Proponents of the global bank tax have suffered a major setback this past weekend in Pusan, South Korea. The G20 finance ministers decided to drop it under pressure from its chief opponent, the Canadian government, as well as Australia, Japan, and Brazil. The decision was based on the usual argument that the levy would punish banks that had acted responsibly, and that other mechanisms such as increased capital requirements were more appropriate for dealing with future bank crises.

The pronouncement does not preclude countries from creating their own bank tax, and the G20 has stated that it is even willing to provide institutional support for countries to do so. However, without the buy-in across the board that a G20 agreement would have provided, it is difficult to see how a bank tax within one nation could work. If taxed within a given country, banks would have an incentive to begin shifting investment towards those countries that rejected the tax.

Instead, the focus must continue to be on building the global tax across the G20. It is possible it will be discussed at the November G20 meeting in South Korea, especially if, rather than folding from this setback, civil society continues to ramp up the pressure. Instead of accepting defeat, activists can use this time before the Seoul summit to clarify issues and address concerns that were raised in the past few of months. Public awareness of the bank tax has increased significantly, and it moved further up the G20 agenda than anyone could have imagined even a year ago. Though the bank tax has been dropped off the agenda for the Toronto summit, the fight will continue.

Here are the arguments:

The lines are drawn: Earlier bank tax discussions

In early February 2010, British Prime Minister Gordon Brown suggested that a deal on a potential tax levy could be reached at the Toronto G20 Summit. A few days later, the Canadian government publicly opposed any such agreement. “We’re not going to impose capital taxes on our financial institutions,” Canadian Finance Minister Jim Flaherty told journalists. “We’re against raising taxes and I hope to be able to convince my colleagues that these are unwise moves.” The Conservative government has also argued that as the only G8 country whose banks did not require bailouts it should not have to enter into a bank taxation plan.

The Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) has criticized the Canadian Conservative government for rejecting financial regulation, accusing it of being beholden to financial interests. “The Conservative government is opposed in principle to any new form of tax,” said Claude Vaillancourt, co-president of ATTAC-Québec. “The Conservatives are blinded by the non-interventionist principles of neoliberal economics, to which they adhere with ideological fervency.”

In April, the Harper government put on a full court press in opposition to the tax. During the G20 Finance Ministers meeting in Washington, D.C., Canada pushed hard and got what it wanted — the bank tax idea fell to the bottom of the June summit’s economic regulation agenda and was openly opposed by a few of the G20 countries.

Nevertheless, there were renewed European calls on the issue, including German leader Angela Merkel stating she wants the Financial Transaction Tax on the agenda at the Toronto G20 meetings. And there are bank tax campaign organizations (such as At the Table) that worked very hard to get it on the agenda.

Why is Britain so strongly behind the tax?

Prior to the economic crisis, London was a pre-eminent banking centre and over the past 20 years has been steadfastly opposed to most regulation of financial services.

The crisis changed all that.

After the insolvency of several British banks, a $1.38 trillion US bank bailout, and an election looming ahead, then Prime Minister Brown was suddenly talking tough about banks “giving something to society,” telling the media he was “interested in how support is building up for international action.” The election of David Cameron presumably did not change this as he campaigned in support of the bank tax. 

The two types of bank taxes proposed

Britain’s proposals included a tax on bank transactions and a levy-style tax on bank assets.

Option 1: The Financial Transaction Tax (or Tobin Tax)

The transaction tax, often called the ‘Robin Hood tax’ or the ‘Tobin tax’ (after the U.S. economist James Tobin, who first proposed it in 1972), is the more ambitious. It would focus on the trillions of transactions that take place in financial markets every day, including speculative ones such as derivatives [explained clearly here], which were a key part of the financial crash.

Precipitating the crash, these assets, including bundles of sub-prime mortgages, became overvalued due to speculation. When their values fell rapidly in 2008, the collapse began.

The transaction tax would put a very small tax (from 0.05 per cent to 1 per cent) on each of these transactions. Critics of unregulated banking argue that had such a tax been in place a few years ago investment banks would have thought twice about performing these transactions, thus lessening the likelihood of the crash.

“A low transactions tax…has little or no impact upon useful, longer term transactions, but limits ‘noise trading’ and very short term ‘in and out’ speculation,” argues Canadian Labour Congress economist Andrew Jackson. “Progressive economists who have advocated a financial transaction tax… believe that it would reduce speculation and volatility, without interfering with normal and useful activities including stock and currency trading and even hedging for legitimate purposes.”

A 2009 study by the Austrian government showed that a 0.05 per cent tax on U.K. financial trades could raise about £100bn a year, paying for the expansion of social programs, paying down debt, and providing insurance funds against future bailouts.

