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Magic bullet or fairytale? Examining the arguments for a financial transaction tax

Thursday 10 June 2010 - by Daniel Sage

Suggestions for a levy on financial transactions gained global support earlier this year but have since been eclipsed by other alternatives. Daniel Sage examines the options available and whether global consensus is achievable

The idea of a financial transaction tax – a levy on a specific or a range of financial transactions – has risen to global prominence over the last year.

Despite this very recent upsurge in attention, FTTs have a long history. An FTT on stock transactions was first proposed by JM Keynes in 1936, whilst in 1978 James Tobin proposed a tax on foreign exchange transactions – thereafter known as the Tobin tax.

There are also working examples of FTTs across the world, such as India’s tax on stock transactions and the UK’s stamp duty reserve tax, which generates almost 1 per cent of total HMRC receipts (see graph overleaf).
Nonetheless, FTTs have never been as richly debated as today.

Due to a unique synthesis of events – the failings of the financial system, government bail-outs and huge public deficits – a movement has developed which believes that an FTT could be a cure for all these ailments. The movement is a diverse and distinguished group, comprising of economists such as Joseph Stiglitz, politicians, think-tanks and charities.


While not harmonious, with fundamental disagreements over the nature of any FTT, the movement has evolved into a major lobby, with ambitious arguments for reform.

Broadly, two proposed benefits are commonly attached to FTTs; this is a premise the World Bank labels the “double dividend”. The first of these is a largely economic point: economies around the world need bolstering and an FTT would provide a means of doing so.

The director of charity group Stamp out Poverty David Hillman says there is a “huge need for money and there is a significant area of untapped revenue”.
Foundation for European Progressive Studies economic adviser Dr Matthieu Meaulle says: “A financial transaction tax of 0.05 per cent could yield revenue of about 1 per cent of nominal world GDP per year and create a future permanent revenue from the financial sector to the real economy.”

Such revenue, advocates argue, could be used for numerous activities, from insurance against future crises and deficit reduction, to fighting climate change and global poverty.


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