How would a Tobin tax affect your business?

A tax on financial transactions has been proposed as one means of reducing the deficit and controlling the City. But what would it mean for your business?

David Cameron’s veto of a new European treaty in the face of sweeping financial reforms has been explained as an attempt to protect the UK’s financial sector, which accounts for approximately 10 per cent of GDP.

The sticking point appears to have been the creation of a Tobin tax (also known as a Robin Hood tax) on financial transactions taking place across Europe.

Precise details of the proposed tax have not been released, but would essentially see every financial transaction taking place within Europe attracting a small charge (less than 0.05 per cent). The tax is intended not only to provide new revenue for the government, but also to deter speculators from adversely affecting stock markets.

Tobin tax would affect a wide spread of people

Although the altruistic aims of a financial transaction tax (first proposed by James Tobin in 1974) are popular with voters, few realise that big banks will not be the only payers of any such levy. Obviously, investment-related transactions will be taxable, but so too will those involved in pension funds, affecting a much wider spread of people than initially thought.

As with any legislative change, pessimists warn that the application of the Tobin Tax would result in immediate job losses, most likely from financial institutions that move outside the Eurozone. Chancellor of the Exchequer George Osborne expects that the UK, if it were to become party to this new levy, would lose a major part of its tax take as businesses moved offshore.

Perhaps the largest problem is that, without a truly global implementation of a financial transaction tax, many institutions will simply move their operational bases to more welcoming countries. George Osborne warns that if the European Union goes ahead with the tax, companies will relocate to the USA, where there is no equivalent tariff.

Increased costs may lead to job losses

So, for non-financial businesses, the Tobin Tax raises a number of questions as to whether or not they conduct financial transactions themselves. Financial trading will naturally become more expensive as banks seek to recoup the cost of the transaction tax from their customers. Increased costs of any kind are never welcome to a business, and will ultimately lead to some other form of efficiency, possibly in the form of job losses.

Organisations trading with customers outside the EU may also fall foul of a transaction tax. As with the banks, businesses will need to increase their prices (or accept reduced profit margins) when exporting outside Europe. If the prices are raised, customers could choose to source products from competitors outside the new tax zone.

Smaller businesses could be the biggest losers

The idea of the Tobin Tax is attractive to many as it seeks to claw back revenue from larger financial institutions, but the lack of global application means that those targeted are also the most able to avoid the levy. As a result, smaller businesses will be left picking up the tab, eventually succumbing to foreign competitors that can trade without attracting the tariff.

Whatever people think of David Cameron and his actions in the EU, one thing is certain: without a worldwide agreement on financial transaction taxes, Britain could well be worse off.

By:

Terry Irwin, founder and CEO of TCii Strategic and Management Consultants.

Terry has consulted for a wide range of businesses, from multinationals to start-ups and growing organisations. He has a “hands on” approach and stays involved with client projects through to the achievement of agreed results.