Today in his annual state of the Union speech to the European Parliament, President of the European Commission, Jose Manuel Barroso has made a few proposals, one on tighter integration of the EU, the second on the introduction of a financial transactions tax in Europe (http://www.bbc.co.uk/...) and the third on Euro bonds.
The last time that financial transactions taxes were proposed in G7-20s, the US’s Timothy Geithner and Canada’s Stephen Harper rejected them as out of hand. This time the discussion is being confined to Europe and as expected with the Co-Dem government in power in the UK, it is the UK which is threatening to scupper their introduction. While I definitely support the introduction of the financial transaction tax, my problem is with the suggestion of what to do with the tax revenues.
This diary will concentrate on Barroso’s second proposal of a financial transactions tax, the response from the right and the financial sector in the UK, and a demand for what to do with the money raised from said tax.
Under the proposal, the tax would raise about 57bn euros ($78bn; £50bn) a year and would come into effect at the start of 2014 (http://www.bbc.co.uk/...).
Under the proposals, the financial tax would be levied at a rate of 0.1% on all transactions between institutions when at least one party is based in the EU. Derivative contracts would be taxed at a rate of 0.01%.
The commission said the tax was "to ensure that the financial sector makes a fair contribution at a time of fiscal consolidation in the member states". It said financial firms had played a role in the current "economic crisis" and was "under-taxed" compared with other sectors. The "significant additional revenue" raised would contribute to public finances, it added (http://www.bbc.co.uk/...).
What is a financial transaction tax and what is its purpose?
A financial transactions tax is a very small tax (from .01 - .25%) on the value of all financial transactions; these include the stock markets, the futures markets, derivative markets, currency markets, and commodity markets.
The two most well-known versions of financial transactions taxes were initially proposed by JM Keynes on the stock market and were later proposed by Robert Tobin in the wake of the collapse of the Bretton Woods Agreement (http://en.wikipedia.org/...).
Essentially the idea behind the tax is two-fold from the point of economists:
1) introduction of financial stability through a decrease in short-term speculative activities which are the ones targeted by the tax (which can be manipulated so those transactions which are short-term speculative ones will be the highest taxed), less speculative activity will reduce the booms and busts; decreased short-term speculative activity being decreased, money instead will flow towards true growth sustaining investments;
2) financial instability is seen to derive in many senses from the variation of the value of assets on the financial markets from GDP in the countries where these markets exist, this will bring the financial/money economy into line with the real economy. So the taxes serve the role of an equilibrating device.
The third point which is more important to those concerned with income and wealth inequality concerns the use of this revenue raised by the financial transactions taxes. Those that have advocated for the introduction of financial transactions taxes have always argued that the money could be used to sustain the social welfare state, be used for ensuring job creation and government investment in the advanced capitalist world. Moreover, part of the funds could be used to enable sustainable fair economic development in the capitalist periphery. It is important to note that this is not what the funds will be used for in the proposal by Barroso and this will be addressed later in the diary.
The reaction in the UK:
Needless to say both the right in the UK and the UK financial sector are not thrilled by this; the UK government has threatened to veto the introduction of a financial transaction tax http://www.bbc.co.uk/...
Their objections are the usual tripe:
1) While they do not oppose the introduction of a financial transaction tax in principle, it needs to be done globally.
2) Money will flow out of the markets that are introducing the tax and into other stock markets; they are destroying our strongest “industry.”
3) UK financial sector spokespeople have said that the majority of the tax (80% according to them) will come from London with the implication that why should they introduce a tax to benefit the Eurozone and EU? They have actually argued that the tax is unfair!
The obvious question is, if the UK and US (really Canada is irrelevant in terms of the size of its financial sector as compared to the US, UK and Germany) oppose the introduction of the tax, how can it be done globally? Certainly other countries would come on board if the objections of these countries instead moved towards the creation of this tax. If they do not come on board, further measures can be undertaken against those countries and speculators investing in those markets.
The introduction of the tax will stabilise the financial sectors in the countries, those countries which do not introduce it will continue to have unstable markets. While there is no question that there will be attempts to get around the taxes and new schemes will be developed by those in the financial markets, these taxes will reduce, at least in part, short-term speculative transactions that are leading to increasing financial instability. It will not solve the current problems, but it will reduce dangers from the unstable financial sector.
