An idea that has re-gained prominence as a result of the financial crisis is that of introducing a global tax on financial transactions. Several weeks ago in Strasbourg, the European Parliament debated and adopted a resolution tabled by the Economic and Monetary Affairs committee (Econ) giving the green light for the EU to agree a common position on the issue and negotiate with the G20 and other international leaders, and for the Commission to undertake an impact assessment of a global financial transaction tax looking at both its advantages and potential disadvantages.
Introducing the resolution and leading the parliamentary debate as vice-chairman of Econ, I spoke in plenary, noting that 40 years ago as a student, part of the New International Economic Order which we used to discuss, included a proposal to use special drawing rights (SDRs) loaned to the IMF to include a sort of tax on national governments which would be used for helping poor countries' development programmes. As we know, this did not materialise.
Many years later the effects of globalisation, combined with technological advancement and stronger political will, means that certain plans are now more doable. However, the number of competing global policy objectives has greatly increased. Alongside the original Tobin Tax idea of using a small financial transaction tax for development aid, some political leaders at the G20 summit last September called for the financial sector to pay for the establishment of stability funds and provide recompense for the damage caused by the financial crisis to the world economy. Meanwhile, President Jose Manuel Barroso has suggested the introduction of a global financial levy to fund environmental projects.
So, besides tackling poverty, we are now talking about using a financial transaction tax to combat the effects of climate change and to act as a sort of global insurance premium to compensate victims for the social and economic pain caused by financial crises. Can we really use one tax to achieve all these different aims?
Moreover, while there are many strong advocates of transaction taxes, there are also reservations and questions about how funds from it could be collected, whether revenues would be outweighed by the costs of implementing it, and over who would decide how the money was used.
That is why the Econ resolution called for an impact assessment on a transaction tax (being undertaken by the IMF) to provide answers to a range of questions such as: the revenue potential; how it would affect price levels; what the previous experiences of transaction taxes had shown in terms of tax avoidance or the migration of capital or services; whether a tax could help stabilise financial markets; and, crucially, the benefits and drawbacks of the EU going it alone in establishing a transaction tax.
From my point of view, it goes without saying that a transaction tax can only work effectively if it has support from the US and other world leaders in the G20, not by the EU going it alone. At EU level we should avoid any policy that would reduce our competitiveness or hamper investment, innovation and economic growth. I am also concerned that any extra costs borne by banks and other financial institutions in conducting financial transactions would simply be passed on to the end users.
If we are not careful, an attempt to apply a levy to banks could become yet another tax paid by consumers.
We need answers to all these questions before we can seriously entertain the implementation of a tax on financial transactions. We also need to decide on a specific purpose that the tax revenues would be used for. Faced with multiple policy objectives, we should stick to the wise rule that each objective needs its own separate instrument. A global financial transaction tax can only succeed if it is focused, achievable and commands widespread international support - not if it tries to be all things to all people.
Prof. Scicluna is a Labour MEP.