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Introducing a 0.05% Financial Transactions Tax as an Instrument of Global Justice and Market Efficiency

Published online by Cambridge University Press:  19 November 2013

Ross P. BUCKLEY
Ross P. BUCKLEY*
Affiliation:
University of New South Wales, Australiaross.buckley@unsw.edu.au
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Abstract

A financial transactions tax (FTT) is a tax on wholesale capital market transactions, which civil society has long advocated for on grounds of social justice. This so-called “Robin Hood Tax” would take from the rich and give to the poor. Revenue estimates for a global FTT of 0.05 percent are around US$500 billion per annum. One-quarter of this revenue stream can achieve the first six Millennium Development Goals relating to poverty, health, and education. Even if the developed countries retain all of the revenue raised, the impost would see financial services institutions making a fairer contribution to the societies in which they operate. Thus, as an instrument of justice, the potential of an FTT is great—but, most of all, such a tax will enhance the operations of contemporary financial markets substantially. This paper explores the potential of such a tax, the arguments for and against it, and its feasibility.

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Asian Journal of International Law , Volume 4 , Issue 1 , January 2014, pp. 153 - 167
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Copyright © Asian Journal of International Law 2013 

We live in the most prosperous time in human history. Citizens of developed countries live lives of comfort and ease inconceivable to their forebears only a century ago. Well-paid professionals today live lives of greater comfort than those lived by royalty a few centuries ago. The wealthiest one percent of people on the planet control forty percent of the planet's wealthFootnote 1 and have annual incomes above US$50,000 after tax.Footnote 2 Yet, almost 2.5 billion people have to live on less than US$2 a day, and over one billion people survive on less than US$1.25 a day.Footnote 3

In these prosperous times, the developed world continues to struggle to bring the poor along with it. The Millennium Development Goals (MDGs) were made in 2000 by all the world's nations and set lofty ambitions, including halving extreme poverty and hunger, providing universal primary education, promoting gender equality in all education, reducing child mortality by two-thirds and maternal mortality by three-quarters, and halting the spread of HIV/AIDS and malaria, all by the target date of 2015. Global poverty and hunger are on track to be halved by 2015 but they are mostly due to the growth in China and India, and not the efforts of the developed world. In these two countries combined, the number of people living in extreme poverty declined by around 455 million between 1990 and 2005,Footnote 4 and a further decline of 320 million is predicted confidently by 2015.Footnote 5 The decline in poverty has been particularly dramatic in China, which is expected to have only 4.8 percent of people living on less than US$1.25 a day in 2015, down from sixty percent of its people in 1990.Footnote 6

The stubborn perseverance of intolerable poverty, suffering, illness, and disadvantage in many poor countries makes a financial transactions tax (FTT) extraordinarily attractive to civil society groups globally.Footnote 7 An FTT is a tiny impost of anywhere between 0.01 percent and 0.1 percent on all wholesale capital market secondary transactions. It was first proposed almost eighty years ago by John Maynard Keynes,Footnote 8 and resurrected forty years ago in the context of foreign currency transactions by the Nobel Laureate James Tobin.Footnote 9 They believed that the essential function of capital markets is to intermediate capital effectively, that is, to allocate it to parties best placed to use it. In their view, such a tax would dissuade purely speculative, short-term transactions, while doing little to nothing to dissuade longer-term investments. Markets would, thus, be encouraged to trade more upon economic fundamentals and less on what speculators believe the price for an asset will be within the next few minutes or hours.

Revenue estimates for an FTT vary because of the dissuasive effect of the tax on transactions, but reliable revenue estimates for a 0.05 percent tax are usually around US$500 billion per annum if imposed globally.Footnote 10 Contrast this sum with the $120 billion per annum needed to attain the first six of the MDGs by the target date of 2015, according to calculations by the Organisation for Economic Co-operation and Development (OECD).Footnote 11 A further $120 billion in aid annually would require a trebling of current developed country aid budgets, an utterly unrealistic prospect in these times of budgetary austerity.Footnote 12 The appeal, therefore, of an FTT to civil society is apparent. The consensus which civil society organizations appear to have settled on globally is to seek one-half of the revenue from an FTT to be applied domestically (in the country that collects it), and one-half internationally, divided equally between programmes for fighting poverty and programmes for implementing climate change mitigation in countries too poor to otherwise afford them.Footnote 13 The argument from civil society is that as the financial services industry has benefited the most from globalization, it ought to contribute towards remedying some of the downsides of globalization, such as the widening inequalities in income and wealth and the financial shocks that have damaged the economies of poorer nations.Footnote 14

The Global Financial Crisis (GFC) has sparked major regulatory reform in Europe and the US. Yet, most reforms have been attempts to improve the types of regulation that pre-dated the recession. There are some exceptions to this, such as the Volcker Rule in the US,Footnote 15 and the measures to cap bankers’ bonuses in Europe at the level of their base salary (or at twice their base salary with shareholders’ approval).Footnote 16 However, the responses to the crisis have mainly involved the same type of thinking that delivered the recession. There has been a marked lack of thinking outside the box.Footnote 17 Therefore, an FTT is needed because while our thinking on regulation has remained largely static, financial markets have not.

