Taxing Finance

Toby Sanger

The financial and economic crisis has led to a long overdue re-evaluation of the role, regulation and taxation of the financial industry around the world.

The IMF estimated that the crisis would cost G20 countries over $1 trillion in increased deficits; costs citizens are now paying for through public spending cuts, austerity measures and consumption tax increases. This alone is a good reason for the unprecedented interest in introducing new taxes on banking and the finance industry. Despite this, the commitment by G20 leaders at their September 2009 summit that the “financial sector should make a fair and substantial contribution” towards paying for some of the costs of the crisis remains unfulfilled.

Following strong advocacy by civil society and labour organisations, a significant advance was made in June 2011 when the European Commission recommended a European financial transactions tax be introduced by 2018 at the latest. It estimated this would generate €37 billion (US$52 billion) a year to fund the European Union’s budget activities.

Beyond paying for some of the costs of the crisis, there are also a number of other compelling reasons for increasing taxation of the financial sector.

Financial sector is too big
Whether considered from a critical political economy or a more conventional neo-liberal perspective, there is broader recognition that the financial sector has grown “too big” for the good of the economy, as a recent IMF report suggested. Finance is an intermediary industry, and doesn’t directly produce products with end-use values for people, so it can divert resources from other more productive areas. Excessive salaries and bonuses paid to engineering graduates to create new financial products and derivatives instead of working to meet more fundamental needs reflects the human resources side of this equation.

Tax changes have provided large benefits and preferences for finance
Major tax changes introduced over the past decades inspired by supply-side economics provided large benefits to the financial sector and to highly-compensated individuals in the industry. These include: preferential tax rates for capital gains and investment income, increasing dependence on consumption-based value-added taxes (which largely exempt financial services), cuts to corporate taxes, reductions in higher income tax rates, as well as the growing use of tax havens.

Reducing incentives for excessive risk-taking
Even from a micro-economic efficiency approach, there is recognition that tax changes increase incentives for short-term speculation and excessive risk-taking in the financial sector, as the IMF and the European Commission have acknowledged. Bankruptcy and limited liability laws have limited downside risk for corporations for centuries. Following the financial crisis, there is also more focus on the damage caused to the entire economy by systemically risky activities, with the implicit public guarantee for “too big to fail” financial corporations.

Some have argued that the exponential growth of trading in financial derivatives — futures, options, swaps, etc. — has magnified financial instability instead of reducing volatility as they were supposed to. The value of financial derivatives outstanding now amounts to over ten times the value of annual global economic output. Clearly much of this involves investments designed to increase profit through leverage and risky speculation instead of hedging to insure underlying investments against economic fluctuations.

There’s been little effort to contain or control this. Financial derivatives have been largely unregulated; unlike transactions for most other goods and services, only a few countries apply taxes to a broad range, let alone any financial transactions; the growth in derivatives, hedge funds, private equity and increasing use of secretive tax havens has not only siphoned revenues from national governments, but also made them more vulnerable to the power of financial capital.

There should be little surprise that pressure exerted by popular groups for new taxes on finance, such as the Robin Hood Tax campaign, is now being supported by many politicians and political leaders from different sides of the political spectrum. The common appeal for international development, anti-poverty, economists and political activists is that new taxes on finance could not just to help pay for the costs of the crisis and provide funding for global social and environmental needs, but also to tame the financial industry and help prevent further financial crises.

The leading group on innovative financing for development has endorsed financial or currency transactions taxes at low rates to raise revenues at the global level to fight poverty and climate change. Proponents estimate that a broad-based tax at 0.05% on all financial transactions could generate US$200 to $600 billion a year in revenues globally — significant funding for global development and environmental priorities.

The idea of special taxes on banks and financial transactions is neither new nor speculative. In 1936, John Maynard Keynes wrote in his General Theory that “the introduction of a substantial government transfer tax on all transactions might prove to be the most serviceable reform available, with a view towards mitigating the predominance of speculation over enterprise in the United States.”

Nobel-prize winning economist James Tobin applied Keynes’ idea when he proposed an international tax on currency transactions “to throw sand in the wheels” of international finance, reduce speculation and cushion exchange rate fluctuations after the Bretton Woods monetary system broke down in 1972.

Many countries already have long-standing and effective taxes on certain financial transactions. The UK’s Stamp Duty tax, which includes a 0.5% tax on most equity transactions, has been in existence since 1694 and raises over US$5 billion in revenues annually. Switzerland also levies a tax on transactions of stocks and bonds. China levies a tax on trading in stocks, and adjusts the rate depending on how much they want to cool down or stimulate their stock market. Taiwan not only taxes transactions of stock and bonds, but a tax at a lower rate on transactions of financial derivatives such as options and futures. Other countries have financial transactions taxes, although a number have been eliminated since the 1990s.

