What is the Financial Transactions Tax (FTT)?

The FTT, popularly known as the Robin Hood Tax, is a small tax on the purchase (and, in some countries, the sale) of financial assets, such as shares, bonds, foreign exchange and their derivatives. The tax rate is usually a fraction of 1% with the usual range between 0.005% and 0.5%.

The FTT is principally paid by financial firms, who buy and sell assets on a continual basis, as opposed to individuals, who tend to make more occasional purchases.

In the UK, we have had an FTT for many years, the Stamp Duty Reserve Tax levied at a rate of 0.5% on the purchase of shares, which currently raises £3.1 billion a year (HMT, Budget 2015 – 2013/14 Outturn).

The FTT has a provenance dating back to the 1690s and an economic pedigree dating back to John Maynard Keynes in the 1930s and Nobel-prize winning economist, James Tobin in the 1970s. In terms of heritage, it is worth noting that the UK’s stamp duty pre-dates income tax*.

* In 1797, British Prime Minister, William Pitt the Younger, described stamp duty as “easily raised, pressing little on any particular class, especially the lower orders of society, and producing a revenue safely and expeditiously collected at small expense.” The inception date of the modern income tax is typically accepted as 1799, when it was introduced by the same Prime Minister.

How much revenue would be raised by Financial Transactions Taxes (FTTs)?

FTTs would raise substantial amounts of new revenue. £20 billion could be raised in the UK alone and as much as £250 billion every year if they were implemented globally.

Why do we need an FTT?

In the two years following the financial crisis advanced G-20 economies spent the equivalent of 6.2% of world GDP – $1,967 billion – on bank bailouts. This has left a massive hole in our public finances, hitting jobs and public services. The effect has been particularly devastating in developing countries. The crisis has left a $65 billion gap in poor country budgets, foreign aid fell by nearly 3% in 2011 (the first drop in 14 years) and the World Bank estimates that globally an additional 64 million people have been forced to live on less than £1 a day.

An FTT is one of the few available options that would generate financial resources in sufficient quantity to make a meaningful contribution to the continuing costs of the global economic crisis. With ordinary citizens at home and abroad bearing the brunt of the costs, it is only just that an FTT redistributes some of the money from those who caused the crisis to those who (through no fault of their own) are suffering its effects the most. The FTT would ensure that the currently under-taxed financial sector pays a greater and fairer share.

How will the money be spent?

Applying the FTT internationally, covering shares, bonds, derivatives and the wholesale market in foreign exchange, would raise as much as £250 billion a year in new revenue. To ensure that it lives up to its name of a Robin Hood Tax, the money must be allocated to domestic and international social priorities. We are calling for the money to be spent in the following ways:

  • 50% to be used to protect the most vulnerable at home and save jobs and public services;
  • 25% to be used to help those in developing countries hit hardest by the financial crisis;
  • 25% to be used to fight climate change at home and aboard.
In the present economic climate, ensuring that a fair proportion of FTT revenue is spent on international commitments is indeed a challenge and far from assured. Thankfully supporting governments have responded favourably to our asks. France and Germany have both reiterated that at least part of the revenue could be spent in this way:

German Chancellor Angela Merkel stated, “one could discuss the use of part of the revenues from the Financial Transaction Tax for development and climate adjustment”*.

President Hollande at the G20 Summit in Mexico in June 2012, said “I supported for a long time, I do now as President of the French Republic, the creation of a Financial Transaction Tax. And I pledge once again that a major part of the revenues from this tax should be used for development objectives”.

* Statement by Chancellor Merkel to the Development Committee of the Bundestag in November 2011.

Can the FTT work without global agreement?

Definitely. Over 40 countries – including many of the world’s largest financial centres (see ‘global FTT map’ to find out where) – have successfully implemented some form of FTT.

A good example is the UK’s FTT on share transactions, known as the Stamp Duty. The 0.5% Stamp Duty yields £3 billion a year and hasn’t stopped the London Stock Exchange being one of the most profitable markets in the world. Many other countries raise substantial amounts of revenue from FTTs. Brazil, for instance, currently taxes transactions of various assets at varying rates raising $15 billion in 2010.

The success of these FTTs clearly demonstrates that the tax does not need to be implemented globally to work. It is a myth that unless the FTT is global, financial institutions will simply relocate their transactions to avoid having to pay (as the above examples clearly illustrate). The IMF has confirmed this stating in a recent report that FTTs “do not automatically drive out financial activity to an unacceptable extent”.

Who supports the FTT and what progress has there been internationally?

The FTT has gained substantial backing over the last few years. Extremely prominent advocates have declared support, not least philanthropist and founder of Microsoft Bill Gates whose report to the G20 Leaders specifically recommended FTTs to raise funds for development. Other big names include: George Soros, Al Gore, Ban Ki Moon and Kofi Annan.

In 2011, shortly after the Robin Hood Tax campaign was launched, the FTT was endorsed by 1,000 leading economists – including Nobel prize winners Joseph Stiglitz and Paul Krugman – and 1,000 parliamentarians from 30 countries. Momentum built up through 2011 and at the G20 Summit in November Argentina, Brazil, France, Germany and South Africa declared their support.

The Robin Hood Tax is not just a nice idea, it’s now becoming a reality. Today, 11 European countries – Germany, France, Italy, Spain, Austria, Belgium, Greece, Portugal, Slovenia, Slovakia and Estonia – have agreed to proceed with the implementation of an FTT in 2014. The tax could raise a massive £34 billion a year – much needed revenue to fund domestic and international social priorities during times of austerity.

Is the European FTT a Brussels tax?

