Financial transaction taxes – The taxes of the future

Policy Study

Background

We are in the midst of a financial and economic crisis brought upon us by excesses in the financial sector. Yet it is this very sector which has received more than a trillion dollars of government support in countries across the world because its functioning is so critical to the economy.

The combination of a recessionary squeeze in tax revenues and the money that governments have had to spend to rescue the financial sector as well as stimulate the broader economy has increased the prospects of a fiscal crisis with many rich and poor country governments facing budget deficits of an unprecedented magnitude.

These factors have led to a renewed interest in the Tobin Tax as well as the broader family of Financial Transaction Taxes. Rather unexpectedly, the chief UK regulator recently expressed support for a worldwide Tobin Tax to curb the size of the financial sector. Financial transaction taxes have also been talked about recently as a way of increasing revenue from the financial sector to ‘make it pay for its rescue’. Another attraction is the potential positive impact these taxes might have on stabilizing financial markets by skewing incentives towards long term investments and away from short term speculation.

This concept paper lays out the case for a big expansion in this family of taxes and shows how the crisis has made it both more desirable and easier to implement financial transaction taxes.

Read the paper made for FEPS by Sony Kapoor, Executive Director of Re-Define