Given this experience, there is no question that financial transactions taxes are not only feasible, but can be effective and raise decent amounts of revenue at a low administrative cost without much economic disruption. The greater interest now is in even broader-based taxes to also cover currencies and financial derivatives. Because much of this trading is global and highly mobile, financial transactions taxes in these areas would be much more effective if established through global or multi-lateral agreements.

Of the US$600 billion figure for a 0.05% tax on all financial transactions, about 80% is estimated to come from trading in derivatives. However, there is considerable uncertainty about the impact of a tax on trading on different types of derivatives and therefore on how much revenue would be raised. With a tax based on the notional value of the derivative contract, in some cases even a small tax rate could exceed the value of the actual premium paid. A global FTT might not raise US$600 billion a year and cure all the ills of the global economy, but it could certainly raise significant sums while improving the functioning of the economy. There is solid research showing that a tax at a rate of 0.005% just on transactions of major global currencies could generate over US$30 billion annually at a low administrative cost with little impact on markets. The G20 and other countries should join with the European Commission proposal to establish broader-based financial transactions taxes at the international level, but agree to direct half the funds generated to international development and climate justice priorities.

There’s also no reason why national governments can’t proceed with increasing other taxes on finance. There’s a strong argument for Financial Activities Taxes to compensate for the broad exemption of financial services from most national value-added tax systems. As proposed by the IMF, a 5% tax on profits and compensation in the financial sector would form a good proxy for value-added by the industry and could generate approximately significant revenues in many countries.

Tax preferences that have provided disproportionate benefits to the financial industry and even increased the incentives for speculative behaviour should also be eliminated. These include reduced tax rates for capital gains, stock options and other forms of financial investment income. There’s also solid justification for a higher corporate tax rate on bank and large financial sector firms given the implicit guarantee governments provide to rescue them from failure.

These tax changes will not fix all problems with finance, nor will they eliminate speculation and generate all the revenues we need for global poverty and environmental challenges. But at a time when governments have reacted to the financial crisis by penalizing people with cuts to public spending, increasing taxes on finance would not only be much fairer but also better for the health of the economy.

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Toby Sanger is a CCPA research associate and senior economist with the Canadian Union of Public Employees. He previously worked as principal economic policy advisor to the Ontario Minister of Finance and as chief economist for the Yukon government.

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Further reading
Toby Sanger (April 2011), Fair Shares: How Banks, Brokers and the Financial Industry Can Pay Fairer Taxes, Canadian Centre for Policy Alternatives

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Building Progressive Alliances

Asbjørn Wahl

The social conflict in Europe has intensified strongly over the past couple of years, in the wake of the financial crisis. The labour and trade union movement has been on the defensive ever since the neoliberal offensive started around 1980. The balance of power in our societies has thus shifted enormously over the past 30 years - from labour to capital, from democracy to market forces. Time is ripe, therefore, to fight back, to build broad social alliances and to reassess our strategies and tactics.

In this article I will take a closer look at the current situation, address the question of alliance building and particularly summarise some of the experiences we have had in building alliances in Norway. My point of departure is that social development is a question of power, social power, and strength. If we are not able to mobilise sufficient social power behind our many excellent demands, they will only end up as wishful thinking.

The current situation

The situation in Europe is going from bad to worse. Subsequent to the financial crisis, we are now facing a crisis of state financing, which is gradually turning into a deep social and political crisis. Add to this the environmental and climate crisis, and the future looks rather dramatic.

Perhaps we should have expected the financial crisis to be followed by strict regulation of financial capital and an end to the neoliberal experiments which contributed so strongly to it. However, quite the opposite has happened, neoliberals are still running the business, both politically and financially. They have even been able to win hegemony for their interpretation of the crisis. It is no longer the capitalist crisis which has led to the mess, but ordinary people who have been living beyond their means. Workers and pensioners have to foot the bill, after the financial institutions and speculators were rescued by governments. This has led to reactionary and anti-social austerity policies across Europe, including fierce attacks on trade unions as well as on wages, pensions and welfare services.

One of the reasons for this development is the weak resistance from trade unions and social forces in Europe. As long as we are not able to shift the balance of forces in society, the neoliberals will continue their silent revolution (as EU Commission President José Manuel Barroso has characterised the current attempts to further de-democratise and take control over economic government in the EU). Already in eight of the EU member states public sector wages have been cut and collective agreements set aside through political decrees – without negotiations with trade unions concerned. While employers and governments are thus breaking completely with post-war consensus policies, many trade unions are still clinging to the illusion of a working social partnership, in which reasonable employers will be convinced by our arguments. However, this consensus was based on a particular balance of power which has shifted enormously during the neoliberal era of the past 30 years. What is going on now is therefore a fierce interest-based struggle, and every sign tells us that the confrontations will increase in strength. We are under attack, and it is a matter of urgency to fight back.

