UK FSA Chief Rekindles Tobin Tax Debate

by Robert Lee, Tax-News.com, London

31 August 2009

Lord Turner, head of the UK’s Financial Service Authority, has suggested that a new tax on financial transactions may be the best way to address excessive remuneration in the banking sector, while providing revenue to help narrow the global wealth gap and fight climate change.

In an interview with Prospect, the British current affairs magazine, Turner said that if increased capital requirements were insufficient to rein in dangerous risk taking and speculative activity by banks and other financial institutions, then he would be “happy to consider taxes on financial transactions,” popularly known as ‘Tobin’ taxes.

“Such taxes have long been the dream of the development economists and those who care about climate change – a nice sensible revenue source for funding global public goods,” he observed, going on to suggest that the global financial services sector had long outgrown its social usefulness.

"There clearly are bits of the financial system... which have grown beyond a socially reasonable size," he said.

The ‘Tobin’ tax was originally proposed by economist James Tobin in the 1970s shortly after the Bretton Woods system of fixed exchange rates was dismantled and had the very narrow aim of discouraging short-term profit-motivated speculation in the currency markets in a bid to calm periods of volatility. However, the idea has since been seized upon by politicians as a way of raising billions in revenues to fight global poverty at relatively little cost. According to the Bank for International Settlements, the average daily turnover in the global foreign currency markets is just under USD4 trillion, and it was recently estimated by supporters of a Tobin tax that a 0.005% levy on transactions would raise up to USD60bn annually.

While many world leaders have been open to the idea – the French have been particularly enthusiastic supporters of a Tobin tax in the past – achieving a global agreement on such a levy is something that Turner acknowledges will be “very difficult.”

“But at least proposals for special financial sector taxes, with increased capital requirements, address the issue of excessive profits and therefore have a chance of doing something about it,” he said.

Naturally, the financial services industry is not keen on the idea.

"The UK's financial services industry is a major provider of jobs and source of tax revenues,” the British Bankers' Association stated in a response to Turner’s comments.

“We are the top centre in the world for global banking and that's why more than half the 336 banks operating in the UK have been attracted here from other countries. That's an achievement that we shouldn't take lightly. If we introduce the wrong kind of regulation or the wrong kind of taxes we could so easily lose that position by driving business abroad.”

“On so many occasions in the past the country has lost chunks of industry through making the wrong decisions. Let's not do that again," the BBA cautioned.

Lord Turner, however, intimated that such concerns should not form part of the financial regulator’s remit.

"It's clear to me that the FSA has to be very, very wary of seeing the competitiveness of London as a major aim, and that's not a popular thing to say,” he said.

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