To set the context, the next section of this paper considers how financial markets have changed profoundly in the past twenty years. The paper then addresses what characteristics would be desirable in an FTT, before considering what is in fact proposed by the EU in its prospective FTT. The next two sections then consider the cases for and against an FTT, before assessing the prospects of such a reform being introduced in Asia.

I. Contemporary Capital Markets—Welcome to a New World

Capital markets have changed fundamentally in the past two decades. The ratio of financial transactions relative to nominal world gross domestic product (GDP) in 2010 was about 70, compared to 15 in 1990.Footnote 18 This dramatic increase in financial market volumes was driven by derivative trading, as spot transactions of stocks, bonds, and foreign exchange grew roughly in line with nominal world GDP.Footnote 19 Derivatives accounted for eighty-eight percent of transactions in 2007.Footnote 20 Furthermore, an ever-increasing proportion of market trades are short-term and technically driven. AlgorithmicFootnote 21 or computer-driven trading accounts for about seventy percent of US equity trading and thirty to forty percent of European and Japanese equity trading.Footnote 22

Many transactions involve ‘high-frequency trading’ (HFT) aimed at exploiting minor price fluctuations.Footnote 23 HFT typically involves the generation of massive numbers of orders for very short periods (often less than a second), many of which are subsequently cancelled to mask the true intent of the trader.Footnote 24 Estimates of the proportion of trading classed as HFT vary, but they generally fall within the fifty to seventy-five percent range.Footnote 25 HFT is founded on the ability to transact rapidly. To enable faster processing speeds, market participants are now relocating their systems beside or within the building of the relevant exchange. Co-location reduces latency, which is the time it takes for data to move across electronic trading systems. French hedge funds moved their trading computers to London because the time it took electronic messages to travel from Paris was placing them at a disadvantage. Goldman Sachs moved its computers beside those of NASDAQ because each millisecond gained, by their calculations in 2008, added more than US$100 million to company profits.Footnote 26

Therefore, financial markets have changed quite fundamentally, yet the measures we use to regulate them have not really changed at all. The market patterns of high-frequency trading, computer-generated activity, and short-termism are now well entrenched, and will be difficult to change. Of the various ways available to encourage this change, the best may be to introduce an FTT.

II. Desirable Characteristics of an FTT

In an ideal world, an FTT base should be as broad as possible to minimize avoidance issues and distortions across security classes and markets.Footnote 27 The FTT should, therefore, apply to all traded securities including equity, debt, currency, and commodities. The taxed securities should include spot and derivative transactions through exchanges and over-the-counter. However, the tax should not apply to new security issuances, offerings, or financial services provided by financial institutions to customers because it is a tax on secondary market trading, not primary market issuance. As we will see below in Part IV, this tax was conceived as a way of enhancing the operation of capital markets, and taxing primary market issuance would not lead to such an outcome—all it would do would be to increase costs to customers and raise revenue.

The tax would be best implemented at a low rate initially, with an agreed review period of five years. The tax, in the author's view, should be a small impost of between 0.005 percent and 0.05 percent. Differential rates should be applied to instruments or asset classes to reflect the varying transaction costs, and the extent to which the tax is intended to discourage trading in particular instruments or classes. The tax should be calculated on the notional value of the underlying security and should be adjusted for the term of the security.

The tax should be collected where possible by the relevant exchange or central clearing house. A European Commission report finds that collecting taxes through central clearing mechanisms is straightforward and cheap.Footnote 28 Collection of the FTT should be designed as a required part of the clearing process to minimize avoidance.Footnote 29 The cost of the tax should be shared between the buyer and seller.Footnote 30

In an ideal world, the tax would be implemented across all jurisdictions. While the asymmetry of revenue across individual countries may be an issue,Footnote 31 the potential benefits of more stable, efficient, and fair global markets and financial systems provide compelling reasons for the successful negotiation and implementation of this tax. Certainly, the potential benefits have proven attractive in Europe and should be so likewise in East Asia were policy-makers to examine the issue seriously.

III. A European FTT

In 2011, the European Commission (EC) voted to implement an FTT in the EU by early 2018.Footnote 32 In January 2013, the EU voted to allow eleven countries to implement an FTT much sooner, possibly in early 2014, depending upon implementation issues. These countries are Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, and Spain.Footnote 33

European governments are keen to have the revenue to rebuild their national balance sheets, which were depleted by the need for stimulus programmes after the GFC and have more recently been stretched to breaking point by the pressure of supporting the euro. Civil society strongly supports governments on this, as it sees the potential revenue stream as its best chance to acquire the resources it needs to make major strides in the fight against global poverty and disease.

The tax in Europe will apply to shares and bonds, and derivatives on shares and bonds. The proposed tax rates are 0.1 percent on shares and bonds, and 0.01 percent on the derivatives of shares and bonds. The tax base applying to derivatives is the nominal value of the underlying assets. The proposed tax will be levied according to the fiscal residence of the seller of an asset (country of origin principle).

The tax is expected to raise more than thirty billion euros a year.Footnote 34 Civil society has played a major role in bringing the idea of an FTT to prominence, and its work in this regard is clearly very far from finished if its goal is to introduce such a tax to all of Europe, and perhaps other regions as well, such as East Asia.