Build alliances
In order to confront the attacks, we have to reorient our unions, and to build broad social alliances to increase our strength. This is a struggle for power, and the struggle has to be political (not party political, but political in terms of addressing social development in the broad sense). The aim is to widen the social basis of our struggle. To that end, we will have to broaden the perspective of our policies and demands.

Alliances can change according to the situation and the aim of our struggle. In the current situation, in which the very foundation of our social achievements is being attacked, it is the broad social alliances which are decisive. In other words, we have to identify common interests with other groups in society. Thus, our alliance policy has to be built on class analyses and practice, not on empty rhetoric and lip service.

Firstly, we have to strengthen our unity within the trade union movement, i.e. in the working class itself, across the divides between public and private, blue collar and white collar, skilled and unskilled, workers and professionals, employed and unemployed, male and female, immigrants and domestically based, as well as formal and informal workers. Secondly, we should build alliances between social classes and strata, like with important parts of the middle class, of peasants, of youth and of women who can be mobilised in favour of social protection and progress. Thirdly, progressive academics and researchers, NGOs and organisations and campaigns which have an understanding of the broader social context are important social allies. Fourthly, and finally, due to the alarming climate crisis, we should seek alliances with those parts of the environmental movement which have an understanding of the social conflict and social justice.

Norwegian experiences
In Norway we have been building alliances between trade unions and other organisations and movements for many years. The one I have been in charge of, the Campaign for the Welfare State, was initiated in 1999, by six trade unions in the public sector. Gradually we grew, firstly inside the trade union movement, but then also among other organisations, such as of retired people, peasants, socially excluded people, users of welfare services, women and students. All in all we gathered organisations with more than one million members, which is not bad in a country with only approximately five million inhabitants. Of course there are different levels of participation among these organisations, but even the support from the more passive ones has given us a lot in terms of legitimacy in the social struggle.

During the general election in 2005 this alliance, in cooperation with other organisations and the broad trade union movement, succeeded in changing the political situation in Norway. It was a favourable climate for change because the existing centre-right government was highly unpopular due to its policies of privatisation and deregulation. Further, the Labour Party had been strongly punished by the voters four years earlier, when it achieved the lowest support in an election since 1924, because of its move to the right. This gave us an opportunity to push the Labour Party to the left and into a coalition with the Socialist Left Party and the Centre Party. Due to this pressure, all the three parties campaigned on an anti-privatisation platform, won the election, and formed a government based on the most progressive political platform in Europe.

More independent – more political

We can identify four main pillars which contributed to this success:

• Focus on alternative analyses – a system critical view of current developments.
• The building of new, broad and untraditional alliances.
• The development of concrete alternatives to privatisation and marketisation.
• The development of trade unions as independent political actors.

These steps contributed to polarising the struggle between the Right and the Left, something which gave people clear political alternatives and helped mobilise them for progressive change.

The 2005 red-green government in Norway started off by carrying through a number of progressive policies. However, as time went by, and the pressure from the movement declined, the government began to slide back to old political positions. Even if great parts of the trade union movement politically had become more independent from the Labour Party, other parts were still too loyal to oppose and to keep up the pressure when welfare provisions were weakened and undermined by ‘their own’ government. It is exactly the move to the right of the traditional Social Democratic/Socialist Parties which has made it necessary for trade unions in the current situation to become more independent politically and to take on a wider political responsibility and, not least, to keep up the pressure on the government after it has won the election and taken power.

So far we have only seen the beginning of the social and political crisis in Europe. In other words, it is time for trade unions which are old-fashioned, afraid of new alliances, afraid of losing control, more or less married to social democratic/socialist parties and locked in by an uninhibited belief in social partnership, to reassess their position. Social resistance to the austerity policies is increasing across Europe, but there is a lack of European coordination and leadership. We have to support those who struggle and follow their example. We have to turn the defensive into an offensive. It is all about power, not only addressing power, but taking power, if we are to stop the current development towards an ever more authoritarian and anti-social Europe.

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Asbjørn Wahl is Director of the broad Campaign for the Welfare State in Norway and Adviser to the Norwegian Union of Municipal and General Employees. He is also Vice Chair of the Road Transport Workers’ Section of the International Transport Workers’ Federation.

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