Given the delusions that the problems in the system are caused by debt/GDP ratios and government deficits, the combined financial instability with continued attacks on effective demand of the poor, working class and middle classes will create an economic crisis that will make 2008 look like a bump in the road.
To stop this far more serious problem, abandonment of the austerity measures and the abandonment of "competitiveness" and "efficiency" arguments that have led to the destruction of the industrial and manufacturing sectors in the advanced capitalist world and the destruction of the social subsistence levels of income are essential. The capitalist system is a demand-driven system and increased income and wealth inequality are destroying not only the lives of the poor, working and middle classes, it is threatening growth and profitability in a system which is dependent upon the effective demand of the majority.
This will never eliminate the inequalities inherent in the capitalist economic system, but at least it will stop the impoverishment of the majority to fill the coffers of the rich. Investment is not occurring as there is no perceived sustained increase in expected demand. Quantitative easing will merely mean that more money will be hoarded or invested in short-term speculative investments in an already unstable world financial system; it is pouring fuel on a fire. The problem is not insufficient money in the economy, the problem is insufficient effective demand to warrant investment, employment and economic growth. This has been caused by our political leaders and the delusional doyens of economic theory in their pursuit of the fantasies of Hayek, Friedman and Barro. The economists and political leaders need to abandon the demonstrably fallacious neoliberal ideology whose sole purpose is to justify the impoverishment of the majority to line the pockets of the wealth.
What shall be done with the tax revenue?
One problem that I am seeing is the call for continuance of the introduction of austerity measures even in countries that are willing to introduce financial transactions taxes. It is interesting that Barroso sees the introduction of these taxes as part of austerity measures and that is probably because they do not want to use the revenue for productive purposes. This is because they are trapped in the delusions that running debts and deficits are the threat to the survival of the system rather than their destruction of the incomes of those that actually ensure the effective demand that capitalism needs in order to guarantee growth and profitability.
Instead of using the tax money to sustain the social welfare state, invest in the various countries for job creation and sustaining industry and manufacturing, they are proposing that it would be used to bolster public finances. In other words, they want to use this tax revenue to address public debt and deficits and hence to continue to be used to bail out the banking sector rather than to stave off the assault on the poor, working and middle classes in the advanced capitalist world.
While there is a certain pleasure in taxing the financial sector to cover its own losses, I would argue that is a waste of good tax revenue. The money can instead be used for purposes that will ensure needed effective demand which is holding back investment and for productive purposes that will actually lead to job creation such as green investment, direct government job creation and maintenance and subsidisation of industries that are declining.
There are many examples that I can provide to explain what can be used with this money. The most obvious one is to protect pensions of state workers and jobs. The tax revenue can be used for green investment, development of green industries, direct jobs creation.
Moreover, I have an additional thought stuck in my head from the news from yesterday. The defence giant BAE industries have eliminated almost 3000 jobs yesterday in the UK (http://www.bbc.co.uk/...; http://www.bbc.co.uk/...). They are, of course, blaming this on worldwide cutbacks to defence spending and keeping the business competitive (yes, that word; http://www.bbc.co.uk/...; for some history see http://www.bbc.co.uk/...).
In Brough, 900 people alone have lost their jobs and the plant will certainly close; these workers are engineers, high wage skilled earners that will need to find jobs in an economy based on low wages (thanks to the destruction of the unions and the industrial and manufacturing sectors). This plant that produces military goods can instead of being closed be turned to civilian production (they make aircraft parts for heavens sake), but that is not competitive for the company. What could be done instead? This is where government nationalisation can save these people’s jobs and the money used for productive purposes to help revive industry in this country. This is simply an example of what the money could be used instead of paying back bank debt.
So while welcoming the proposal to introduce financial transaction taxes, I would argue that it is useful certainly, but it is insufficient to deal with the looming crash. Tax revenue should be used for protecting our social welfare state, ensuring and increasing employment, government investment in green manufactures, EU investment in green manufactures, protecting (and increasing) incomes for the poor and working class.
ht to Richard Lyon: it seems that the spot currency markets will not be taxed in this financial transactions tax proposed by Barroso due to EU rules preventing the free mobility of capital. http://www.forexlive.com/.... This adds an additional problem to the one I raised in the diary about spending of tax revenues. Spot currency markets not only are responsible for the large amount of financial instability in the system, but also represent a large source of revenue. The EU is built upon neoliberal economic principles and this affects a number of economic policy decisions negatively. It is one of the reasons that the left has been so skeptical about the EU.