The document discusses the potential of financial transaction taxes (FTT) and currency transaction taxes (CTT) to generate substantial funds for development financing. Estimates suggest a tiny CTT of 0.5 basis points could generate $40 billion annually, while a broader FTT could raise up to $75 billion. However, higher taxes may reduce trading volumes and thus revenues. International agreements would be needed to dedicate revenues to development goals. FTTs could help curb disruptive high-frequency trading while taxing an undertaxed sector, providing a "double dividend."

1. UN-DESA Policy Brief No. 38
depth and breadth of the taxes. Estimates of the potential
The potential of financial revenue from a CTT have been as high as $400 billion
transaction taxes for per year, with estimates of broad based FTT as high as
$1 trillion per year an amount that is a multiple of
—
development financing existing official development assistance (ODA). However,
these large estimates generally do not sufficiently account
D ifficulties in raising sufficient resources to finance
internationally agreed development goals and global
objectives, such as combating climate change, have led the
for the potential adverse impact of the tax on the volume
of trading, as higher costs associated with the tax will
likely lead to fewer transactions. In general, banks that
quest for new and innovative sources of development finance. make markets in financial products earn profits from
As described in the United Nations World Economic and large volumes of financial market trades, with low profit
Social Survey 2012: In Search of New Development margins on each trade. Because of this, even a relatively
Finance, existing innovative financing initiatives have thus small tax can have a significant impact on trading margins
far raised limited resources and have been mainly confined and thus on the number of transactions. For example, it is
to the health sector. However, the Survey highlights the estimated that increasing a CTT from one half of a “basis
potential of proposals such as taxes on the financial sector, point” (0.005 per cent) to one basis point (0.01 per cent)
which could raise substantial additional resources for would lower volume to the extent that total revenues from
international assistance. These include taxes levied on a range the tax would stay constant or even fall with the higher
tax.
of financial activities, including currency transactions.
According to the Survey, realistic estimates of a tiny
As proposed, a financial transaction tax (FTT)
CTT put the revenue yield of a tax of one half of a basis
or a currency transaction tax (CTT) would be part of an
point on all trading in four major currencies (the dollar,
international agreement by which Governments pledge to
euro, yen and sterling) at $40 billion per year. A tax on
jointly implement such a tax and earmark (all or part of )
a wider range of financial transactions, such as equity
the proceeds for international development cooperation.
trades, bonds and derivatives, could raise more resources.
It is estimated that the proposed European FTT will raise
Growing support for an FTT… but will the
approximately $75 billion annually. The participation of
revenues be as large as estimated?
Figure 1. Potential revenue of a limited financial and currency transactions
While there has been a plethora of proposals for taxing taxes relative to ODA disbursements and commitments
financial activity dating back to the 1930s, support (billions of United States dollars per annum)
for these mechanisms has increased in recent years. In
November of 2011, France, then the Chair of the Group 180
of Twenty (G20), put the FTT on the agenda of the G20 160
Leaders Summit in Cannes, and in May of 2012, the 140
European Parliament voted in favour of such a tax. The 120 CTT
growing support of governments for an FTT has, in part, 100 40
167
been a response to intensifying international advocacy 80 133
efforts by civil society organizations in search of additional 60 FTT
development financing. Advocates across development 40
75
sectors from climate financing to education and
— 20
agriculture – have understandably sought to tap these new 0
mechanisms to meet their individual priorities. Financial Transaction Existing Official ODA Delivery Gap*
Taxes Development
Nonetheless, there is no clear estimate of how Assistance (ODA)
much revenue an FTT would raise, or how much of the
revenues would be set aside for development cooperation. Source: United Nations MDG Gap Task Force Report 2012 and United Nations World Economic
and Social Survey 2012.
Estimates of the potential vary widely, in part because * The ODA delivery gap is the difference between existing ODA and agreed upon UN targets
expected revenues depend on assumptions made on the (at 0.7 per cent of donor country national income).