IV. The Case for an FTT

Say “tax” and people think “revenue”, as raising revenue is the primary purpose of most, but not all, taxes. Raising revenue is not the main reason taxes are imposed on alcohol or tobacco. Instead, it is to enhance people's health and reduce medical costs. The revenue itself is a bonus of imposing a tax. And so it is with an FTT. Keynes and Tobin both proposed their taxes in response to markets that they saw would operate more efficiently and effectively if so taxed. Their primary concern was the welfare-enhancing effects of better, more efficient markets.

However, we live in radically different times from those experienced by these august economists, and an FTT has more to offer markets today than it ever has before. Computer-driven trading began less than thirty years ago. The exceptional short-termism of today's trading was unknown even ten years ago.

An FTT has the potential to improve the long-term allocative efficiency of financial markets.Footnote 35 A well-structured and applied FTT has the potential to deter purely speculative short-term trading, move markets towards trading on the underlying economic values of assets, instead of their likely price movements within minutes or hours, and encourage simpler transaction structures, for which disclosure—the cornerstone of all securities regulation regimes—would be far more likely to be effective. The complexity and opacity of financial instruments was one of the reasons the markets mispriced risk so profoundly in the years leading up to the GFC in 2008.

Effective, efficient financial markets that discharge their core functions of pricing risk and assets accurately, and, therefore, allocating resources efficiently, is the real potential payoff from an FTT. It is difficult to argue with the proposition that we need to restructure our markets in favour of longer-term investment and away from rewarding short-term speculation.Footnote 36

An FTT specifically regulates short-term transactions. Its impact on longer-term transactions is minimal. For instance, a hedge fund buying $1,000,000 of stocks, holding them for eight seconds before selling, would incur the same tax as an individual buying these stocks to hold them for the long term. At a rate of 0.05 percent, the tax either way is $500. This impost is unlikely to deter the longer-term investor, while making the ultra-short-term trade, and much of high-frequency trading, unprofitable.Footnote 37

As Schulmeister's research has established, the ever-faster trading we have witnessed in recent years tends to make exchange rates, and stock and commodity prices, less accurate, i.e. less close to that which would be dictated by economic fundamentals. This is because short-term price runs, fuelled by very rapid trading and strengthened by the impact of algorithmic trading programs, contribute to baseless long-term trends and distortions in prices. The resulting overshooting of prices favours speculators over longer-term investors, and, thereby, feeds into the ever-higher levels of trading we are seeing.Footnote 38

An FTT will have the effect of encouraging the simplification of transactions, and thereby enabling securities regulations to perform their job better. Its cascading effect of applying to multiple transfers that together comprise one transaction has the benefit of incentivizing simplicity in transactional design, which should increase the efficacy of securities regulation. One of the lessons of the GFC is that the incredible complexity of many transactions meant that full disclosure—the principle at the heart of contemporary securities regulatory regimes worldwide—simply became ineffective as investors could not understand what they were buying, and instead relied on the ratings assigned to the financial products, and the reputations of the investment bank packaging the products, as well as the law and accounting firms advising on them.Footnote 39

Many experts believe the financial sectors of a number of developed nations have grown too large, are consuming too much of the nation's capital, both human and financial,Footnote 40 and have developed too much of an appetite for risk.Footnote 41

The tax will tend to mitigate the growth in the financial sector. While bankers see this as a negative, the social usefulness of the growth of transactions that boost the relative and absolute size of the finance industry is questionable. Financial services have become such a significant part of the total economy in some countries that too many of the best-educated individuals in these countries may be trading paper assets rather than generating tangible ones.Footnote 42 The Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System states that the:

measure of success of financial policy should not be the rate of growth or the size of the financial sector as a share of GDP. Indeed, an excessively large financial sector relative to the GDP of a medium to large economy should be a cause of concern to those interested in long-term economic growth because financial crises are often associated with unsustainable growth of the financial sector.Footnote 43

Lord Turner, former Chairman of the UK's Financial Services Authority, argues that the City of London has grown “beyond a reasonable size”. He describes much of the current market trading as “socially useless activity”,Footnote 44 and suggests that “a bigger financial system is not necessarily a better one … parts of the financial services industry have a unique ability to attract to themselves unnecessarily high returns and create instability which harms the rest of society”.Footnote 45 The fact that an FTT may reduce the rate of growth in financial sectors is, therefore, not necessarily a negative.

In summary, if humanity were somehow able to vote on whether to adopt an FTT from behind the veil of ignorance as suggested by John Rawls, so that we have no knowledge of each of our endowments and capacities, our skills and place in society—almost as if we have to make this vote before we are born and before we know to whom we are to be born—it is difficult to imagine rational people would do anything other than to vote for an FTT.Footnote 46

The good news for such rational and disinterested people is that an FTT today is eminently feasible. When James Tobin suggested his tax on foreign currency transactions forty years ago, its implementation was highly problematic because most trading was conducted on proprietary systems. However, this has changed. Trading has migrated to centralized exchanges and clearing houses that undertake the function exceptionally efficiently, and moving trades away from these exchanges and clearing houses would cost far more than the amount of the tax, and, thus, collection of the tax today would be relatively simple. Indeed, in August 2011, when the International Monetary Fund (IMF) considered the administrative feasibility of levying an FTT, it concluded that an FTT “is no more difficult and, in some respects easier, to administer than other taxes”.Footnote 47

Furthermore, both Hong Kong and London have long had securities transactions taxes in place which were substantially larger than the scale proposed for an FTT, and securities trading continues to flourish in these places.