No. Like all taxes, the revenue will be collected nationally meaning it is up to each individual country to decide how to spend the money. Both France and Germany, the biggest supporters of a European-level FTT, are against using the revenue for the EU budget.

Will ordinary citizens like you and me pay the tax?

This is untrue. The FTT will be paid, first and foremost, by the principal buyers/sellers of financial assets. In fact 85% of the taxable trades are carried out by banks and other financial institutions, such as hedge funds, whose clients are often high-net-worth individuals. Ordinary people do not, by and large, trade assets such as bonds or derivatives. The IMF has studied who will end up paying FTTs concluding that they would be “quite progressive”. This means they would fall on the richest institutions and individuals in society, in a similar way to capital gains tax. This is in complete contrast to VAT, or sales tax, which falls disproportionately on the poorest people.

Most importantly, it is businesses, rather than individuals, who are constantly trading as opposed to making a one-off purchase as an investment, who will consequently pay the most in tax from an FTT. The greater the frequency of the transactions, the greater the tax bill. Most particularly the FTT will have an impact on High Frequency Trading (HFT)3, which is regarded as a good outcome by many economists who believe HFT is disruptive and risky and should either be regulated against or considerably reduced in size.

* High-frequency trading (HFT) is the use of sophisticated technological tools to trade securities like stocks or options. HFT employs computerised algorithms to analyse incoming market data and implement proprietary trading strategies. Investment positions are held only for very brief periods of time – even just seconds – rapidly trading into and out of positions, sometimes thousands or tens of thousands of times a day. By 2010, high-frequency trading accounted for over 70% of equity trades taking place in the US and was rapidly growing in popularity in Europe and Asia (source: Wikipedia). Some finance experts believe the development of HFT is unhealthy and potentially destabilising. “Rapid increases in high frequency trading (HFT) have created a dangerously unstable web of computer-driven trading that spans global stock markets, putting them at risk of a system-wide ‘flash crash’.” See: Financial Crisis 2: The Rise of the Machines, (R. Gower, 2011): http://www.ubuntu.upc.edu/docus/Robin_Hood_Tax_Rise_of_the_Machine.pdf

Would the FTT hit our pension funds?

Ordinary people will not end up paying the cost of the FTT through losses to their pension funds. The tax would target traders who buy and sell financial assets frequently, often turning over their entire portfolio in a day. In contrast, pension funds (anywhere in the world) invest over long time horizons, buying and selling on average once every couple of years. A tiny tax applied at entry and exit from the market would therefore be negligible for pension funds. According to a recent study by a leading City think tank, high-frequency traders on the other hand would pay 1,666 times more in FTTs than the average pension fund.

Can the FTT easily be avoided?

No, not if it is designed competently. The example of the many successful FTTs that have already been successfully implemented bear testament to this.

Avoidance can be minimised if the behavior to get around paying the tax is turned into a high-risk, low return activity. In other words, by setting the tax rate low (between 0.5% and 0.005%) and making the costs of non-compliance high, the incentive to avoid paying the tax is significantly reduced. Using the following two design principles together would help to minimise avoidance.

  • The “residence principle” (as proposed by the European Commission in 2011):
    Capture of FTT revenue is based on the principle of tax residence of the financial institution or trader. Collection of tax depends on who is involved, not where the transaction takes place. For example, if a European state such as France levied an FTT, then any business or individual, registered as a French taxpayer, whether resident or non-resident in France, would be liable for payment of the tax, wherever in the world the asset is traded.
  • The “exchange of legal title principle” (sometimes referred to as the stamp duty):
    When an asset is traded, there is no registered change of legal ownership unless the FTT has been paid to the relevant authority. In other words, if you don’t pay the tax, you don’t end up owning the asset. This is a very high consequence of non-compliance, as the buyer will not receive legal title to the asset and the benefits this brings such as dividends or the ability to use the asset as collateral.

It should be noted that all taxes are to some extent avoided and 100% capture never happens. Take the example of income tax in the United States, which is a principal source of revenue for the US Government. A study by the IRS showed that non-compliance was about 19%, equating to a staggering $345bn for that tax year alone. However, the year’s income tax receipt was $2,000bn. No-one would argue that because nearly a fifth of potential revenue wasn’t captured, this is not a valuable tax. When considering any taxation measure, the aim is to design it in such a way as to minimise tax avoidance and evasion, which the above principles achieve, it cannot be eliminated altogether.

What impact would the FTT have on our economy and jobs?

An FTT would increase economic growth and help create jobs. According to the European Commission’s most recent impact assessment, introduction of the FTT would increase growth in Europe by 0.2% to 0.4%. The additional revenue provided by the FTT has the potential to contribute to job creation, infrastructure investment and poverty reduction. An FTT would also improve market stability and, through reducing high-frequency trading, reduce the probability of economic crises in the long-term. A comprehensive study that takes these positive affects into account concludes that in the UK a broad-based FTT would raise £8.4 billion a year and boost GDP by 0.25%, or the equivalent of 75,000 new jobs.

The revenues raised, if used in a smart and progressive way, could be invested to help stimulate the labour market and increase employment in specific sectors such as manufacturing. This would help rebalance the economy, which especially in the UK has become over-reliant on the financial sector. The FTT may cause a relatively small reduction in the amount of people working in the specialist field of High Frequency Trading but this would be more than compensated by the increase in jobs in other areas of the economy, leading to a net increase in employment.

It is worth noting that many of the countries that currently have FTTs display strong growth, such as South Africa and Brazil. Indeed, these are some of the fastest growing economies in the world.

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Key reading

For more detailed answers to these (and other) questions read our comprehensive Financial Transaction Tax Myth Busting document.