Analysis: Transaction tax would cause uproar

Published on Saturday 7 November 2009 19:03

GORDON Brown's surprise proposal for a transaction tax on banks is set to create uproar in the financial sector and the Treasury.

The idea of a levy on bank transactions to finance a global stability fund harks back to the ideas of Nobel prize-winning economist James Tobin. Thirty years ago, he proposed a tax on financial transactions to deter short-term currency speculation.

The idea was deemed impractical and was quickly forgotten. But the global financial crisis, and in particular the explosion of financial derivatives trading, has brought the idea of a Tobin tax back to the fore.

In the UK it was refloated by Adair Turner, who argued that previous approaches to financial market regulation needed to be radically rethought.

Britain was opposed, suspecting the move by France to champion a Tobin tax was a thinly disguised competitive assault on the UK and the City of London – global leader in currency dealings. When, in August, Lord Turner revived the idea, it was not well received.

Against this background the pronouncement by Brown at the G20 summit in St Andrews is likely to come as a bolt from the blue.

It may be that Brown is seeking to position himself as being "tough on banks", this mantle having been seized in recent weeks by shadow chancellor George Osborne. Or it may be that Lord Turner has won him round. Either way, the banks and the financial services sector won't like it one bit. Unless other countries also adopt it – America has already rejected it, almost certainly killing it off at birth – an adoption by Brown would put the UK at a global disadvantage. Business would move elsewhere.

And the banks would argue that any such tax would delay their recovery back to financial health.

Finally, there is the prospect of substantially more tax rises coming round the corner – a Brown Tobin Tax might just be a tax too far.