Finally, if Europe were to impose an FTT payable equally by the seller and buyer on euro-denominated transactions, parties in other nations would find themselves paying the tax, even though their governments are not sharing in the revenue stream. This would generate considerable momentum for the adoption of the tax in other countries. The only likely way that there will ever be a global FTT on wholesale capital market transactions is if one region enacts one first by itself. Once such a tax is proven to be feasible and a major source of revenue with few downsides, the pressure on other governments to follow suit will grow, and become very considerable indeed.

V. The Case Against an FTT

An FTT would decrease, probably markedly, the incidence of short-term and hyper-speculative trading. In simple terms, it would reduce the amount of outright gambling in our financial markets, while not curbing longer-term investment.

For bankers, this provides a strong reason to argue against the tax, as it would diminish their profits from casino capitalism.Footnote 48 Yet, pleas to preserve bankers’ bonuses are likely to be ineffective, and so the industry turns to other arguments, some of which are potentially valid and some entirely spurious.

Spurious arguments against an FTT include the contention that it will fall principally or entirely on consumers, not banks. In the words of the British finance minister, George Osborne, there “is not a single banker in this world that is going to pay this tax … The people who will pay this tax are pensioners”.Footnote 49

Yet this statement is demonstrably false.Footnote 50 For most of the burden of the tax to fall on pensioners, pension fund managers would have to be initiating most of the short-term trades. While global data on trading participants is limited, this is deeply improbable. Most short-term trades are initiated by hedge funds and the hedge fund-like proprietary trading desks of the major banks for their own accounts, not those of their clients. Accordingly, this tax will impact primarily the profits of hedge funds and many of the major banks. Its impact on retirees will be much less. Indeed, to the extent that pension managers are involved in consistently high levels of short-term derivative trading, one should question whether this is a sound investment policy in the interests of their members. Pensioners will ultimately pay a very small proportion of the total tax collected, and should also benefit from the more stable and long-term oriented markets that an FTT will encourage.

The argument that an FTT will be an additional burden on banks and reduce the banks’ proclivity to lend is industry-generated spin. The tax would apply to secondary trading of securities and not to mortgages, bank loans, or primary capital issues. It will reduce bank profits, but it should not reduce the size of their lending books.

A valid objection to an FTT is that its precise impact is difficult to quantify. There are more predictable ways to raise revenue than an FTT. It has weaknesses when assessed by the traditional criteria used to assess the efficacy of taxes, although these criteria utterly ignore the positive effects on the efficacy of markets a tax such as an FTT will have, because most taxes do not have positive market efficiency effects. If the goal of reform is to reduce the size of a country's financial sector and its appetite for risk, there are other taxes available that can achieve these ends in a more predictable and controllable way than an FTT. The IMF recommends the imposition of levies on bank balance sheets, and a financial activities tax on bank profits and senior staff remuneration above certain levels.Footnote 51 The precise impact of an FTT is very difficult to predict as it will dissuade a substantial proportion of financial transactions, quite probably a majority of them, and it cascades, in the sense that a complex transaction composed of a series of related, conditional transfers will attract the tax a number of times. The impact of bank levies and a financial activities tax admits of much more precise calculation, and these measures are preferred by some economists for this reason.

Another potentially valid objection to an FTT is that it increases trading costs in a market, and if one accepts trading costs and bid-ask spreads as measures of efficiency, then an FTT tends, in that sense, to decrease efficiency. This, however, is a very narrow definition of efficiency. It looks only to the efficiency of individual transactions, not to the allocative efficiency of the market as a whole.Footnote 52 For instance, if HFT is causing prices to diverge for sustained periods from those that would be dictated by economic fundamentals, then the markets are allocating resources substantially inefficiently.Footnote 53 Likewise, if the preponderance of hyper-speculative trading is making markets more crisis-prone, we have clear evidence that crises damage long-term growth very substantially and are much more damaging than minor enhancements in trading costs.Footnote 54 So, while some scholars see the tax as diminishing efficiency, the author believes this view is only tenable with an overly narrow definition of efficiency, but when allocative and longer-term efficiency are considered, the tax has the ability to be substantially welfare-enhancing.

In addition, national tax authorities traditionally oppose hypothecating tax revenues in advance,Footnote 55 and they tend to reject civil society's claims that one-half of the proceeds should be directed to poor countries on the basis of this principle.

While the implementation of an FTT is administratively feasible and relatively simple, its global political feasibility is a very different matter. As the author has said, the tax would ideally be applied in all major jurisdictions, but its prospects of implementation in the US are decidedly bleak—the interchange of staff between the US Treasury and Wall Street banks makes sure of this. Nonetheless, the tax does not need to be applied universally. Regional applications can work. Europe as a whole can readily and effectively implement an FTT with very little loss of trading activity to the US, and it will be very interesting to see how much trading activity shifts to London after the imposition of the FTT in the eleven Eurozone countries. Certainly, these Eurozone nations have a free hand in imposing an FTT on euro-denominated transactions, as all of these settle and clear in Europe.