July 2012 United Nations D epar tment of Economic and S ocial Affairs 1

2. the United States and other countries would obviously shared financial safety net. Although, in theory, individual
increase the revenue potential, but, to date, the United countries might allocate a portion of their taxes for
States has not been supportive of any form of FTT. international development, experience has shown that
Nonetheless, even when limited to Europe, as shown in countries are unlikely to do so to a significant degree
the figure, an FTT and CTT have the potential to make without a separate international political agreement.
a significant contribution to global financing needs, with
estimated annual revenues nearly as large as existing The way forward
annual flows of traditional ODA, even though — with the There is a clear need for additional resources to address
indicated scope — it would be insufficient to make up for global needs. At the same time, the financial sector is se-
the delivery gap between existing ODA and the agreed verely undertaxed compared to other economic sectors. In
upon United Nations target (of 0.7 per cent of donor addition, to the extent that the financial sector has ben-
country national income). An FTT and CTT should efited significantly from globalization, there is a view that
therefore be viewed as additional to exisiting ODA, and revenues from taxing finance should be used to address
not as substitutes for it. global concerns. In particular, a CTT, which taxes inter-
national transactions, is by its nature a tax on financial
Double dividend taxation market internationalization. In addition to countries ap-
There are several benefits of an FTT, which make it a propriating a portion of taxes on domestic financial mar-
particularly attractive complement to other forms of ket transactions to international development, the inter-
international financing. First, while a tiny tax would national community should look to the implementation
have minimal impact on transactions by non-financial of a CTT to be allocated exclusively towards development
customers, it would likely reduce the profitability and thus and global needs, such as combating climate change.
the volume of computer-operated high-frequency trades, This makes sense from an international public finance
such as proved so disruptive to the functioning of the perspective: a small tax on currency transactions, which are
United States equity market in the “flash crash” of 2010. largely undertaken by the wealthy, would serve the global
There is already concern that such high-frequency trading public good of more stable currency markets and that
threatens to exacerbate volatility in major foreign-exchange of more equitable and sustainable global development.
markets. Second, the tax would fall on a sector that is not International forms of taxation are more than fitting in
yet heavily taxed. Indeed, financial transactions are exempt an increasingly globalized world.
from the value-added tax (VAT) of the European Union. In sum, financial and currency transaction taxes are
In addition, the FTT is a progressive tax inasmuch as poor technically feasible and economically sensible. They could
people engage in relatively few transactions with financial readily provide the means of meeting global development
institutions and the rich engage in many. financing needs. International agreement is urgently
A concern voiced regarding imposition of an FTT needed to enable implementation of these taxes, which
is that it might reduce economic growth. This concern should play an important role in financing sustainable
was, for example, raised in discussions on the proposed development goals as part of the post-2015 development
European financial transaction tax. However, recently agenda. n
revised estimates of the growth impact by the European
Commission suggest that, if anything, such impact would
be extremely small. Some independent studies have even
argued that the proposed FTT could stimulate economic
Prepared by
activity because there would be less financial market
volatility. Christina Bodouroglou, Shari Spiegel and Rob Vos
For further information please contact:
International agreements are necessary Rob Vos, Director, Development Policy and Analysis Division
While the potential is clear, it is not obvious that the Department of Economic and Social Affairs, Rm. DC2-2020
revenues from financial and currency transaction taxes United Nations, New York, NY 10017, U.S.A.
Tel: +1 212 963-4838 • Fax: +1 212 963-1061
would become available for development cooperation. e-mail: vos@un.org
European Governments, for instance, who have agreed to http://www.un.org/en/development/desa/policy/index.shtml
the idea of introducing a concerted financial transaction
tax, have not agreed on using the proceeds for development.
Rather, they seem to be set to use the tax to finance a Follow us on Facebook, LinkedIn and Twitter
2 United Nations D epar tment of Economic and S ocial Affairs July 2012