An amazing thing happened this week. A New Labour politician proposed a new tax – and the sky did not fall in. Maybe that is because Gordon Brown's levy would target those modern-day pantomime villains, the bankers. Maybe it is because the prime minister's suggestion came as such a bolt from the blue that criticism was masked by disbelief. After all, Mr Brown's idea of taxing bankers on their trades has previously been described as having "very substantial drawbacks" and "big problems attached" by none other than the prime minister himself. Never forget that Mr Brown is the former light-touch chancellor, the man who spent years battling Brussels over withholding tax on the City. Make no mistake, this is a bigger U-turn than any ever attempted by a boy-racer.
Nonetheless, it is welcome – and timely, too. From London to Washington, governments left financiers to their own devices for too long. After all, the bankers made pots of money; they paid a huge amount in taxes and they played their part in pumping up a giant asset bubble that the wider share- and property-owning classes could enjoy. Now boom has turned to expensive bust, that contract must be redrawn. According to a new paper from the Bank of England, British, US and eurozone governments alone have spent over $14 trillion to prop up the banking sector – almost a quarter of global GDP. Then there are the sums administrations around the world have spent on countering the recession. This crisis has left governments with two main objectives. The first is obviously to reform finance; the second is to find new sources of revenue. Which is where Mr Brown's idea of a tax on bank transactions comes in. Indeed, it should be said that Germany, Austria and France got here way before the UK, with French foreign minister Bernard Kouchner having launched a task force on international financial dealing last month. Nearly 40 years after the Nobel prize-winning economist James Tobin came up with the idea for such a tax, its time may finally be nigh.
The levy European politicians are calling for is not quite the one Mr Tobin had in mind. The Tobin tax on currency dealings was intended to throw "sand in the wheels of finance" – to slow down the destabilising rush of hot money into and out of countries. That remains an important problem – just ask the South Koreans who saw their currency swing up and down last year as a result of the global market meltdown. But there are more direct ways to restrain finance – such as break up over-large banks, and introduce a system of licensing on new financial innovations so that possibly toxic or useless products are tested, just like new drugs. In this case, what Mr Brown and others are reaching for is primarily a money-raiser. In that respect, it is not that different from the stamp duty Britons already pay when dealing in houses or shares. And it could be very lucrative. One study suggests that a 0.05% tax on all financial-market transactions around the world would rake in well over £400bn. Those sums could be used to pay back money borrowed to bail out banks, and to help poor countries prepare themselves for climate change.
There is just one obstacle: Washington. Barack Obama has made it clear he opposes any such move. The IMF is working on a feasibility study of transaction taxes to be completed by next spring and it is bound to come under heavy lobbying from the Americans. But a transaction tax does not need to be global; it merely needs a critical mass. If Britain were to club together with the eurozone and impose a mere 0.005% charge on dealing in euros or sterling alone, that would probably yield just under £10bn a year. Such a small-change tax would not scare off financiers, and it could prepare the ground for a wider international tax. European leaders should introduce a joint transaction levy now.