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Canada Confronts Europe on Bank Levies

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Issue: 68 Section: Business Geography: Europe Topics: G20, tax

June 24, 2010

Canada Confronts Europe on Bank Levies

Flaherty leads the charge against Robin Hood Tax

by Darren Puscas

Photo: Heidi Haering

TORONTO—A confrontation is brewing at the upcoming G20 summit in Toronto, pitting Canada against European countries who are promoting a global “Robin Hood” bank tax that could raise hundreds of billions of dollars for social programs, food security or debt-payment.

A number of European nations, led by Britain, are calling for the adoption of taxes that would discourage speculative trading. Canada, however, is opposed to the taxes, and the US, while still uncommitted, is leaning towards Canada’s position. Opposition from one country would undermine the consensus required for the adoption of the multinational bank tax.

In early February, 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 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-Quebec. “The Conservatives are blinded by the non-interventionist principles of neo-liberal economics, to which they adhere with ideological fervency.”

Britain has been at the forefront of the push for various tax and levy schemes to curtail bank risk. Prior to the economic crisis, London was a preeminent 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 and a $1.38 trillion bank bailout, and with an election looming, Prime Minister Brown is suddenly talking tough about banks “giving back to society,” telling the media he is “interested in how support is building up for international action.”

Britain’s proposals include a tax on bank transactions and a levy-style tax on assets. The transaction tax, often called the "Robin Hood tax" or the "Tobin tax" (after the US 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 such as derivatives, 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 one 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,” said 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 UK financial trades could raise about £100 billion per year, paying for the expansion of social programs, paying down debt and providing insurance funds against future bailouts.

Grassroots organizations like ATTAC-Quebec 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.

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.

A great deal of Canada’s authority on these bank tax issues within the G20 is based on the perception that the country’s traditional banking sector was able to withstand the financial crisis. The historical record is murkier. While it is true that Canada did not have to bail out its banks 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.

Critics argue these merger attempts were not prevented because of a prudent fear of systemic risk, or the Liberal government’s foresight. News of the banks’ ambitions and public outcry about layoffs, branch closures and increased service charges forced the Canadian government to block the mergers. Canadian financial elites and the business class harshly criticized the government. Yet it may have been fortunate for them, and the current government, that the Canadian public was not swayed. Otherwise, Canadian banks might have been bailed out as well in 2008.

The International Monetary Fund has also weighed in, with Managing Director Dominic Strauss-Kahn saying countries opposing bank levies only because they escaped the current crisis unscathed are being “shortsighted.”

The US position leading up to the June G20 meetings is likely to be a major determinant of the success or failure of the G20 bank tax talks. The US bank bailouts have made it difficult for the US government, unlike Canada, to point to their strong financial sector as a reason to oppose bank taxes. Nevertheless, the US 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 an internal bank levy proposal. This may lead the US to be more open to an international levy given that it would shield them from capital flight if all nations bought in.

Because consensus is required for G20 policy decisions the growing Atlantic divide leaves any tax or levy plans up in the air. Meanwhile, the positions of the other 15 G20 countries are still being developed and do not seem to be getting much attention from the major players.

Though tax-watching might seem like a dull sport it is worth observing the developments this month. The European powers backing these taxes have been shaken by the crisis and pressured by their electorate. Regardless of motivations the taxes could have real-world effects that should not be minimized. The taxes are not radical but at least they point in the right direction: towards the banks.

Darren Puscas is a researcher on a project on women and unionization at McMaster University, and is the editor of the blog www.g20breakdown.com.

This story was published in The Dominion's special issue on the G8 and G20 summits in Ontario. We will continue to publish independent, investigative news about the G8 and G20 throughout the month of June.

For up-to-the-minute G8/G20 news from the streets of Toronto, visit the Toronto Media Co-op.

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Financial regulations

Thanks for the interesting article.

The corporate media ceaselessly quoted Conservative officials saying that the reason Canadian banks didn't need bailouts was Canada's strict regulation of the financial sector. I'd love to hear your assessment and response, either here in the comments section or in a future article.

A tax is not financial regulation

This transaction tax would not have prevented the financial crisis as it did not prevent the crisis in the countries that have this tax. The IMF's past and recent studies show that this tax will not and cannot work. Studies show the tax revenue will be net negative. This tax is being used in place of real financial reform so they can continue getting away with future crisis.

please give us links, i'm

please give us links, i'm very curious how the transaction tax can be net negative. if it's something they can't get around, and was taxed at 0% before, it seems to be it must be net positive.

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