In 1816 the British parliament repealed the temporary income tax that former British prime minister William Pitt the Younger had introduced in 1789 to finance the Napoleonic war. The MPs hated the tax so much that they even agreed all documents connected with it should be collected, cut into pieces and pulped.
When income tax was reintroduced in Britain in 1842 by former British prime minister Robert Peel, everyone considered it a temporary measure to replenish the depleted exchequer. However, despite generations of politicians after Peel promising to abolish it, the tax never went away. It proved impossible to abandon a tax whose time had come.
By the time former British prime ministers Benjamin Disraeli and William Gladstone kept breaking their promises to abolish the income tax — one of the few things they agreed on — the homespun capitalism of the 18th century had already given way to a more organized capitalist system.
With economic development the social division of labor was becoming more and more sophisticated, increasing the importance of collective inputs such as infrastructure and education. A more effective provision of collective goods required a well-financed state, for which an income tax was seen as a new and vital ingredient. As they too developed, countries such as the US and Sweden followed suit. Today income tax is the biggest source of government revenue in most rich countries.
The same destiny may await the financial transactions tax (FTT) — or Robin Hood tax, as it is widely known. Although the French government, which chaired meetings of the G20 finance ministers and the IMF and World Bank member states last weekend, supports a global Robin Hood tax, US opposition means that initial progress is more likely within a smaller “coalition of the willing,” including France, Germany and South Africa. French and German support may ensure that the eurozone is the first international forum that sanctions a transactions tax.
Even a decade ago, when it was doing the rounds under the alias of “Tobin tax” (named after James Tobin, the Nobel laureate economist who first raised the idea), the levy was an absolute taboo in polite society. However, after the great financial crash of 2008, the case for the tax is looking “obvious” to many, as indeed the income tax did in the late 19th century. Its time, too, has come.
This levy on financial transactions, even at the very low level that is currently proposed — 0.05 percent — is expected to slow down the most speculative elements of international capital flows and raise the significant sums needed to provide the newly required global collective goods — especially green technologies and development aid.
Of course, the transactions tax alone will not achieve a great deal in terms of stabilizing our financial system. It needs to be implemented as a part of a comprehensive package.
The first principle of such a package should be that countries that cannot issue “hard currencies” be allowed to use capital controls. The significant change of position by the IMF in this regard following the 2008 crisis is encouraging, but capital controls should be seen as normal policy tools, rather than a measure of last resort.
The second is that ratings agencies must be reformed. Despite their incompetence and even cynicism, revealed in the 2008 debacle, they are still deciding what is a good asset and dictating how governments should conduct their policies — not just fiscal policies but monetary and social welfare policies. They should be regulated more heavily, and a nonprofit public agency set up to provide a credible alternative.
The third, if we are serious about the revenue implications of our financial policy: Tax havens must be reined in, if not abolished. That single act would generate sums on a par with a global financial transactions tax.
And last but not least, overly complex financial instruments should be banned unless they can be shown to bring net benefits in the long run, in a manner similar to drugs approval. Otherwise our ability to manage the system will be outstripped, and there will be another crisis.
What finally emerges from this new round of post-crisis tax invention may differ somewhat from the FTT, but the general principle — taxing international financial flows for the public good — seems as if it’s here to stay. In 30 to 50 years our children and grandchildren may wonder how we ever thought to run the world without such a tax, just as few of us can imagine how our antecedents managed without income tax.
Ha-Joon Chang teaches economics at Cambridge University; Duncan Green is the head of research at Oxfam GB.
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