Global imbalances require a global fiscal system in place

A turnover tax offers many merits.

First, it is a user-pay tax that is less regressive than other forms of taxation. It is akin to a gambling tax on socially negative activities.

Second, a turnover tax can be counter-cyclical, being increased or decreased depending on the level of speculative fever in the markets. When the risk of a bubble collapse rises, the tax rate can be increased to fund safety nets in the event of a crisis.

It complements capital adequacy tools.

Third, a turnover tax can finance global public goods that currently have no other forms of financing.

Fourth, a turnover tax will reduce profits of financial institutions and hence their capacity to pay excessive bonuses that promote too much risk-taking at the expense of society.

Fifth, the turnover tax collection system will generate data on financial transactions will help regulators monitor excessive speculation, market manipulation and insider trading that currently plagues effective global financial market supervision.

Of course the financial sector would object to any form of new tax.

But those who prosper by public subsidy in the form of deposit guarantee and enjoy higher profits at public risk deserve to pay some tax.

Those who argue for frictionless finance have created a windmill spinning at supersonic speed that fractured the whole financial structure.

A minimal turnover tax will stop infinite financial derivative layering that creates complexity, opacity and potential for systemic risks.

Just how much can governments raise from a turnover tax?

Based on BIS Triennial Survey data in 2007, global annual value of foreign exchange turnover was roughly US$800 trillion.

Add another US$101 trillion stock market trading based on the World Federation of Exchanges statistics would give total annual financial trading, excluding bonds and other over-the-counter transactions, of roughly US$900 trillion. Using a turnover tax of 0.005% would yield US$45 billion, roughly the aid pledged to Africa of US$50 billion annually.

Global public goods are currently funded by equity (voting quota for Bretton Wood institutions) or by direct national grants.

These are not sustainable. We need a global tax to fund global public goods.

But for a turnover tax to work, it is vital that G-20 agrees for all countries to impose a single, uniform rate of say, 0.005% to avoid a race to the bottom from the onset. This would put into place the module of fiscal standardization and tax mechanism that improves conditions for future coordination in monetary policy and financial regulation. The tax can be collected at the national level based on buyer-pay. The tax collected could be credited to a global fund, with a formula that would allow national governments to use part of the proceeds to resolve domestic crisis problems.

A global turnover tax can fund non-controversial global public goods, such as Education for All initiatives, before moving to tackle other more controversial areas, such as funding to tackle climate change.

Global problems are global tragedy of the commons. We cannot build a global fiscal system to tackle global problems overnight, but we must begin the debate.

Andrew Sheng is author of “From Asian to Global Financial Crisis”, published by Cambridge University Press and Adjunct Professor at University of Tsinghua, Beijing and University of Malaya, Kuala Lumpur.

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