VI. Prospects of an FTT In ASIA

The debate on an FTT in Asia has been far less extensive and vigorous than in Europe, perhaps in part because civil society is less well developed in the region, and the existing civil society that is active and vocal understandably tends to focus on issues that are more domestic and central to a rights agenda.Footnote 56

Nonetheless, in the past few years, the idea has gained some traction. In early 2013, the South Korean government was discussing imposing a modified Tobin tax on foreign currency transactions to limit speculative inflows of foreign capital.Footnote 57 South Korea was contemplating imposing a Spahn tax. Named after German Professor Paul Bernd Spahn, this tax is imposed at very low rates in normal times, perhaps at 0.02 percent, but rising to rates of 10 percent or more at times of extreme fluctuations in the value of the won currency. At the time of writing, it seemed that there was some form of general consensus in Korea that such a tax should, perhaps, be implemented if speculation in the won intensified, and that the threat of imposing such a tax was itself having a salutary effect in dampening speculation in, and appreciation of, the won.Footnote 58

Xia Bin, an academic member of the Monetary Policy Committee of the People's Bank of China, has been reported as writing that “China should continue to strengthen its regulations on capital inflows to fend off the risks produced by hot money”.Footnote 59 He suggested that “the government impose a ‘Tobin tax’, a levy on all spot conversions of one currency to another, to penalize short-term financial ‘round-trip’ excursions into other currencies”.Footnote 60

In 2010, Foreign Minister Katsuya Okada of Japan said that politicians in other countries should consider a tax on international finance in order to help support developing nations,Footnote 61 and Deputy Finance Minister Naoki Minezaki said that Japan should consider implementing an FTT to dampen speculative capital flows and market volatility.Footnote 62

So, the idea of an FTT, in its various guises, is now part of the debate in the region, although it will take decisive leadership in at least one nation to see its implementation.

VII. Conclusion

France, Germany, and nine other EU nations are proceeding with an FTT as a way to raise much-needed revenue. They argue that with national balance sheets devastated by the need to bail out the banks in 2008, and to stimulate national economies in the years since, it is fair and just to tax the sector that had caused these problems. The argument from civil society is that as no sector of the modern economy has benefited as much from globalization as the financial services sector has, it is fair and just to require that half of the revenue from an FTT be dedicated to assisting those who have not benefited from globalization. The arguments of these European governments and of civil society are grounded in justice and fairness. However, these arguments are not likely to prevail globally.

There are many benefits offered by an FTT that cannot be replicated by other measures, but neither civil society nor the leaders of France and Germany are basing their arguments principally on an FTT being the best way to improve the efficiency of contemporary financial markets. Yet, efficiency in the operation of financial markets, and the consequential welfare benefits that flow from this for everyone are the strongest reasons to introduce an FTT, and the reason why the originators of the idea for the tax, Keynes and Tobin, had sought it in the first place. However, for the EU governments poised to implement it, and the wide range of trade unions, churches, and civil society organizations that support it, an FTT is enticing primarily because of its capacity to raise revenue.

Market regulators in Asia, particularly China and Korea, are expressing serious concerns about the destabilizing effects of hot money inflows, and are discussing the possibility of imposing a Tobin tax on foreign currency transactions as a way to dampen these inflows. The memories of the lead-up to the 1997 financial crisis remain fresh in East Asia, and a Tobin/Spahn-style tax would provide a degree of insurance against the destabilizing effects of hot money speculative flows.

Globally, an FTT would satisfy multiple policy objectives. An appropriately structured FTT would improve market function and reduce systemic risks by dampening or discouraging ultra-short-term and hyper-speculative trading. The tax would also ensure a fairer contribution from the finance industry to the public purse. Much of the resistance to this tax is a testament not to its weaknesses as an appropriate policy response to the new world of globalized capital, but to the political power of the finance industry that has grown so large in the richer nations.

Market regulators globally are expressing serious concerns about the effects on market stability and fairness of the rapid rise in HFT and algorithmic trading, and of the shift towards trading in “dark pools”—off-market pools of liquidity, from which many market participants are excluded. An FTT would have a dramatic and highly salutary effect on HFT volumes and dark pool trading. It is the simplest, most elegant solution available to these problems, and it is only when it is understood in this way that its enactment globally becomes a real possibility.

Globalization has benefited many industries, but perhaps none more so than finance. Money can be moved instantly around the globe, in response to information flows and computer transactions. This has been seen in the extraordinary growth of financial services. As the finance industry is the chief beneficiary of globalization, it is plausible to argue that any tax on financial services should be shared with those less well served by globalization—the poorer nations. Thus, civil society can make a credible argument for one-half of the proceeds of an FTT to be devoted to reducing global poverty and to climate change adaptation in developing countries. This is not to say that the nations imposing and collecting an FTT will agree to such an allocation of its proceeds. Indeed, at present, the proceeds of the European FTT appear destined for the purses of the governments in the nations collecting it.

Nonetheless, the argument for the application of a portion of FTT revenues towards tackling global problems like climate change and poverty is a reasonable one. The argument would be less credible if it involved the proceeds of bank levies or financial activities taxes, which are more substantially taxes on national activities. By contrast, much of the FTT's revenue will arise from international transactions, in which funds cross national borders. Civil society has embraced an FTT in part because it can be seen as a small tax on globalization. The political appeal of a tax on a phenomenon that puts workers in rich countries out of jobs and causes change and dislocation in all countries is considerable, notwithstanding that such change and dislocation are usually part of a process of enhancing efficiency and productivity.

