Brown drops bank tax idea after worldwide criticism
Chancellor Alistair Darling frustrated because he knew the US would never back the proposal
Prime Minister Gordon Brown is pedaling smartly back on his proposal for a financial transactions tax or 'Tobin Tax' after his surprise presentation, delivered at a Group of 20 finance meeting in Scotland, was met with a chorus of criticism over the weekend.
It is believed that Brown's handling of the issue provoked renewed dispute with the Treasury. Chancellor Alistair Darling is said to be frustrated by the prime minister’s promotion of a plan he already knew would be publicly shot down by the US.
The American rejection of the proposal - "A day-by-day financial transactions tax is not something we are prepared to support," said US Treasury Secretary Tim Geithner (above, with Alistair Darling) - was followed by rejections from Canada, Russia, the International Monetary Fund and the European Central Bank.
Last night, it was effectively confirmed that the prime minister will not be pushing his proposal further. "We're not that massively wedded to a transactions tax. We're not saying 'it's this or nothing' – we're saying we need a deal," a Downing Street aide told the FT.
The idea of a Tobin Tax of some form has been around for years and came up again in August when it was proposed by FSA chairman Lord Turner. Through the international clearing systems, a kind of sales tax or stamp duty system would be easier to implement than its opponents (who believe it will penalise pension funds, not banks) suggest.
The tax was not originally proposed as a revenue-raising exercise. Its author, James Tobin, conceived of a small levy on currency transactions in 1971 to reduce exchange rate volatility - to "throw sand in the wheels" of short-term speculation.
But it has major flaws. First, it can't work unless everyone applies it worldwide and, second, it would have to be resolved what kind of transactions to apply it to, at what rates and so forth.
Still, Brown is not alone in thinking banks should pay upfront against any future bank-generated crisis, or that the risk-reward balance in the banking sector needs to be adjusted.
Yesterday, IMF managing director Dominique Strauss-Kahn said the fund is exploring the idea of making banks pay insurance fees against future rescues in the sector.
Strauss-Kahn told Reuters the IMF was not pursuing a Tobin Tax, which he called "a very old idea that is not really possible today." "We're working on a tax on the financial sector which, in line with what Gordon Brown said, would solicit an insurance premium from a business activity that is riskier than others." Proposals for the scheme are due in April.
Only Christine Lagarde, France's finance minister, welcomed Brown's comments, a reflection of Paris's long-held support of a transactions tax. ·