"If this crisis has a silver lining, then it is the increased support for using tax to raise revenues, especially a Tobin tax and curbing tax avoidance," Geoff Lloyd, senior adviser at the OECD's Centre for Tax Policy and Administration, told a hearing at the European Parliament yesterday (2 December).
The idea of a financial transactions tax, drafted by economist James Tobin, may still have credence despite having been swept under the carpet at the September round of G20 talks in Pittsburgh. The European Commission, the agenda-setter of the EU, is also in the process of examining the tax's merits.
Tax hampered by uncertainty
Though recent statements from UK Prime Minister Gordon Brown also show that he is reconsidering earlier criticism of a Tobin tax, the debate surrounding the tax is marred by uncertainty.
Could such a tax harm Europe if it only existed in the EU jurisdiction? What will the tax revenues be spent on and what kind of financial instruments will be covered?
The OECD admits it was sceptical about the tax but has since come full circle. Lloyd advised MEPs that the tax should be considered as a viable option.
Geoff Lloyd's endorsement was shared by MEPs and academics, but unsurprisingly clashed with the views of London Stock Exchange CEO Xavier Rolet.
"The UK already has a Tobin tax, it's called a stamp duty," Rolet told MEPs, repeating the British government's view that a tax on financial transactions would cost more than it could raise.
Rolet produced a litany of negative consequences caused by the UK stamp duty, such as a 4-12% increased cost in capital.
Target derivatives
At the hearing, the European Commission echoed views it has held for a while, saying that a Tobin tax were to come into being, it should be aimed at speculative transactions and especially derivatives.
The only unanimity to emerge among global policymakers taking part in the debate surrounding the financial crisis is that derivatives undermine liquidity.
Getting their value from other assets, derivatives have been blamed for increasing risk to exponential levels and spreading the negative consequences of defaults across markets.
"Putting a tax on international financial transactions seems a very sensible idea to me," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said ahead of the G20 in September.