The nine EU nations are right to be pushing ahead with the imposition of an FTT. The tax is relatively simple to implement and provided that it remains broad-based, is difficult to avoid. The tax will tend to reward longer-term investments over ultra-short-term trades, and thus nudge markets towards fulfilling their traditional roles of allocating resources for the production of goods and services, and away from serving as financial casinos. The end result will be markets that price assets more accurately, and are thus better able to allocate resources, while also facilitating a more appropriate contribution by financial firms to the communities from which they derive their profits. For these reasons, East Asia would also be well served by a regional imposition of an FTT, although the political climate at present suggests that if such a tax is to be applied in the region, it would likely be limited, at least initially, to foreign currency transactions.

However structured and implemented, the final word on an FTT should go to the 1,000 economists who wrote to the G20 finance ministers in 2011 advocating an FTT. In their words, “this tax is technically feasible. It is morally right.”Footnote 63

Footnotes

*

Scientia Professor and Centre for International Finance and Regulation (CIFR) King & Wood Mallesons Chair of International Finance Law, University of New South Wales, Sydney, Australia; Fellow, Asian Institute for International Finance Law, University of Hong Kong, Hong Kong. The author sincerely thanks the Australian Research Council for the Discovery Grant which supported this research; the two anonymous referees whose questions, comments, and insights greatly improved the final version; and the participants at the joint conference of the Asian and Australian and New Zealand Societies of International Law on “International Law and Justice” in Sydney on 25−26 October 2012 for their insightful comments on an earlier draft. The author would also like to thank Rebecca Stanley, Vivianne Schwarcz, and Laura Ferraro for their invaluable research assistance. The responsibility for any errors remains with the author.

1. James DAVIES, et al., “The World Distribution of Household Wealth”, Centre for Global, International and Regional Studies, University of California, Santa Cruz, Commissioned Paper, 28 November 2007

2. MILANOVIC, Branko, “The Real Winners and Losers of Globalization” The Globalist (25 October 2012)

3. CHEN, Shaohua and RAVALLION, Martin, “An Update to the World Bank's Estimates of Consumption Poverty in the Developing World”, Development Research Group, The World Bank, Briefing Note, 1 March 2012

4. United Nations, “The Millennium Development Goals Report 2011” (June 2011), online: UN 〈http://www.un.org/millenniumgoals/pdf/(2011_E)%20MDG%20Report%202011_Book%20LR.pdf〉 at 7.

5. Ibid.

6. The World Bank and the International Monetary Fund, “Global Monitoring Report 2011: Improving the Odds of Achieving the MDGs—Heterogeneity, Gaps, and Challenges” (2011), online: SEA Change 〈http://www.seachangecop.org/sites/default/files/documents/2011%2004%20World%20Bank%20-%20Global%20Monitoring%20Report%202011.pdf〉 at 14.

7. Over 600 civil society groups are involved in the Robin Hood Tax campaign globally, including Oxfam, World Vision, The Salvation Army, UNICEF, and Comic Relief.

8. KEYNES, John Maynard, The General Theory of Employment, Interest and Money (London: Macmillan and Co., Limited, 1936) at 156

9. TOBIN, James, “A Proposal for International Monetary Reform” (1978) 4 Eastern Economic Journal 153 at 153−159

10. SCHULMEISTER, Stephen, “Boom-Bust Cycles and Trading Practices in Asset Markets, the Real Economy and the Effects of a Financial Transaction Tax”, Austrian Institute of Economic Research, Working Paper (2010) at 21–22

LAWSON, Max, “Financial Transaction Tax—The Time is Now!” Rethinking Finance (16 December 2009)

MCCULLOCH, Neil and PACILLO, Grazia, “The Tobin Tax: A Review of the Evidence”, Institute of Development Studies, Research Report, May 2011 at 68

11. MCNAIR, David, “Who's Going to Pay for the MDGs?” Guardian (Poverty Matters Blog) (23 January 2012)

Jean-Philippe STIJNS, et al., eds., Can We Still Achieve the Millennium Development Goals? From Costs to Policies (OECD Publishing, 2012) at 33−43

12. FEENY, Simon and SILVA, Ashton DE, “Measuring Absorptive Capacity Constraints To Foreign Aid” (2012) 29 Economic Modelling 725 at 725−733

RENZIO, Paolo DE, “Increased Aid vs Absorptive Capacity: Challenges and Opportunities Towards 2015” (2005) 36 IDS Bulletin 20

13. See online: The Robin Hood Tax 〈http://robinhoodtax.org/sites/default/files/Robin%20Hood%20Tax%20FAQ.pdf〉.

14. Ibid.

15. The Volcker Rule is named after former Chairman of the US Federal Reserve system, Paul Volcker. The basic idea is that banks that accept deposits from the public should not engage in proprietary trading. It is now enshrined in s. 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (commonly known as the Dodd Frank Act), which prohibits depository institutions and their affiliates from engaging in proprietary trading, or acquiring or retaining an interest in a hedge fund or a private equity fund, or sponsoring a hedge fund or a private equity fund.

