Tobin Tax Splits G20 Summit

November 9, 2009 International Tax CooperationTaxation in CanadaTaxation in EUTaxation in FranceTaxation in GermanyTaxation in UKTaxation in USA  No comments

Gordon Brown, UK Prime Minister, brought forward a suggestion at the G20 summit, to instate a global foreign currency transaction tax on banks (commonly referred to as a Tobin Tax). The idea created an almost immediate split of opinion within the G20.

At the G20 Summit on November 7th, in St. Andrews, Scotland, the UK Prime Minister suggested banks be levied with a tax on their financial transactions. Gordon Brown made it clear that he wishes to see the burden of bank bailouts shifted from the tax payers to the institutions themselves and that this tax was one form of doing that. Other suggestions voiced by the PM included raising insurance premiums for banks to reflect their risk levels, creating bank financed investment pools which will fund bailouts, or instating upfront fees for banks, which will give them a right to request government help.

An early form of the proposed tax was put forward by James Tobin in an effort to create currency stability, after the 1971 announcement that the US Dollar would no longer convert to gold. It was originally created as 1% levy on all foreign currency trades by a bank, though modern discussion has lowered this figure to between 0.1% and 0.25%. James Tobin envisioned that the tax would reign in bank’s speculative activity and bring a higher level of stability to the economy by lowering both fluctuations in currencies and bank risk. The name Tobin has been used on modern incarnations of taxation systems that bare resemblance to the original Tobin Tax, though they might differ slightly in reality.

Quick response to the suggestion came from Timothy Geithner, US Treasury Secretary, who made it clear that the US government would not support the the creation of a Tobin Tax, or any form of “day-to-day financial transaction tax”, though he did not rule out the creation of some form of fiscal incentive to lower bank risk. The view of the US Treasury Secretary was supported by officials from Canada and Russia. Gordon Brown, meanwhile, had the backing of France and Germany.

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