Financing nothing but fine words: It’s time to take tax seriously
Date: 21 July 2015
The Financing for Development Conference, held in Addis Ababa (Ethiopia), came to a close on 17 July. The conference was meant to provide a practical yet ambitious framework for financing the Sustainable Development Goals (more on the SDGs in my next blog). Did it succeed? That depends on who you ask.
The UN’s press release uses words like ‘historic’, ‘bold’ and ‘groundbreaking’ to describe the conference agreement, the official name of which is the tongue-twisting Addis Ababa Action Agenda. The consensus among civil society groups, on the other hand, is that the agreement ‘lost the opportunity to tackle the structural injustices in the current global economic system and ensure that development finance is people-centred and protects the environment’.
I think that the civil society reaction hits close to the bullseye while the UN’s stance virtually misses the dartboard all together. Let’s just take tax as one example. The agreement reached in Ethiopia ignores the need for a UN global tax body where all countries would have an equal say and take decisions together. Thus the rich country club that is the Organisation for Economic Co-operation and Development remains the only intergovernmental agency that adopts global standards on tax issues. Other countries still won’t get a say on fixing the deeply flawed global tax system so that both tax evasion and avoidance are properly tackled.
The Addis agreement also fails to engage with another set of tax issues, namely how the financial sector should be taxed. For example, a bank levy is a tax on banks’ balance sheets (usually their debts). This is a useful way of discouraging banks from engaging in risky borrowing and can raise significant revenues. Unfortunately the Chancellor’s Summer Budget saw him reduce the UK’s bank levy – which has raised £8 billion since 2010 – following tough lobbying by the banking industry. While it’s true that the Chancellor introduced a new 8% surcharge on bank profits (another example of how the financial sector may be taxed), this wasn’t an ‘either/or’ option. The bank levy should have remained as it was and the new tax on bank profits introduced (preferably at a higher rate than 8%).
The Addis agreement totally ignores these issues, as well as another critical element of this discussion: a Financial Transaction Tax (FTT) aka the Robin Hood Tax. An FTT is a tiny tax (usually no more than 0.1% and often less than this amount) on transactions involving bonds, stocks, derivatives and foreign currency. It’s easily implemented, as modern computer systems can be employed to collect the required taxes.
FTTs serve two main functions. Firstly, they aim to stabilise financial markets by curbing high-frequency trading and speculation. Secondly, they seek to raise revenue, which can be spent on tackling poverty and climate change. And the sums involved aren’t to be sniffed at – it’s estimated that an FTT across all G20 countries could raise as much as $250 billion annually. You’d think that a Financing for Development Conference would get pretty excited about that sort of figure!
Many countries have experimented with FTTs in the past, and some countries continue to utlise them, including the UK, through a stamp duty on shares. In spite of this, George Osbourne has been a severe critic of European plans for an FTT, going as far as to launch a (thankfully unsuccessful) legal challenge against it. Why is the Chancellor playing the role of the Sheriff of Nottingham? A reasonable guess would be because he has been subject to intense lobbying by certain elements of the financial sector. In the words of the European Commission, the European FTT plans are ‘most irritating for high-frequency traders and for fund and hedge fund managers whose business model is based on quick successions of financial transactions and on frequent transactions with high profit (and loss) potential’.
Are there any genuinely important criticisms of FTTs? Not really. Some analysts have argued that these taxes may do little to reduce market volatility, and may even increase it, if productive trading as well as short-term speculative trading is impacted. Yet an extremely small one-off tax shouldn’t deter long-term investors. Moreover, no one seriously suggests that a global FTT wouldn’t require careful design and close monitoring once launched, with the potential for adjustments to be made if necessary.
There’s absolutely no reason to hold off from giving the green light to a global FTT. Shame on those who wielded the most power in Addis Ababa. A lost opportunity indeed.