16. SCOTT, Mark and KANTER, James, “Europe Votes to Curb Bank Bonuses” The New York Times (16 April 2013)

BRUNSDEN, Jim, “EU Governments Approve Banker Pay Curbs as U.K. Objects” Bloomberg (27 March 2013)

Kevin CROWLEY et al., “Europe's Bonus Clampdown Hits Two-Thirds of Fund Managers” Bloomberg (22 March 2013)

17. Most post-GFC reforms have simply tried to make regulatory measures, that were in place before the crisis, work better, such as reforms aimed at improving the efficacy of disclosure regimes. The Volcker Rule is not really new as it is in the main part simply a return to the division between investment and commercial banking instituted by the Glass-Steagall Act. However, limits on bank executive compensation is a new measure, and not an attempted enhancement of an old measure.

18. SCHULMEISTER, Stephan, “A General Financial Transactions Tax: Motives, Effects and Implementation”, Austrian Institute of Economic Research, Brussels Tax Forum 2011, Summary of a Presentation (29 March 2011)

19. SCHULMEISTER, Stephan, “A General Financial Transactions Tax: A Short Cut of the Pros, the Cons and a Proposal”, Austrian Institute of Economic Research, Working Paper, October 2009 at 5

20. DARVAS, Zsolt and WEIZSÄCKER, Jakob VON, “Financial-Transaction Tax: Small is Beautiful”, Bruegel Policy Contribution, 8 February 2010 at 5

CANOVA, Timothy A., “Financial Market Failure as a Crisis in the Rule of Law: From Market Fundamentalism to a New Keynesian Regulatory Model” (2009) 3 Harvard Law & Policy Review 369 at 388

21. Algorithmic trading uses high-speed computer programs to generate, route, and execute orders. The Australian Securities and Investments Commission defines algorithmic trading as “computer-generated trading activity where trading parameters are determined by strict adherence to a predetermined set of rules, aimed at delivering specific execution outcomes”. See Australian Securities and Investments Commission, “Market Assessment Report: ASX Group, Report 222” (November 2010), online: ASIC 〈http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rep222.pdf/$file/rep222.pdf〉.

22. HEWETT, Jennifer, “No Rush into Dark Pools” Financial Review (21 November 2012)

MATHESON, Thornton, “Taxing Financial Transactions: Issues and Evidence”, International Monetary Fund, Working Paper, March 2011 at 19

23. Matheson, supra note 22 at 19

24. BRIGAGLIANO, James A., “Speech by SEC Staff: Remarks at the Trader Forum 2009 Fall Workshop: Securities Markets and Regulatory Reform”, Address at the Trader Forum Fall Workshop, 8 October 2009

25. Ibid. See also International Organization of Securities Commissions (IOSCO), “Regulator Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency” (July 2011), online: Securities Technology Monitor 〈www.securitiestechnologymonitor.com/news/iosco.php〉.

26. WILLIAMS, Tee, “Oh Dear! I'm Queued! It's Latency!” Mondo Visione (29 October 2008)

27. BUCKLEY, Ross and NORTH, Gill, “A Financial Transaction Tax: Inefficient or Needed Systemic Reform?” (2012) 43 Georgetown International Law Journal 745

28. See European Commission, “Commission Staff Working Document: Innovative Financing at a Global Level” (1 April 2010), online: European Commission 〈http://ec.europa.eu/economy_finance/articles/international/documents/innovative_financing_global_level_sec2010_409en.pdf〉 at 19 [European Commission, “Commission Staff Working Document”].

29. Robert POLLIN et al., “Securities Transaction Taxes for U.S. Financial Markets” (2003) 29 Eastern Economic Journal 527 at 542

30. European Commission, “Commission Staff Working Document”, supra note 28 at 19.

31. Schulmeister, supra note 10

32. European Commission, “Proposal for a Council Decision on the System of Own Resources of the European Union” (29 June 2011), online: European Commission 〈http://ec.europa.eu/budget/library/biblio/documents/fin_fwk1420/proposal_council_own_resources_en.pdf〉 at 5 [European Commission, “Proposal”].

33. INMAN, Phillip, “EU Approves Financial Transaction Tax for 11 Eurozone Countries” The Guardian (22 January 2013)

DIZARD, John, “Trouble Brews over EU Transactions Tax” Financial Times (12 April 2013)

MIECAMP, Julie, “Europe's Financial Transaction Tax Could Be Boost to Loan Market” Bloomberg (15 February 2013)

34. European Commission, “Proposal”, supra note 32 at 5; Inman, supra note 33.

35. BUCKLEY, Ross and NORTH, Gill, “A Fundamental Re-examination of Efficiency in Capital Markets in Light of the Global Financial Crisis” (2010) 33 University of New South Wales Law Journal 714

36. The Aspen Institute, “Overcoming Short-Termism: A Call For a More Responsible Approach To Investment and Business Management” (9 September 2009), online: The Aspen Institute 〈http://www.aspeninstitute.org/sites/default/files/content/images/Overcoming%20Short-termism%20AspenCVSG%2015dec09.pdf〉.

