Will a global bank levy mean more alms for the rich?

England and America, as George Bernard Shaw said, are two countries separated by a common language. But when it comes to banking regulation, these countries, host to the world’s two largest financial centres, appear to be speaking in different dialects.

Where this dissonance risks turning into more than a war of words is over plans to recoup the billions of taxpayers’ money used to bail out the banks and to provide a fund to compensate governments for future banking collapses.

In one corner are Gordon Brown and Alistair Darling, the Chancellor, who are keen to re-animate the once dormant idea of imposing a global tax on currency transactions and extending this to all financial contracts ­ a financial transactions tax (FTT) better known as the Tobin Tax, named after its inventor, the late Nobel Laureate James Tobin, who, in 1972 proposed curbing speculative transactions by using a tax to put “sand in the machine”. He has proven to be something of a Cassandra.

In the other is Barack Obama who wants to impose a levy on the largest banks in the US to raise around $90bn in the next decade, to meet the costs of his government’s bailouts. Who would handle this money and what exactly would be done with it ­ not least, in-between inception and the next banking collapse, when it is intended to be used as compensation for governments ­ remains to be seen.

Common aim
The methods may be different, but the aim is the same ­ to meet popular demands that banks pay for the costs that financial failures incur. But will popular demand wither as economies return to growth, and if it does, will these ideas be shelved?

In the UK, we’ve even seen a celebrity-backed campaign calling for the Tobin Tax, while in mid-February Peter Hain became the first Cabinet minister to publicly back the concept. Citing comments in Progress magazine, The Guardian reported Hain saying: “On the one hand, there is global warming, global poverty and the prospect of massive, right-wing driven cuts to public services, resulting in a double-dip recession. On its own, maintaining public spending isn’t the answer to all these problems. But part of the alternative is the application of innovative financing arrangements such as a financial transactions tax. And this is what the Robin Hood Tax represents.”

However, back in January one learned voice, former International Monetary Fund (IMF) chief economist Simon Johnson told BBC Radio that he believed the Tobin Tax “still doesn’t address the core problem which is really about financial institutions that are ‘too big to fail’. Financial transaction tax is more of a tax on regular people like you and me.” Johnson believes a better solution is simply to curb banks becoming too big to fail with appropriate legislation ­ in other words, a return to something akin to the Glass-Steagall Act. That puts into sharp focus the fact that the problems that precipitated the Act back in 1933 seem to have been repeated even after decades of regulatory build.

Growing momentum
At the moment, there appears to be movement on these levy ideas. “There is growing momentum behind proposals for some sort of global levy on the banks,” says Julian Jessop, chief international economist at Capital Economics.

G20Gordon Brown breathed life into the idea last November when he raised it as one of four options to curb bankers’ excesses at the meeting of G20 finance ministers in St Andrews. Somewhat predictably, the idea won strong support from German Chancellor Angela Merkel but ran into stiff opposition from the US. As Stephen Lewis, chief economist at Monument Securities, notes, “The puzzle is why Gordon Brown advanced a plan for a tax which he must have known would not find favour with the US team.”

But there are signs it is building support, according to Jessop. “Momentum seems to be increasing even in the US,” he says.

According to him, the advantage of the FTT is that it would change behaviour as well as bring in revenue to insure against future failures. “It could kill two birds with one stone,” he says. “I think that some sort of Tobin Tax on high-frequency transactions would be a good idea.”