A 'Financial Transactions Tax' Could Fund Climate and Poverty Goals
A Financial Transactions Tax (FTT) is a tiny tax on financial market transactions including equity, bond, derivative and foreign exchange trades.
A growing number of politicians, civil society organizations, and economists advocate a global FTT as the best way to fund programs to fight world poverty and pay for developing countries' climate adaptation and mitigation measures.
How much would it cost to meet these challenges?
Bruno Jetin, an assistant professor of economics at the Université Paris Nord, has calculated that US$180 billion a year is needed over the period 2012 to 2014 to close the gap between available Official Development Assistance and the funds needed to achieve the United Nations Millennium Development Goals. The MDGs aim to reduce by half the proportion of people living in extreme poverty, achieve universal primary education, improve maternal health, reduce child mortality and halt the spread of HIV/AIDS, malaria and other diseases.
In addition, Jetin estimates that the additional resources needed each year over the same time period to finance climate change adaptation and mitigation in developing countries to be US$170 billion.
Who Supports an FTT?
Leaders from several G20 countries including French President Nicolas Sarkozy, German Chancellor Angela Merkel and British Prime Minister Gordon Brown have endorsed an FTT. Japan's Vice Finance Minister Naoki Minezaki, Paul Volcker (former US Federal Reserve Chair and current advisor to President Obama) and billionaire financier George Soros have all spoken in favour of an FTT.
In 1999 Canadian members of Parliament passed a motion urging the government to "enact a tax on financial transactions in concert with the international community" by a margin of 164 votes to 83.
How much would an FTT raise?
The Austrian Institute for Economic Research estimates that a global FTT would yield between US$286 billion to US$917 billion a year depending a tax rate ranging from 0.01% to 0.1%. At a mid-range tax rate of 0.05%, an FTT would raise annual revenues of approximately US$650 billion. This would be enough to cover the funds needed to help developing countries adapt to climate change, the costs of the MDGs and most of the budget deficits of developed countries.
How would the money be used?
Half of the revenue would be devoted to helping developing countries meet their climate change adaptation and mitigation costs and achieve the MDGs. The other half could be used to reimburse governments for the costs of bailing out financial institutions and sustaining demand in the face of the global financial crisis.
Is an FTT feasible?
Opponents of any kind of transactions tax allege that such taxes are not feasible. In fact there are many examples of such taxes already in existence. For instance, Britain levies a "Stamp Duty," a 0.5% tax on purchases of shares of UK companies. Other specific financial transaction taxes exist in Austria, Greece, Luxembourg, Poland, Portugal, Spain, Switzerland, Hong Kong, China, and Singapore. The state of New York levies a stamp duty on trades taking place on both the New York Stock Exchange and on NASDAQ.
Rodney Schmidt, an economist with the North-South Institute, has demonstrated that levying a tax at the point where currency trades are settled effectively eliminates the possibility that such a tax could be avoided.
How would an FTT Affect Financial Markets?
An FTT ranging from 0.01 to 0.1 per cent would be small enough not to dissuade individuals from investing for medium or long-terms, but big enough to curb short-term speculation by traders who sometimes buy and sell the same financial instruments five times in a single day. At 0.05% a FTT would cost an investor buying a $1,000 bond just 50 cents.
Why Does KAIROS Support an FTT?
A tax on financial transactions is a measure of political fairness and social justice. It could raise enough revenue to put the Millennium Development Goals on track and pay for developing countries' climate mitigation and adaptation costs. An FTT would shift the burden of crisis resolution from the general public to the financial sector, from taxing wages and consumption to taxing financial speculation, making the tax system fairer.
For More Information see the KAIROS Policy Briefing Paper 'An Idea Whose Time Has Come: Adopt a Financial Transactions Tax'.