37. Schulmeister, supra note 10 at 1

38. Ibid.

39. BUCKLEY, Ross and ARNER, Douglas, From Crisis to Crisis: The Global Financial System and Regulatory Failure (The Hague: Kluwer Law International, 2011) at 1−360

40. Nations, United, “Report of the Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System” (21 September 2009)

TURNER, Adair, “Address at the City Banquet”, The Mansion House, London, Speech, 22 September 2009

41. DEWATRIPONT, Mathias and FREIXAS, Xaviereds., “The Crisis Aftermath: New Regulatory Paradigms”, Centre for Economic Policy Research, Report, 30 March 2012 at 1

42. STIGLITZ, Joseph, “Using Tax Policy to Curb Speculative Short-term Trading” (1989) 3 Journal of Financial Services Research 101 at 109

SUMMERS, Lawrence and SUMMERS, Victoria, “When Financial Markets Work Too Well: A Cautious Case for a Securities Transaction Tax” (1989) 3 Journal of Financial Services Research 261 at 270

BAKER, Dean, “The Benefits of a Financial Transaction Tax”, Center for Economic and Policy Research, Article, December 2008

BLAIR, Margaret, “Financial Innovation and the Distribution of Wealth and Income”, Vanderbilt University Law School, Working Paper, June 2010 at 29

Financial Crisis Inquiry Commission, “The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States” (January 2011)

43. Report of the Commission of Experts, supra 40 at 47.

44. MONAGHAN, Angela, “Tax ‘Socially Useless’ Banks, Says FSA Chief Lord Turner” The Telegraph (27 August 2009)

45. Turner, supra note 40

46. RAWLS, John, A Theory of Justice (Cambridge, MA: Belknap Press of Harvard University Press, 1971) at 136−142

47. BRONDOLO, John, “Taxing Financial Transactions: An Assessment of Administrative Feasibility”, International Monetary Fund, Working Paper, 1 August 2011 at 5

48. CHOUDHURY, Ambereen and CHRISTIE, Rebecca, “EU Financial Transaction Tax Seen Costing Britain $6 Billion”, Bloomberg (3 April 2013)

BARKER, Alex and POLITI, James, “Brussels Proposes €30bn ‘Tobin Tax’ ” Financial Times (14 February 2013)

PERSAUD, Avinash, “Don't Believe Bankers’ Warnings About a Robin Hood Tax”, The Guardian (13 March 2013)

49. KOVACHEVA, Ralitsa, “Pros and Cons Of a European Tax on Financial Sector” euinside (10 November 2011)

50. McCulloch and Pacillo, supra note 10

51. International Monetary Fund, “A Fair and Substantial Contribution By the Financial Sector: Final Report for the G-20” (June 2010)

Brooke MASTERS et al., “IMF Calls For Bank Balance Sheets” Financial Times (20 April 2010)

52. Buckley and North, supra note 35 at 714−744

53. Gordon MENZIES, et al., “Asset Price Regulators Unite: You have the Macroeconomy to Win and the Microeconomic Losses are Small” (2011) 87 Economic Record 449

54. Gordon MENZIES, et al., “The Economic Costs of US Stock Mispricing” (2011) 33 Journal of Policy Modeling 552

55. WORSTALL, Tim, “Why We don't do Hypothecation of Taxes”, Adam Smith Institute, Blog, 28 August 2010

SEELY, Antony, “Hypothecated Taxation”, House of Commons Library, UK Parliament, 27 September 2011

56. KIM, Young-Chul, “Understanding the Silence Amid Turmoil: The Tobin Tax and East Asia” in James WEAVER et al., eds., Debating The Tobin Tax: New Rules for Global Finance, (Washington, DC: New Rules for Global Finance Coalition, 2003), 135

57. NINGZHU, Zhu, “Tobin Tax Estimated To Add 740 Mln USD To S. Korea's Tax Revenue” Xinhua News Agency (21 February 2013)

RANGANATHAN, Vidya, “Korea Becomes the Red Flag for Asia's Currency War” Reuters (1 February 2013)

SEUNGKI, Yoo, “S. Korean President-elect Park Stresses Currency Stabilization” Xinhua News Agency (20 February 2013)

58. MAIN, Carla, “Won Bets Ease As South Korean Calls For Transaction Tax Escalate” Bloomberg (3 April 2013)

59. Xiaotian, WANG, “Safe Promises Crackdown on ‘Hot Money’ ” China Daily (5 August 2011)

SHAW, Joy C. and YU, Rose, “PBOC Adviser Mulls Tobin Tax” Wall Street Journal (25 November 2010)

LEUNG, Sophie and AVERY, Nerys, “China's PBOC Plans to Strengthen Liquidity Management” Bloomberg (25 November 2010)

60. Wang, supra note 59

61. CONWAY, Edmund, “ ‘Robin Hood’ Bank Tax Wins Backing of Japanese Foreign Minister” The Telegraph (2 March 2010)

62. Toru, FUJIOKA, “Japan Should Impose Taxes on Financial Trading, Minezaki Says” Bloomberg (17 February 2010)

63. Stewart, Heather, “Robin Hood Tax: 1,000 Economists Urge G20 to Accept Tobin Tax” The Guardian (13 April 2011)

* Scientia Professor and Centre for International Finance and Regulation (CIFR) King & Wood Mallesons Chair of International Finance Law, University of New South Wales, Sydney, Australia; Fellow, Asian Institute for International Finance Law, University of Hong Kong, Hong Kong. The author sincerely thanks the Australian Research Council for the Discovery Grant which supported this research; the two anonymous referees whose questions, comments, and insights greatly improved the final version; and the participants at the joint conference of the Asian and Australian and New Zealand Societies of International Law on “International Law and Justice” in Sydney on 25−26 October 2012 for their insightful comments on an earlier draft. The author would also like to thank Rebecca Stanley, Vivianne Schwarcz, and Laura Ferraro for their invaluable research assistance. The responsibility for any errors remains with the author.