Global financial tax – taxation in the next generation?

The hot topic on the minds of world leaders is the potential for a global tax on financial transactions.  The idea seems to have emerged from the French, who saw the tax as a potential way to generate financial development aid. The tax would be a form of Tobin tax, although instead of being at stabilization of a currency, the primary goal would be to raise international funds to deal with crises.

The idea was subsequently picked up by UK PM Gordon Brown and presented to the G20 at their meeting in St Andrews, Scotland on Nov 7th.  Brown presented the tax as an instrument to fund future bank bailouts.  Moreover, he sees the tax as increasing accountability in the financial sector.   However, the idea was not received as well as had been hoped.  The USA has rejected the idea, and Canadian Finance Minister Jim Flaherty also came out against the tax.

While things looked dismal for the tax proposal following the G20, it seems that at least as far as the US is concerned, the idea in principle may still be kicking around Congress.  U.S. House of Representatives Speaker Nancy Pelosi has spoken out in favor of a similar proposal, affectionately named the Wall Street tax, from which funds would be used for job-creating legislation sought to be passed in December.  The Democratic proposals are citing nearly a $150 billion per year fund to help with economic recovery. However, the US is staunch about the necessity of the tax being an international one, otherwise it stands the risk of losing financial jobs to markets overseas.

So what would these taxes practically look like? Democrat Representative John Larson proposes a 0.25 percent tax on over-the-counter (OTC) derivatives transactions.  But once again, we see the Democrats in favour of the tax being adamant about applying this potential tax internationally.  These OTC derivative transactions go on primarily between banking and financial institutions and include interest rate contracts, credit default swaps, foreign exchange contracts, commodity contracts and equity contracts among others.    To contrast, France was looking at roughly 5 cents on every 1,000 euros.

As long as the US dollar remains as a standard trading currency, there is an opportunity to achieve the goals set out by this potential tax proposed by some Democrats.  Even when money is traded in US dollars between two foreign banks, the transaction passes through New York.  However, a potential tax only on USD transactions thus would tally another minus for the already weakening use of the USD as a currency of trade.

However, it leaves one to wonder how feasible a truly solidified global financial tax really is.  While places like New York and London have been seats of financial power for ages, there’s no telling what might happen if the tax isn’t uniformly implemented.  All it takes is one or two countries with a relatively stable currency to withhold to cause a great threat to the goals of the tax.  The danger is not just in the abandoning of the US dollar as a currency of trade, but rather corporations moving operations overseas.  Like the phenomenon of ships leaving the US to be registered under Flags of Convenience, a non-uniform global tax might cause corporations to do the same.  And that certainly wouldn’t help raise funds for stability or any future bank bailouts, nor would it help create more jobs in this continued time of high unemployment.