by T. R. Reid
Italy, France, Switzerland, South Korea, and Taiwan all tax stock trades. Some countries put a tax on bond purchases and foreign currency exchange. About a dozen countries have bank account taxes; when you deposit money to your account, or withdraw it, the government takes a small portion of it in tax. Another common form of the Tobin tax—in fact, the type that James Tobin himself initially championed—is a tax on foreign currency transactions. In Brazil, for example, when you convert your dollars into reals, or vice versa, there’s often a tax, ranging up to 6%, in addition to whatever fee the bank wants to charge.
One key problem with a FAT is that investors can carry out financial transactions almost anywhere today, and so they tend to buy stocks and bonds, or trade currencies, in the countries that don’t tax those trades. This has made many nations reluctant to try this form of taxation. Sweden’s experience was typical. When the government introduced a stock-trading tax in 1984, there was a burst of revenue in the first few years as Swedish investors continued, out of habit, to buy and sell on the Stockholm exchange, and thus pay the tax on each trade. Gradually, though, they started doing their trading through exchanges in Berlin, or Paris, or New York; it was just as easy, as computer trading became the norm, and the Swedish FTT did not apply. With the volume of trading plummeting in Stockholm year after year, the Swedes finally gave up and repealed their tax, in the hope of keeping some of the business at home.
In the aftermath of the global Great Recession of 2008–9, there has been renewed interest all over the world in some kind of Tobin tax. Amid the global downturn, governments everywhere had to use general tax revenues to bail out big banks and investment houses; now they want to impose some kind of tax on the financial industry that will pay for the next round of bailouts, if needed. Some economists argue as well that a well-designed tax could reduce volatility in securities markets and thus make financial crises less likely. Accordingly, national tax agencies and the big finance organizations like the World Bank and the IMF have launched new studies of the FTT. All over the developed world, universities and think tanks are holding learned seminars with clever titles like “Tobin, or Not Tobin?”
At a special meeting in Pittsburgh, finance ministers and Treasury secretaries from the Group of Twenty called on the International Monetary Fund to study and report back on “the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with [saving] the banking system.”4 In plain English, governments wanted to know how to tax the financial industry to raise the money needed for future bailouts. The basic principle here is a familiar one to Americans. For decades, the government has been assessing a fee from every bank to pay for the FDIC program, the insurance plan that gives you back the money you had on deposit if your bank goes broke. In the same way, the FTT would tax the financial industry to build up an insurance fund that would cover any future government rescue of troubled firms.
But any financial transactions levy would face the same problem the Swedes ran into; in an era of electronic trading, financiers will just move their transactions to a jurisdiction that doesn’t tax their stocks and bonds. For proponents of a Tobin tax, the answer to that problem is a multinational tax regime; that is, every country should institute an FTT so that traders couldn’t dodge the tax by setting up shop in a tax-free country. Like Professor Piketty’s global wealth tax, that looks at first blush like one of those neat propositions that will never come to pass. But one wealthy, powerful league of nations has indeed agreed—well, sort of agreed—to institute financial transaction taxes that don’t stop at the national border. The European Union, a political and economic conglomeration of twenty-eight countries stretching across the Continent from Ireland to the Russian border, has been working for years on plans for a pan-continental FTT. This effort took on new momentum after several European governments were forced to bail out big financial institutions in the wake of the Great Recession.
By 2013, eleven European Union member countries—including some of the world’s richest nations, such as Germany, France, Italy, Belgium, and Spain—had agreed on a plan that taxed just about all financial trades. That’s the so-called Robin Hood tax. To get around the problem of traders’ simply shifting their business to tax-free jurisdictions, the EU tax applies regardless of where the transaction takes place; thus a German bank buying call options on the New York Stock Exchange would have to pay the transactions tax. Great Britain, in the midst of a strong anti-Europe swing in its domestic politics, opted out of the new tax. So did Luxembourg, a tiny but rich country where banking is the main industry. The remaining nations have repeatedly committed to move ahead with this tax. But this remains a controversial idea, and it has faced a relentless lobbying campaign from banks, brokerage houses, and hedge funds that would end up paying the tax. As a result, the EU’s FTT keeps getting stalled. It was originally scheduled to take effect in 2013. This was delayed to 2014, then 2016. In the spring of 2016, the EU announced that the financial tax would be imposed starting in 2017. Definitely. No more delays. Of course, the EU has said that kind of thing before.
The striking thing is that the rates of FAT taxation are tiny. A standard sales tax in an American state might run about 8%; the value-added tax, a broader form of sales tax, runs about 18% to 25% in countries around the world. In contrast, taxes on financial transactions are almost always less than 1%. The British “stamp duty” on stock trades, for example, is a tax of one-half of 1%. That proposed EU tax which has sparked so much controversy would be one-tenth of 1% for purchases of stocks and bonds and one-hundredth of 1% for derivative transactions (that is, one cent of tax on a $100 transaction). If a Frenchman, for example, bought a $3,000 wide-screen TV, the French value-added tax on that purchase, 20%, would come to $600; if the same Frenchman bought $3,000 of some company’s stock, the tax would be all of $3. Even Bernie Sanders, in the midst of his soak-the-rich campaign for president in 2016, stuck to this tiny-rate formula when he proposed his FTT. He called for a tax of 0.5% on stock trades, 0.1% on bonds, and 0.005% on derivatives. At that tax rate—it is a tax of five cents on a $1,000 purchase—an investor buying a derivative contract worth $1 million would owe a total of $50 in tax on the purchase.
