September 27, 2011; Source: Financial Times | We can write about Bill Gates as just about a full-time philanthropist nowadays because that’s where is devoting most of his energy and creativity. Thus, it is worth noting that Gates is proposing to the G20 nations the concept of a financial transactions tax as a way to raise revenue and discourage financial speculation.
A financial transactions tax, also known as the Tobin Tax after economist James Tobin, is a tax of a fraction of a percent on certain financial-market transactions such as the sale of stocks, bonds, options, or futures. The proceeds from a FTT could be used to help the disadvantaged. This isn’t just an errant, off-the-cuff musing of the Microsoft founder, but the result of a study by the Bill & Melinda Gates Foundation commissioned by the G20 nations to examine ways of helping poor nations address an estimated $80-$100 billion funding gap they face in tackling climate change.
The European Commission proposed a financial transactions tax, but the U.K. pitched a fit and threatened to veto the tax unless it could opt out. The British concern was that the tax would hurt business in the City of London (the U.K.’s Wall Street), causing business to leave the City for other jurisdictions outside of the European Union. In the U.S., the notion has attracted scant public discussion, though the Humphrey-Hawkins 21st Century Full Employment and Training Act introduced by John Conyers (D-Michigan) included a Tobin Tax financing structure.
Gates thinks conditions are ripe for a financial transactions tax to work and that it will generate “huge” revenues to devote to solving social problems. Financial Times columnist John Plender notes that there are also some side benefits. Tobin proposed the tax with an eye not only to revenue generation, but also to slow down the markets somewhat. Plender anticipates that the tax would discourage “high-frequency trading” typified by big traders issuing huge “flash orders.” Theoretically this sort of speculation should make markets more efficient, but in practice traders can get ahead of themselves, as with the occasional “flash crashes” that are touched off by high-frequency trading algorithms.
Gates deserves credit as a philanthropist looking at the sources and structure of public-sector revenue generation. Critics will undoubtedly associate him with Fidel Castro and Hugo Chavez, both of whom also support the Tobin Tax, though it would be hard to imagine that one of the richest people ever is actually a closet socialist.
The as-yet unreleased report apparently concludes that “even a small tax of 10 basis points (0.10 percent) on equities and two basis points (0.02 percent) on bonds would raise about $48 billion among the G20 member states, or $9 billion if adopted only by larger European countries,” substantial money that in reality won’t affect stock market trading all that much. The Bill & Melinda Gates Foundation may be the world’s largest philanthropy, but Gates himself is increasingly aware that his annual grantmaking budget of a few billion dollars a year is still microscopic when compared to the world’s macro-problems. Public-sector revenues are needed.
The financial transactions tax looks like a reasonable idea warranting support among G20 nations and here in the U.S., but unfortunately, it appears that within the G20, only France and Germany support the idea.—Rick Cohen