EU FINANCE ministers are meeting today to discuss the latest incarnation of the Tobin Tax. The City should be worried. Tobin’s proposed tax on foreign exchange transactions has deservedly been in the wilderness for forty years, but the mood has changed. There is a real danger that a punishing levy could happen, sooner rather than later.
Consider the other topic of discussion on the table at this EU meeting: finalising plans for a yearly bank levy that will pay for any future bailouts. This is a tax on prudence, which will squeeze those long-term profits that come from sound investment decisions and use the money to support the risk-takers who mismanage their assets. Moral hazard will grow, not contract. And yet the UK, Germany and France have all agreed to take it forward; Britain’s version is especially bad. In such an environment, a Tobin Tax no longer seems inconceivable.
The prospect of taxing foreign exchange could scarcely come at a worse moment for the UK. The triennial foreign exchange figures from the Bank for International Settlements were out just last week, showing that the UK remains the global centre for foreign exchange and continues to grow in importance in the sector. London-based traders now account for 36.7 per cent of all foreign exchange market turnover, which is more than the next four countries (the US, Japan, Singapore and Switzerland) put together.
It is hard to imagine any sane chancellor wanting to harm such a magnificent British success story, even when bankers make such easy prey. And yet any transaction tax would be a global decision, with all nations signing up behind it. And at the trans-national level, senior figures with less to lose are already falling into line. Nicolas Sarkozy, Angela Merkel and Jose Manuel Barroso have all supported the measure. The head of the International Monetary Fund retracted his opposition at the end of last year.
Any conclusions from this EU discussion will be taken forward to the G20 in South Korea this November. George Osborne is, thankfully, said to be wary, but the dilution of his voice as the family of nations works toward its consensus can only grow.
If the worst happens, there will be fine words about global agreement, of everyone having signed up as equal partners, accepting a twenty-first-century tax for the greater good. The truth will be that Britain’s disproportionate success in foreign exchange bears a disproportionate share of the burden. Our global competitors will be only too happy to posture while loading its weight on our shoulders.
Even those sectors of the City that might imagine a tax on foreign exchange isn’t their problem should read the small print of today’s agenda. Proposals under discussion include extending the concept to cover transactions in bonds, stocks and derivatives. Once transaction levies begin, all trades will become targets for the global taxman.