Has Gordon Brown’s support for a Tobin tax waned, or will he press home the idea in the near future? Alistair Darling’s pre-budget report has been cautious. The good news is a once off super-tax on bankers’ bonuses while the bad news is future reductions in public expenditure. A forthcoming Treasury report is rumoured to suggest introducing a Financial Transactions Tax and an insurance levy on the banks, but it is being made contingent on the actions of other countries (ie, the USA) and there is no indication of its timing.

Was this a good PBR? It was a small step, but cold comfort for most ordinary Britons. The government seems convinced that by continuing to steer a cautious economic course, Britain will return to business as usual in 3-4 years. But can mere caution, coupled with a temporary tax on greedy bankers and a neutral budget, prevent an outright Tory victory in 2010, still less restore our economic health?

Zero growth means little extra revenue

The answer remains ‘probably not.’ Britain will not return to pre-2008 style growth anytime soon, perhaps not even for a generation. We’ve now fallen behind Germany, France, and Italy in GDP terms, and it’s already being forecast that the UK will soon slip out of the top ten in the economic league tables altogether. Industrial output is falling despite a  25% effective devaluation. In the absence of growth and a large boost in tax receipts for the Exchequer, spending will be cut sooner or later, hastening our economic decline.

Anybody who thinks zero growth under present circumstances is a good thing should remember that fiscal stringency means no public investment in new technologies for energy generation, no public subsidies for developing fuel-efficient cars, for insulating houses, for installing double glazing and so on. Fiscal stringency means that Britain will not do the sort of things which Germany, The Netherlands and the Nordic countries have been doing for the past two decades, the Treasury argument being that that ‘we simply can’t afford it.’ However strongly you and I may disagree with this argument, the UK Treasury is a deeply conservative force at the heart of power.

Nevertheless, there is a way forward. A government determined to push through genuine tax reform could raise new billions for the sort of green investment that Britain so badly needs while at the same time helping to boost economic recovery. But why include a Tobin tax? The answer is, basically, because it’s an enormous money spinner.

A Tobin Tax

In our Compass pamphlet, we listed a financial transactions tax (FTT) as one of the recommended measures. The Tobin tax is merely a special form of FTT: it’s a currency transactions tax or CTT. Such a tax was first suggested in 1971 by the American Keynesian economist, James Tobin, and was designed to slow speculative currency dealing by traders---what Lord Turner recently termed ‘socially useless’ activity.

The Bank of International Settlements (BIS) estimates that in 2007 the world’s yearly currency transactions totalled $800tr (that’s fifteen time world GDP, or nearly a quadrillion dollars) of which 80% is purely speculative. The sterling trade alone is worth £34tr---far less than dollar transactions but still a vast amount of money (sterling is the fourth most traded currency). A 0.1% tax on sterling transactions would raise £34bn per annum, or the equivalent of about 2.5% of UK GDP---and that’s based on a tax rate of £1 per £1000, one-tenth the rate originally proposed by Tobin.

Why Not?

The usual argument against a Tobin tax is that all countries must agree to it if it is to work; ie, that if Britain alone imposed it, all sterling traders would move to the Caymans or Lichtenstein. There are two answers to this. First, Britain already has a form of FTT: the stamp duty on share dealings is 0.5% per trade---five times 0.1%---and share dealers have not fled the country. Secondly, even if the sterling trade migrated, this objection has been overtaken by technology. Sterling trades today take place on computer screens, and these can be monitored wherever they are physically located. Most important, for a currency trade to take place there must be an official settlement: unless the tax were paid, authorisation would be withheld and the trade could not take place. A City foreign exchange brokerage firm, INTL Global Currency, has already run successful trials of a CTT software program which does precisely this.

Another objection is that a Tobin tax alone would not achieve its objective of deterring risky economic activity. Again, there are at least two replies: first, one can experiment with variable rates for different types of trades. Secondly, a Tobin tax could be complimented by a new bankruptcy regime requiring unsecured creditors and other counterparties to be forcibly and swiftly converted into shareholders, until the failed institutions are adequately recapitalised.

It’s quite feasible

In short, a Tobin tax on sterling, dollar, euro, yen or other currency transactions is perfectly feasible. Clearly, a CTT levied on all currencies would raise vast sums---according to a recent Austrian government study, a tax of just 0.05% would raise $700bn per annum, enough to meet the Millennium Development Goals with ease.  In the case of sterling, a CTT—combined with other tax reform---would cover the UK government’s future structural budget deficit; ie, the average deficit over a business cycle, even assuming (as one must) that future growth will be sluggish and therefore the budget deficit deeper. Most important, it could pay for Green New Deal!

We need a Tobin tax. A temporary tax on bankers’ bonuses is simply not enough. Why should ordinary Britons be made to pay for the financial sector’s gambling debts? After all, currency speculation is just another form of gambling. Darling’s tax on bankers’ bonuses is a small step in the right direction, but we need far bolder measures. Let’s make Britain a leader in promoting tax justice. If Labour has the courage to seize this opportunity, it could lay the basis for genuine economic sustainability.

George Irvin