Friday, 20 August 2010

Where we are. What’s next? | The Robin Hood Tax

Where we are. What’s next?

June 11th, 2010 by Robin Hood

Posted in: Campaign updates, FAQ

The Robin Hood Tax campaign launched in February. What’s been happening?

The Robin Hood Tax campaign has grown hugely since it launched in February and is now a very successful campaign.  We are a unique coalition of well over one hundred domestic, development and green organisations backed by 350 economists worldwide.  We have 170,000 supporters on Facebook and over a million have seen our films. Every MP and Prospective Parliamentary Candidate in the UK has been emailed about the campaign at least five times, and in total 20,000 e-actions have been taken. Former Prime Minister Gordon Brown described it as a ‘formidable online campaign’.

Similar campaigns have now been launched across the world from Austria to Australia and the International Monetary Fund has recognised “the seriousness of the public support” which a Robin Hood Tax has gained. Due in part to our campaigning, bank taxes are now firmly on the political agenda and the new UK coalition government has agreed to tax the financial sector. The question now is how much and what for.

What constitutes a true Robin Hood Tax?

The Robin Hood Tax campaign wants a financial sector tax that will raise hundreds of billions every year, and that money should be spent helping the poor at home and abroad and tackling climate change.

We are campaigning for a tax of £250 billion a year globally with at least £20 billion in the UK – the financial sector can afford it, and the needs are huge. We continue to support 50% of the revenue going towards fighting poverty in the UK, 25% for fighting poverty in developing countries and 25% for helping poor countries adapt to climate change. The money for poverty abroad and for climate change must be additional to our commitment to give 0.7% of GNI which was agreed in 1970.

We still believe that a tax on all financial transactions of around 0.05% is the best way to raise the volume of money needed. However, if another financial sector tax or taxes are proposed that also raise hundreds of billions annually and are linked to fighting poverty and climate change we would be hugely supportive.

While of course a global agreement is the best outcome, we continue to support the UK moving ahead unilaterally regardless of whether a global agreement is reached.

What has the International Monetary Fund (IMF) recommended?

The IMF Report

The IMF was asked to prepare a report looking at how the “financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system”. The IMF stretched this to include indirect costs of the crisis in rich countries. However, they stopped short of including the indirect costs on poor countries, which according to recent Oxfam research amounts to a fiscal hole of $65 billion in 2009 and 2010.  The paper proposes two kinds of tax: a Financial Stability Contribution (FSC) and a Financial Activities Tax (FAT).

Financial Stability Contribution (FSC)

The FSC is aimed at building up a rainy day fund to insure against future crises which would be applied to all financial actors. The value of financial institutions would be calculated and a small percentage tax levied upon this. The IMF also recommends a fund worth 2-4% of GDP. Whether this would actually cover the true cost of the public subsidy given to the financial sector has already been questioned. The IMF would seek to reduce the moral hazard of a “rainy day” fund, whereby financial actors continue risky behaviour because of the security the levy would guarantee, by introducing a punitive resolution mechanism should a financial actor need to access the funds. However, some commentators are continuing to call for regulations instead of deterrents.

Financial Activities Tax (FAT)

The FAT would be a tax on excess profits and bonuses in the financial sector. It recognizes that there is a systematic level of profitability in many parts of the sector that is excessive and above what would be defined as a “normal” rate of return. This is groundbreaking for the IMF and would have been unthinkable pre-crisis.

The author of the report blogs: “This means that a FAT of this kind [value-added tax] could make the tax treatment of the financial sector more like that of other sectors and so help offset a tendency for the financial sector, purely for tax reasons, to be too large. Taxing away some of these high returns in good times may help correct for any tendency to excessive risk-taking implied by financial institutions not attaching enough weight to outcomes in bad times (whether because of limited liability, or because they think themselves too big to fail).”

Financial Transactions Tax (FTT)

The IMF stated that the FTT should not be dismissed on grounds of administrative practically. “Collecting taxes on a wide range of [transactions] could be straightforward and cheap if withheld through central clearing mechanisms, as the experience with the UK stamp duty shows”. It was not one of the mechanisms recommended because it was not believed to be the best way of meeting the report’s objectives. The IMF was also critical of the idea that none of the FTT would be passed onto ordinary consumers, although the report did not offer evidence to demonstrate why this is any less true for the FAT or FSC. The IMF plans to release two additional working papers on the FTT.  The IMF report has pushed an FTT further into the mainstream and it remains likely that the French will return to the FTT in 2011.

The Robin Hood Tax Campaign

While the IMF has not dismissed outright the FTT, momentum is currently behind other methods of taxation for the financial sector. Some form of FTT is not incompatible with either of the proposed taxes and there is nothing to stop governments implementing all three taxes – we could see the introduction of a FSC, FAT and a FTT working together to raise the $400 billion needed. However, for the next six months the energy of the G20 will be directed at the taxes recommended by the IMF.

Between now and November, there is a major opportunity to ensure that the FSC/FAT is ambitious ($200-300 billion annually) and that at least some of the countries involved undertake to use a part of these resources for development and climate change, and link the revenues to spending on the poorest in their own country.

