Is the Tobin tax an idea whose time has come and gone? Discourse, power and politics in global economic governance

Update: This story from the Guido Fawkes politics blog suggests the regulatory capture has a more direct route: a promise to veto the tax from the UK Prime Minister to an exchange boss who stood to lose from the FTT. Over dinner, naturally. 31-March

Further to my post on ‘Who’s afraid of the financial transactions tax?’, here’s my full essay on the risks of regulatory capture by private interests in this area.

 (the bank lobby)

Introduction

This is an essay about the failure of an idea in the face of private power. It begins with a brief history of the idea of a financial transactions tax. It then explains how the modern concept came to be a rallying call for activists and several politicians during the ongoing financial crisis.

It examines the economic merit of the European Commission’s conception of the tax, but finds little agreement among scholars and institutions. Despite this lack of agreement, it finds a highly disparaging narrative of the tax in the popular press and in political discourse, particularly in the United Kingdom, which, when coupled with the unrealised nature of the tax, despite the idea’s decades-long existence, suggests that the discourse of the tax has been shaped to reflect its more negative aspects.

To explain this, the essay examines the political situation at the global, regional and national levels, using the Group of Twenty (G20), the European Commission (EC) and the UK as case studies. Here the essay makes a case that there is a significant danger of regulatory capture of these political institutions by the banking lobby.

It uses Doris Fuchs’ tripartite definition of power to show how financial institutions exercise control over political institutions, then uses Walter Mattli and Ngaire Woods’ model of regulatory capture to compare the G20, EC and UK. In this case, it finds that the EC is the institution least susceptible to capture. The essay concludes by considering the case of the financial transactions tax as symbolic of the lack of political action in the face of the power of global private interest, which presents grave problems for global governance.

Summary in tasty bitesize pieces:

  1. The idea of FTT was developed by economists keen to avoid some of the dangerous ‘animal’ elements of the markets, long before it was adopted by campaigning bodies like the (excellent) Robin Hood Tax Coalition. President Sarkozy of France is the only OECD leader vehemently in favour of the tax.
  2. There is no conclusive evidence of the economic effects of such a tax, which is strange because…
  3. UK and European politicians have been at loggerheads over whether this tax will damage the City of London
  4. So if it’s not clear what the economic effects will be, why are certain politicians so opposed to it?
  5. It might be that private power has altered the discourse on the FTT – due to the financial services industry’s instrumental, structural and discursive power.
  6. The EC is the least susceptible institution to ‘regulatory capture’ – unsurprisingly, it’s gone the furthest towards implementing an FTT. The G20 and the UK government can be said to face private capture – and they’re generally opposed to the tax.
  7. This is a worrying case for the quality of global economic governance – there is a risk that nothing will change post-financial crisis – and that at the global political level, private power rules the roost.

Full essay and bibliography (or view it here)

Mild disclaimer – this essay was written in late December 2011. I just never got round to posting it here. I’ve updated it briefly to include Sarkozy’s statement that France will go ahead with the FTT, whether Europe does or not. But there may have been other relevant events I’ve missed. The essential argument about private sector power remains true.

Flickr credit: JimNix

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Who’s afraid of the financial transactions tax? Why trialling the tax won’t lead to the end of the world

Following the G20 summit, there have been lots of ‘where next‘ briefs on the financial transactions tax. Sarkozy had talked it up before Cannes, but failed to deliver any movement towards it at the global level. It’s in the press again following the last EU Summit – the one where Cameron upset everybody – as the UK is standing in the way of the tax. The House of Lords is already complaining about it, despite being only days into their inquiry about it.

I’ve spent some time reading pretty much everything I can find on the FTT – economic and political stuff, and the EC’s proposal, and it seems to me like it can’t be dismissed as easily as Osborne, Boris Johnson, The Economist, the FT and surprise, surprise, the banking lobby suggest.

My favourite paper is this essay from James Matheson at the IMF. He essentially reviews all the economic modelling arguments about what happens when you introduce a tax – does liquidity dry up and destory the markets? do the transactions all move elsewhere, thus meaning you raise no money anyway? are the costs of the transactions all just passed on to pensioners anyway (my favourite argument by the banks – great work guys)? – to find that there is no conclusive answer.

The UK’s version of the Robin Hood Tax website is extremely good on this stuff too, making the ecconomics readable and in some places pretty entertaining:

“Talk to a banker or hedge fund master of the universe about financial sector taxes and they’ll apparently have to call you back from their Blackberry en-route to the airport, the rest of the company in tow, quite prepared to never set foot in the country again to avoid your unnecessary meddling…”

The UK already has a transaction tax on shares: stamp duty. It raises several billion pounds a year. It doesn’t seem like it adversely affects market behaviour, or penalises any particular sector of society. In Hong Kong and Taiwan the income from these taxes represents between 1 and 2% of their GDP. We don’t hear them complaining terribly.

So if it’s not going to be the end of the world, let’s trial it (as HMT did with the bankers bonus tax) and see what happens. I don’t know if this is possible. It doesn’t seem crazy.

At some point I’ll post up my full essay, about how the FTT represents a good example of regulatory capture by private interests. Mmm..private interest.

Flickr credit: Torcello Trio