Q&A: What is the Tobin Tax on financial trading?

Stock exchange trading
Image caption A Tobin tax is intended to affect all share, bond and currency transactions

Eleven EU member countries have said they wish to move ahead with introducing a financial transactions tax.

The nations - which include France and Germany - intend to use the tax to help raise funds to tackle the debt crisis.

The tax has the backing of the European Commission. The other countries that wish to introduce it are Italy, Spain, Austria, Belgium, Greece, Portugal, Slovakia, Slovenia and Estonia.

Yet the tax is opposed by other nations, such as the UK, where the government feels it would damage the City of London. The US has also expressed its opposition to the idea.

EU lawyers have now issued a 14-page legal opinion saying the move would be illegal, since it would exceed member states' tax powers.

The idea of such a tax - often described as a Tobin tax or "Robin Hood" tax - was first outlined 40 years ago.

What is the Tobin Tax?

It was put forward in 1972 by the Nobel-prize winning American economist James Tobin.

Originally he suggested a tax on all payments from one currency to another.

His aim was to curb massive and destabilising movements of funds between foreign currency exchanges.

He proposed that the cash raised should be used as aid for developing countries.

The idea has since been extended to cover a tax on all share, bond and currency transactions.

How would it work?

Tobin said it had to to be an internationally agreed uniform tax to work effectively.

He said each government would levy it with the proceeds paid into a global financial body such as the World Bank or the International Monetary Fund (IMF).

Critics said it would be impractical: a high rate would undermine financial markets, but if it were too low, it would not achieve its aim.

It has also proved impossible to get global agreement to introduce it.

Without worldwide agreement, the 11 European countries have decided to move ahead on their own, with the support of the European Union.

And instead of paying the proceeds to a global body, they will use the funds to help bring down their respective national debts.

How much would it cost?

Tobin suggested a rate of 0.5%, but other economists have put forward rates ranging from 0.1% to 1%.

Even at a very low rate, supporters argue that if it were imposed on all financial transactions across the world, it could raise billions of pounds.

What are the advantages and disadvantages of the tax?

The advantage of the tax is that it could be a huge money-raiser for governments. Others add that it is only fair that banks and other financial firms pay an additional tax to help tackle government debt levels that they helped increase, as a result of the bailout schemes which many of them required during the financial crisis.

Those in favour of the tax also argue that it helps to increase stability. They say that in the 1990s, it could have prevented countries such as Russia, Mexico and those in South East Asia having to raise their interest rates to very high levels, as their currencies came under threat from speculators.

Critics argue that the tax will result in fewer financial transactions being made, resulting in job losses in financial centres. Others warn that the tax will mean pension funds and savers get less returns, as banks will simply pass the cost of the tax onto their customers.

Has a Tobin tax been tried anywhere?

A version of it was tried in Sweden in 1984, where a 0.5% tax was introduced on the buying and selling of shares.

The results were disappointing. It had been hoped that about 1.5bn Swedish kronor (£142m) per year would be raised. On average, 50 million was raised. Capital gains tax revenues also fell.

But the impact on market trading was also more dramatic. During the first week of the tax, the volume of bond trading fell by 85%.

In 1991, the tax was scrapped.

Yet Tobin taxes are still in place in some of the world's fastest-growing financial centres - Hong Kong, Mumbai, Seoul, Johannesburg and Tapei - where they are said to collectively raise £12bn a year.

How quickly could the 11 European nations introduce the tax?

No timetable has yet to be released. The tax will, however, need to be backed by a majority of the 27 European Union member states, including those who will not be introducing it. It will also need to be approved by a majority in the European Parliament. When such backing has been secured, Europe's Taxation Commissioner Algirdas Semeta can release a detailed proposal on the tax and its implementation.

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