, Danish pensioners could lose up to five percent of their savings as a result, leaving them about 700 kroner a month out of pocket.
“High frequency traders will see a drop in trading. But what’s important is that normal pensioners will be affected despite the fact that they might only trade once or twice a year,” Morten Frederiksen from Finansrådet told The Copenhagen Post. “If the government has a problem with some kind of trading, they ought to directly regulate against it. What they are doing here is too broad and will hit the man on the street and that’s the problem.”
Both Frederiksen and Vestager also challenge the EC’s view that the financial sector is under taxed – at least in Denmark. A payroll tax was levied on the financial services industry in the 1980s to redress the advantage gained by their VAT exemption.
And Vestager goes on to argue that additional costs have already been placed on banks due to the strict reforms – such as increased capital requirements – they were forced to adopt after the banking crisis.
“We think we could have a more healthy financial sector by making sure that they have high quality capital that can absorb losses,” Vestager said.
The FTT has placed politicians in a tricky position. With money so tight, recouping it from the industry widely blamed for putting us in this position, seems both a sensible and politically popular move. And yet society is deeply dependent on the services and jobs that banking and finance provide – a tax risks upsetting the balance.
There seem to be three options. Firstly, Europe could push for a global FTT that would be undermined if one country decided to opt out.
Secondly, don’t adopt an FTT and try and find another way to regulate the financial industry that will both raise funds and mitigate a future crisis, but without affecting its profitability.
Thirdly, introduce an FTT and raise tens of billions of euros to reinvest in society. It’s a risk, but perhaps no more of a risk than many traders took with our own economies before the crisis. And even if it did put some traders out of a job, as Financial Times columnist John Plender put it, there might be a silver lining.
“A tax on financialisation might well kill off high-frequency trading,” Plender wrote in September. “If this reduces employment a bit in the city of London, so be it – it will release people into more socially useful activities.”