The reason proponents of FTTs opt for these tiny rates is that the dollar value of these transactions tends to be so huge—and there are so many of them, in an era of high-speed computer trading—that even a minuscule rate of tax can bring in serious money. The Tax Policy Center in Washington estimates that a U.S. financial transactions tax set at the tiny rate of one-tenth of 1% would bring in $66 billion per year; that’s more than enough to run several cabinet departments. A Wall Street Journal headline nicely captured this basic fact about the tiny tax: “Small Fees, Big Bucks.”
Proponents of the FTT say keeping the rates extremely low means there won’t be much burden for the average investor, who makes relatively small trades now and then. The tax burden would fall, instead, on high-speed traders who move billion-dollar securities in a hundredth of a second and then move on to the next deal half a second later. So here’s a tax that would fund much of the government but would be paid almost entirely by swashbuckling Wall Street 1-percenters. Politically, it sounds like a winner. And yet the idea has never gone far in the United States—despite the surprising popularity of the 2016 Sanders campaign—because major financial institutions argue that it would stifle the securities industry and make investing more expensive for everybody. And major financial institutions tend to get their way on tax issues in the U.S. Congress.
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ANOTHER NEW FORM OF TAX that has been tested around the world in recent years is the carbon tax—that is, a tax on carbon-based fuels and emissions of carbon dioxide into the atmosphere. As with the soda pop and financial transaction taxes, the carbon tax has two purposes: it would raise revenue for government, of course, but it should also serve to of
fset the production of greenhouse gases (mainly, carbon dioxide) that promote climate change and accelerate global warming.
In the United States, the science around climate change is still a matter of political debate. In the other rich countries, though, it is accepted as fact that the average temperature of the planet is rising, that this will pose significant problems in the future, and that mankind’s production of greenhouse gases—which prevent the earth’s heat from escaping into the atmosphere—is a major reason for this climatic trend. Accordingly, most developed countries consider it essential to reduce carbon emissions; if they can bring in some additional tax revenue at the same time, all the better.
A 2015 study by the International Monetary Fund set forth the basic argument for the carbon tax in a nation (like the United States) that is running large government deficits:
In the absence of mitigating measures, rising atmospheric concentrations of carbon dioxide (CO2) and other greenhouse gases (GHGs) are projected to warm the planet by around 3.0 to 4.0ºC by 2100 relative to pre-industrial times. Temperature increases of this magnitude . . . are very large by historical standards and pose considerable, and poorly understood, risks.
At the same time, the United States faces substantial fiscal challenges. . . . The federal debt-to-GDP ratio—already (at 73 percent) well above historical levels—is projected . . . to rise over the medium to longer term because of higher interest costs and growing spending for Social Security and the government’s major health care programs. . . .
A carbon tax—that is, a tax on the carbon content of fossil fuels (or on their carbon emissions)—could help address both of these problems. Carbon taxes are potentially the most effective and cost-effective policies for reducing CO2 emissions. . . . These taxes could also raise substantial revenues for easing fiscal pressures and/or funding reductions in other taxes.5
Carbon taxes come in various shapes and sizes, but there are basically three ways to tax CO2 emissions.
The emissions tax measures how much CO2 pours out of the smokestacks of major producers, such as power plants and factories, and then imposes a tax on each ton of the stuff that is poured into the air. This approach requires fairly costly measuring devices to be installed and maintained. But it gives major emitters an economic incentive to invest in cleaner technology, or to use cleaner fuels, and thus reduce emissions, which cuts the tax bill.
The fuel tax imposes a special sales tax on the fossil fuels that cause CO2 emissions when they are burned. Generally, this tax is higher for fuels that contain more carbon, so coal is taxed higher than crude oil, and oil is taxed higher than natural gas. Economists at the IMF prefer this form of carbon tax, which avoids the need to install complex emission gauges on smokestacks and such. Coal mines and oil wells already know how many tons or barrels they are selling to the power company, so it is easy to compute the carbon tax they have to pay. Because the coal and oil companies will pass the tax on to their customers through higher prices, this type of tax gives those who burn carbon fuels an incentive to increase the fuel efficiency of their operations.
