Brown bid to tax banks sunk by US

GORDON Brown yesterday faced fresh embarrassment over his handling of the economic crisis when his radical plans for a new transaction tax on banks were almost immediately shot down by Barack Obama's administration.

The Prime Minister raised the prospect of a new global levy that would enable banks to create an emergency fund to prevent a repeat of the publicly funded bail-outs that have cost the taxpayer billions.

In front of the world's most powerful finance politicians at the G20 meeting in St Andrews, Brown called for the introduction of a transaction tax to curb risky speculation and provide cash for future bail-outs.

The proposal was the Prime Minister's "big idea" to create a fairer relationship between banks and a public which is disenchanted with rescuing failing institutions – most notably the Royal Bank of Scotland and the Lloyds Banking Group.

His plan, which requires international support, faced opposition in the City, where analysts believe that a tax which could be levied on every share, derivative and currency transaction carried out by a bank would damage the money markets.

But most devastatingly for Brown, it was almost immediately rejected by the US Secretary of the Treasury, Timothy Geithner, who said he was not prepared to back it.

When asked about the levy in a Sky News interview last night, Geithner said: "That's not something that we are prepared to support."

Later, the Canadian finance minister, Jim Flaherty, also dismissed the idea.

Brown used the G20 meeting to renew his attacks on the irresponsible risk-taking of bankers, before coming up with his controversial suggestion, which will be worked on by the International Monetary Fund.

"It cannot be acceptable that the benefits of success in this sector are reaped by the few, but the costs of its failure are borne by all of us," Brown said. "There must be a better economic and social contract between financial institutions and the public based on trust and a just distribution of risks and rewards."

Brown said a fairer relationship between the public and the banks could be achieved through four methods.

Those were: an insurance fee to reflect systemic risk; a special "resolution fund"; contingent capital arrangements; plus his preferred option – a global levy on financial transactions, the so-called "Tobin tax".

An insurance fee is the idea that banks, whose performance is crucial to the financial system, should hold more capital than less important ones.

A resolution fund is a pre-funded bank bail-out fund.

A contingent capital arrangement means that, in the event of a disaster, funds are available because of a pre-negotiated agreement, which has seen banks make payment to a second party. It is similar to insurance, but with no transfer of risk.

But Downing Street indicated Brown preferred the Tobin tax, a levy named after the US Nobel Prize-winning economist James Tobin, who was the first to propose it in the 1970s.

Academics have estimated that a levy of £5 on every £10,000 of transactions would raise £415 billion a year.

A long-standing criticism of the tax has been that, unless it was levied across the world, it would result in financial

institutions relocating to countries where it was not enforced.

Brown stressed that in order to work, the measures would have to be implemented by all the major financial centres around the world – including the US, Europe, Asia, the Middle East and Switzerland. "Let me be clear: Britain will not move unless others move with us together," he said.

Almost as soon as Brown announced his transaction plan, its future was in doubt when America indicated that it would not co-operate.

When questioned by the world's press, Geithner was circumspect. He said that America shared the aspiration of other countries to create a financial system that did not expose taxpayers to risk and in which the public did not bear the responsibility for the mistakes of financial institutions.

But, on TV, Geithner shot it down completely.

Lord Oakeshott of Seagrove Bay, the Liberal Democrat Treasury spokesman, said: "Gordon Brown looks humiliated and isolated, a bit-part player on the world stage. Only weeks after his own Treasury rubbished the Tobin tax, he's pulled it out of the hat like an old conjurer desperate for a new trick."

Vince Cable, the Lib Dem shadow chancellor, added: "The Americans clearly aren't going to waste time on something which is simply too difficult to implement."

The Conservatives accused Brown of "chasing headlines". A Tory spokesman said: "Six weeks ago Downing Street poured cold water on this proposal and the Treasury said it was unworkable – what has changed?

"Instead of empty headline-grabbing announcements, Gordon Brown should focus on the crisis we are living through now, which he helped to create, which means businesses are folding and insolvencies rising at record rates."

RBS and Lloyds, which are to benefit from a second bail-out of £30bn announced earlier this month, declined to comment.

Angela Knight, chief executive of the British Bankers' Association, suggested it would be unworkable. "We would have to get every country in the world to agree and say they would implement this in some way," she said. "This came up about 30 years ago and there is a reason it has never been implemented – practically it does not operate."

Oxfam welcomed Brown's call. Senior policy adviser Max Lawson said: "Gordon Brown today signalled that payback time for banks could be just around the corner. A tax on banks would be a major step towards clearing up the mess caused by their greed. The G20 has a responsibility to act. Every minute around the world 100 people are forced into extreme poverty as a result of the economic crisis."

At the G20 meeting at the Fairmont Hotel near St Andrews, Chancellor Alistair Darling urged the world's most powerful finance ministers to treat climate change with the same urgency they gave to the economic turmoil.

Environmental activists staged a protest.

About 20 demonstrators donned suits and ties and buried their heads in the West Sands in an attempt to draw attention to climate change.