Robin Hood Tax and Currency Transaction Levy – the differences explained

Since December RESULTS has been campaigning for the UK government to implement ‘financial transaction taxes’ – tiny taxes onCurrency transactions between banks that could help to pay for global public goods like health and education. There are a couple of different proposals for financial transaction taxes, including ‘currency transaction levies’, ‘Tobin taxes’ and the ‘Robin Hood Tax’.

From feedback that we have received from our grassroots network we know that there is some confusion – among MPs, in the media and for ordinary people – about exactly what each of the proposals is and what the differences are. The post below gives an overview of the main proposals and sets out exactly how they differ. We hope that it will be useful!

If you have any questions about these issues please do comment on the post and we will reply.

What is the Currency Transaction Levy (CTL) and how much could it raise?

The CTL is a proposal to harness some of the vast wealth of the foreign exchange market (changing money between different currencies) through a very small levy of just 0.005% on all transactions. It would apply the levy to all wholesale or interbank transactions of a particular currency, which means that it would be paid by banks and not by ordinary customers getting their holiday money. It can be applied to transactions in the currency affected anywhere in the world, which means that it would not require all countries to sign up.

A staggering US$3.2 trillion worth of currencies are exchanged every day on the international Foreign Exchange (FX) market, which unusually among financial markets remains untaxed. Applying a transaction levy on the four major global currencies – dollar, euro, sterling and yen – would yield annual revenues of over $30 billion.

Collection of a CTL would be simple to set up and efficient to run, as the entire FX market is electronic and operates through an interconnected global network of central banks and national payment systems that cooperate in the oversight of cross-border payment systems – adding a small levy to the processes already taking place at these places would be very easy to do. This is particularly true of Sterling, as all trades are ultimately settled through the Bank of England.

There are two different proposals for currency transaction taxes that are widely discussed. There is a confusing tendency to call them both ‘Tobin Taxes’, but in fact only the first proposal is properly referred to as a ‘Tobin Tax’. The two proposals are as follows:

  1. Initially, there was James Tobin’s original idea from the 1970s of a 1% levy on currency transactions. The measure, by making currency transactions more expensive, favoured trading in goods and services, intending to price out speculative activity. The motivation for this was regulation of the market, not to raise revenue.
  2. Since 2005 a much smaller rate currency levy has been proposed specifically to raise revenue for global public goods such as health and education. Its aim is to take advantage of the enormous volume of today’s foreign exchange market. The proposed rate is 0.005%. This low rate is chosen so as not to distort normal market activities. Its motivation is to raise revenue and not to regulate. And the potential income it could produce is in excess of US$30 billion per annum. It is this modern version of the CTL that organisations working for international development are currently advocating for world governments to establish.

What is the Robin Hood Tax (RHT) and how much could it raise?

The RHT is actually a set of proposed financial transaction taxes (FTT) rather than a single tax, which would include taxes on currency transactions (the CTL) but also taxes on other types of financial trades, including the various different derivatives and other vehicles that were at the heart of the credit crunch and the current recession. Every day, trillions of dollars change hands between banks, hedge funds and other finance institutions, and these trades have exploded over recent years – the volume of financial transactions is now an amazing 75 times global GDP. Because there are so many of these transactions, even at very low rates of between 0.005 and 0.05% tax per transaction, hundreds of billions of dollars could be raised each year.

Robin Hood Tax logoSo far estimates are that at an average rate of just 0.05% applied globally the tax could raise $400 billion every year – that’s almost three and a half times the amount that was given in aid by OECD countries in 2008. This could pay to get the world back on track to the Millennium Development Goals: getting every child into school, stopping mothers and children dying, and fighting major infectious diseases. It could also help the poorest adapt to climate change.

On the domestic front, it could help rich countries avoid damaging cuts to public services in their own countries and protect the poor there too. As we are talking about such large amounts of money there really is scope for including several different uses.

What is the difference between a CTL and the RHT?

There is understandable confusion over the difference between a CTL and the RHT – often fuelled by media portrayals describing all Financial Transaction Taxes (FTT) as Tobin taxes, which is inaccurate – yet the difference is quite simple in practical terms.

The CTL is just one type of financial transaction tax, whereas the proposal for a Robin Hood Tax is a broad levy applied to various categories of financial transactions including stocks, bonds and currency – a set of financial transaction taxes that taken together could help to recover some of the revenue lost due to the financial crisis. The primary motivation of the Robin Hood Tax proposal is to raise revenue to pay for global public goods – things like health and education. There is also a secondary benefit to the proposal, which is that it would help to regulate the financial market.

Crucially, the Robin Hood Tax would require at least some level of international participation in order to work best, which means that it would require a large amount of political capital and buy-in to establish. This is primarily because most countries are reluctant to “go first” and risk making their trading centres slightly less competitive.

Because of the centralised nature of the clearing systems (how trades are registered and approved, through the Bank of England) for Sterling, a CTL could be applied to all transactions in Sterling regardless of where they occur, meaning that it would be easily feasible for the UK to implement a levy on Sterling – at least at the low rate of 0.005% proposed – without international agreement. It would be a powerful initial step towards implementing broader transaction taxes, and would send a clear message to the world that these kinds of taxes – The Robin Hood Tax, Financial Transaction Taxes, and Currency Transaction Levies – are achieveable both politically and practically, and can make major contributions to our common good.

Because of the centralised nature of the clearing systems (how trades are registered and approved, through the Bank of England) for Sterling, a CTL could be applied to all transactions in Sterling regardless of where they occur, meaning that it would be easily feasible for the UK to implement a levy on Sterling – at least at the low rate of 0.005% proposed – without international agreement. It would be a powerful initial step towards implementing broader transaction taxes, and would send a clear message to the world that these kinds of taxes – The Robin Hood Tax, Financial Transaction Taxes, and Currency Transaction Levies – are achieveable both politically and practically, and can make major contributions to our common good.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s