The gas tax increases the tax on gasoline and diesel fuel used in cars, trucks, and machines. This one is fairly simple to implement, because nearly every jurisdiction already has a gasoline tax and the pumps at every gas station are already equipped to calculate and collect the tax each time a motorist fills her tank. There is theoretically a lot of margin in the United States to tax carbon by increasing the gas tax, because America’s taxes on motor fuel are much lower than those in most other countries. The New York Times columnist Thomas Friedman has been promoting higher gas taxes in the United States for years; he has proposed a $1 per gallon increase in the federal gas tax (it’s 18.4 cents per gallon at present). To make this politically palatable, Friedman wants to call this levy the “anti-terror tax,” because it would reduce gasoline consumption and thus reduce imports of oil from the Middle Eastern countries that finance terrorist groups.
A common way to implement the carbon tax is through a quasi-market mechanism called an emissions-trading system. There are dozens of these operating at the multinational, national, state, and local levels (the city of Tokyo, which uses more energy by itself than most countries, has an emissions market of its own). The basic design is that government gives (or sells) permits to each major source of emissions—power plants, refineries, manufacturing plants, automotive fleets, and so on—allowing it to pour out so many tons of CO2 per month. That limit is called the cap. In order to reduce emissions over time, the amount of emissions permitted from each source is reduced every few years, even if the plant or factory increases overall output. If the emitter goes over the permitted cap in any year, it owes a fine to the government. Conversely, if a factory reduces its emissions and comes in under the cap, it can sell its excess permits to other companies so they can avoid the fine. Under an emissions-trading system, there’s a public exchange in these permits, where companies can buy or sell (or “trade”) the right to emit more tons of CO2 than the cap would permit. Accordingly, this system is often called cap and trade. Because the fine imposed on sources that exceed the cap works just like a tax, opponents of these systems call them “cap and tax.”
This kind of tax is broadly supported by economists, including American economists, of every political persuasion. Lawrence Summers, a Harvard liberal who held senior positions in both the Clinton and the Obama Democratic administrations, notes that “government debt and global climate change are two of the great problems of our time. Carbon taxation uniquely has the potential to address both.” Summers’s conservative Harvard colleague N. Gregory Mankiw, an adviser to many Republicans and chief of the Council of Economic Advisers under George W. Bush, agrees: “There is little doubt in my mind that for dealing with global climate change, the best policy includes a tax on carbon emissions.”6
But bipartisan backing from academic economists doesn’t necessarily make a difference when it comes to tax policy in the United States. In the U.S. Congress, the word “tax” is the kiss of death for almost any new idea, particularly among Republicans. Thus most efforts to create some form of a national cap-and-trade (or “cap-and-tax”) scheme in our country—Bill Clinton tried it in 1993, and Barack Obama proposed it again in 2010—have been rejected. Still, there are emissions-trading systems operating today in the United States, ranging from the city of Boulder, Colorado (population 105,000), to the state of California, with 39.2 million people and thousands of emission sources subject to the state’s caps. Ten U.S. states in the Northeast and the mid-Atlantic have created their own regional emissions-trading scheme (the Regional Greenhouse Gas Initiative). None of these plans have been big revenue raisers so far, but they could bring in significant money if expanded nationally.
Globally, dozens of countries now have cap-and-trade mechanisms in place. The world’s biggest such market is the European Union’s Emissions Trading System, known on the Continent as the ETS. It grants emission allowances to more than eleven thousand power plants and industrial sites in thirty-one countries; airlines are also covered. The system has had some serious problems since it started in 2005 and was almost given up for dead in 2013. By 2016, though, it was operating reasonably well. CO2 emissions in Europe have fallen significantly since the ETS began, although some of that decrease stems from the Continent’s prolonged economic doldrums. The EU now predicts that it will exceed the plan’s original goal of reducing emissions by 20% from the 2005 level while bringing in billions in new tax revenues.
But even in Australia, a deeply green nation of twenty-three million environmentalists, a tax is still a tax, as the Australian Labor Party learned. “It’s the kind of place where any tax to protect the environment ought to be a barn burner,” explained the political reporter Malcolm Farr. “We’ve got a bloody big landmass and a bloody small population; it’s a country the size of the United States with the population of Greater Los Angeles. And we all love our beautif
ul outback.” Australians are devoted to the outdoors; almost every Aussie has (at least) one bicycle, and nearly all the bikes you see on the street are equipped with special racks for carrying golf clubs or surfboards. Indeed, nobody seemed particularly surprised when the nation’s prime minister (Harold Holt) died in a surfing accident one choppy day off a beach on the Tasman Sea. “That’s the kind of thing that happens to ’stralians,” Farr told me, “even if you’re prime minister.”
Australia is also a major polluter. It’s one of the world’s leading producers and exporters of coal, and most of the nation’s electric supply is produced by coal-burning power plants. The country rates among the world’s top three nations for CO2 emissions per capita. After the Kyoto accords on global warming, though, Australians became concerned about this; dealing with climate change became an important political issue in Australia. In the 2007 national election, both major parties supported a cap-and-trade system to reduce emissions. The mining and power companies fought back, and the 2008–9 global recession put the plan on hold. By the time of the 2010 election, the matter was so conflicted that Julia Gillard, the candidate of the Labor Party (the Australian equivalent of our Democrats), made a solemn pledge that “there will be no carbon tax under the government I lead.”