Grassroots organizations like ATTAC-Québec take a stronger position, suggesting that any new funds from a tax should not go to banks, which might only encourage them to take more risks, potentially leading to new crises.

“The tax should simply be a fee for assisting citizens across the world,” said Vaillancourt. “This tax could, for example, give all citizens basic services-quality health care or free education.”

Despite its current opposition, Canada was one of the first G20 countries to consider adopting the Tobin tax. In 1999 the Liberal government passed a resolution to “enact a Tobin tax in concert with the international community.” However, the Reform Party (later the Conservative Party) opposed the resolution and it did not gain enough international support to be enacted.

Option 2: The bank levy

The other proposal promoted by European countries is a tax or levy on the assets of banks. It would not bring in sums on the scale of a Tobin tax, though some financial analysts believe it would restrain banks and raise some bailout money. As it stands now the levy has gained support from Britain’s key European counterparts, France and Germany, both of whom are strongly promoting it.

From the perspective of the banks this is a more acceptable proposal than the Tobin tax as it would be either a one-off or infrequent fee based on a bank’s worth rather than a tax on its every transaction. From the perspective of advocates of the FTT, this is an inferior choice both because of its nature as a one-time fee and because it is more likely to be used create an insurance fund to bail out the banks after a crash rather than build a tax which could stabilize markets by discouraging risky speculation.

Is Canada really an inspiration for the world’s troubled banks?

A great deal of Canada’s authority on these bank tax issues is based on the perception that the country’s traditional banking sector was able to withstand the financial crisis. The historical record is murkier — there is much more to the story than mainstream media accolades of bank prudence and wise Conservative government policy.

In the late 1990s (and again in the early part of the new millennium) the five Canadian banks aimed to merge into three institutions to obtain the capital base to compete internationally with banks such as Citigroup, UBS, and Royal Bank of Scotland. They hoped to enter the “major leagues” of investment banking and non-traditional speculative banking: the very markets that were at the heart of the crash. The banks were unsuccessful in their quest, as the Canadian government blocked the mergers.

Many critics have argued (here and here, for example) that it was not a prudent fear of systemic risk, or the Liberal government’s foresight that stopped the mergers. Rather, it was news of the banks’ ambitions and public outcry about branch layoffs and closures and increased service charges that forced the Canadian government’s hand, pushing it to block the mergers. Canadian financial elites and the business class harshly criticized the government.

Yet it may have been fortunate for bankers, and the current government, that the Canadian public was not swayed. Otherwise, Canadian banks likely would have needed a U.S. or U.K. style bailout in the 2008 economic crisis.

According to political commentator Murray Dobbin, the current Conservative government actually has offered a great deal of money to banks in the past two years, and he questions whether this was a form of bailout in itself. The Canadian government spent $70 billion to buy up risky mortgages from the big five banks (Dobbin wonders, if Canadian banks are so wonderful, why does the government need to buy these mortgages?), created a $200 billion fund called the Emergency Finance Framework to insure banks when they need it, and currently ensures 100 per cent of all mortgages through the Canadian Mortgage and Housing Corporation — eliminating risk for banks.

The fiscally sound Canadian bank appears to be more fable than fact.

U.S. position

The enormous U.S. bank bailouts have made it difficult for the U.S. government to point to their strong financial sector as a reason to oppose bank taxes. Nevertheless, the U.S., ever averse to taxation of any kind, has also come out strongly against the Tobin tax and has reacted ambiguously to the idea of an international bank levy.

On the other hand, the Obama administration has made public statements over the last few months about a domestic bank levy proposal. This may lead the U.S. to be more open to an international levy in the future, such as at the November G20 meetings in Seoul, given that it would shield them from capital flight if all nations bought in.

Conclusion: Can the bank tax be revived?

Though the bank tax is off the G20 agenda for June, there is still hope. The European powers backing these taxes have been shaken by the crisis and feel pressured by their electorate to do something about the banks. With the addition of pressure from civil society, the tax can be revived if a broad-based movement grows. The taxes are not radical solutions to more fundamental systemic problems, but at least they point in the right direction: towards the banks.

Darren Puscas is the editor of the G20 newsblog. He is currently a researcher on a multi-country project on women and unionization at McMaster University in Hamilton, Ontario. He lives in downtown Toronto, not far from the summit fence.

This is an updated version of a bank tax backgrounder that first appeared in The Dominion in its Special Issue on the G8/G20.

Further information on the bank tax at G20 Breakdown.

Plug-in to the campaign against the tax.