Published 07 May 2013 | Standard notes SN06184
At various times over the last thirty years politicians, economists and bankers have debated the case for introducing new taxes on financial transactions, following a proposal by the American economist James Tobin that a tax on currency trades could dissuade harmful speculation by financial markets.
For many the need for a ‘Tobin Tax’ was shown by the banking crisis in late 2007 and its devastating impact on the world economy. Taxpayers in many countries have provided considerable sums to bail out individual companies and restore stability to the global system – and new taxes on the banking system would appear to be a fair way of recovering these costs. In addition the ability of some of the largest banks to return to robust financial health, and to reward their top personnel handsomely, has increased the political pressure for a change – seen in the popularity of the campaign launched in early 2010 for a Tobin-like ‘Robin Hood Tax’.
For the next two years the case for some form of international levy on the banking system was explored by the International Monetary Fund and discussed by the G20 nations – culminating in the G20 summit held in Cannes in November 2011, but without a consensus being reached. In September 2011 the European Commission published proposals for an EU-wide tax on financial transactions (FTT). Although this idea received support from some EU States, the Coalition Government has been strong opposed, on the grounds that such a tax would only be viable if implemented on a global scale, and that the UK’s own banking levy, which was introduced in January 2011, meets many of the aims set for an FTT without some of its possible drawbacks. Other countries have also raised concerns, and in June 2012 Finance Ministers agreed that the measure would not be proceeded with.
In October 2012 eleven Member States agreed to pursue the option of having a Tobin-like levy on a smaller scale. Under the procedure of ‘enhanced co-operation’, if Member States have failed to obtain an objective within a reasonable period of time, a minority of countries may pursue a proposal, provided at least nine States participate. This use of this procedure was approved by European Finance Ministers in January 2013, and the Commission published draft provisions the following month. Although the UK is not one of the eleven participating Member States, in April the Government confirmed that it would launch legal action against the initiative, on the grounds that, in its current form, it would override the rights, competencies and obligations of the Member States who were not participating, and, as such, fail to meet the conditions established in the Treaty for ‘enhanced cooperation’. Treasury officials are reported to be confident that negotiations could ensure that a final FTT did not affect financial institutions outside the eleven States, but that making a legal challenge at this early stage would ensure that the UK could pursue the option, if this assessment proved over-optimistic.