Does this mean we are abandoning a Financial Transaction Tax (FTT)?

No. The FTT remains popular with the German, French, Austrian and Belgian governments, and as a campaign we still support it as the best way to raise the amounts of money from the financial sector that are required.  There is a good chance the FTT will return to political favour when the French chair the G20 next year.  For now however, the momentum is behind the two other taxes recommended by the IMF, on liabilities (the Financial Stability Contribution or FSC) and on profits (the Financial Activities Tax or FAT) which have the potential to raise as much as a FTT. We need to make sure that these two taxes are as large as possible and are directed to helping the poor and fighting climate change.

What will happen at the G20 Summits?

The G20 was established in 1999, in the wake of the 1997 Asian Financial Crisis, to bring together major advanced and emerging economies to stabilize the global financial market. Since its inception, the G20 has held annual Finance Ministers and Central Bank Governors’ Meetings and discussed measures to promote the financial stability of the world and to achieve a sustainable economic growth and development. The possiblity of introducing a global tax on the financial sector will be discussed at the 2010 G20 Summits in Canada in June and in Korea in November.

G20 Finance Ministers are not in agreement on the IMF report. The main opposition to a bank levy has come from Canada joined by Australia and a number of developing countries including Brazil, India and China. It is not clear whether these countries object to any tax or to the proposals made. The Canadians and Australians are adamant that their banking systems did not indulge in the risky behaviour that led to the crisis and so do not have to be taxed. However, the important major players, US, UK, France and Germany, all favour some form of co-ordinated global taxation. This ‘coalition of the willing’ will almost certainly go ahead with some form of tax even if G20 consensus is not reached. The US have said they would press ahead regardless, either unilaterally or with a smaller group of countries, and the UK has also committed to introducing a unilateral bank tax. Germany and France are also in favour of a tax on the financial sector, with the Germans saying they are prepared to implement a tax within the EU or the Eurozone if a global bank tax cannot be agreed.

By the Korean G20 in November a tax or taxes on the financial sector will be agreed. While this may not be a Financial Transaction Tax, these taxes could still raise hundreds of billions of dollars globally, and over £20 billion here in the UK. Without the campaign the UK could agree on a small tax of £1-5 billion a year with no link to good causes.  But with a big push the tax could raise £20 billion a year or more in the UK and be clearly linked to fighting poverty and climate change.

What are the findings of the IPPR report?

The Institute for Public Policy Research (IPPR) has published a report exploring the possibilities of taxing the financial sector. The report concludes that taxing the banks is a fairer way to balance the UK budget than regressive measures such as an increase in VAT which would hit the public hardest.

The IPPR report follows suggestions from the IMF about the different ways in which Governments can tax the financial sector. The research looks at all the potential bank taxes and examines their effect on the financial sector and the public in the UK. The IPPR also examines how much the financial sector can afford to pay.

The report finds that the financial sector has rapidly returned to high levels of profit and bonuses, estimated to be in the region of £90 billion by 2011. On average, banking is 26 times more profitable than other industries. The IPPR states that the sector “could pay more” from a combination of new taxes plus a crackdown on current tax avoidance.

Taxes on the financial sector would also be “progressive” and help rebalance the gap between the poorest and richest. This is in direct comparison with a rise in VAT, a “regressive” tax widely predicted to be included in this month’s Budget. A VAT rise would hit ordinary people hardest; the poorest fifth of Britons pay twice as much of their disposable income in VAT (12.1%) compared to the richest (5.9%), according to the report. This means that poorer areas of the UK would be affected more severely than affluent areas.

A VAT rise of 20% would also only raise around £11 billion in comparison with taxes on the financial sector which could raise £20 billion and spare the poorest from further shouldering the burden of the financial crisis.

The IPPR concludes that whatever “the method of taxing financial institutions, the most important point is that with a recovery in profits there is the potential to raise up to £20 billion from the financial sector that could be used to help fight poverty and climate change”.

The findings of the report show that there are no excuses not to introduce a Robin Hood Tax. The banks can afford it, it can help stop VAT rises hitting ordinary people, and the money can be spent helping the poorest people get back on their feet after the financial crisis they had no part in creating.

For more information, read the IPPR report.

What is the impact of the new Coalition Government?

The new UK Government is a coalition of the Conservatives and the Liberal Democrats. The Conservatives favour the FSC or bank levy. They have not commented on the FAT and oppose the FTT. The Liberal Democrats favour a temporary FAT for general revenue and commit to pursuing a FTT with the agreement of the US, France, Switzerland and Germany to finance development. Both the Conservatives and Liberal Democrats are committed to pressing ahead with a bank tax without waiting for global agreement.  The Conservatives have said they will unilaterally do one that would raise £1 billion annually, whereas the Liberal Democrats have said their profits tax would raise £2-3 billion annually until the banks are broken up.

The press are reporting that the new Coalition Government will definitely press ahead with a bank levy as part of a series of reforms of banking.The risk is that we see a tax agreed that is temporary, small scale and not targeted on the poor, and at the same time the commitment to the FTT is dropped by the Liberal Democrats.

Posted in: Campaign updates, FAQ

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