Could Financial Transaction Taxes Underway in Europe Help Education in Developing Countries?

On January 23, the European Union’s finance ministers unanimously endorsed Financial Transaction Taxes (FTT) by giving a green light to 11 eurozone countries to impose a coordinated tax on financial transactions – an act filled with potential not just for national budgets, but overseas development assistance as well.  Such taxes may or may not eventually cross the ocean to U.S. markets, but as the group of nations that include the eurozone’s four biggest economies (Germany, France, Italy and Spain) begin to negotiate the tax’s rate and design, policymakers should consider the possibility of using even a small percentage of the revenues gained to provide a new source of development finance–money that can change the world.

The animating force behind the idea is to skim “excess” revenue from the financial sector to repair national budgets severely strained in the aftermath of the global financial crisis, thus holding financial institutions accountable for their role in causing the recession. An additional benefit cited by the tax’s supporters is it would place some constraints on the increasing volume of high-frequency trading that has at times threatened the stability of financial markets.

The nation at the forefront of the FTT movement is France, which passed a 0.2 percent tax on financial transactions in 2012. At the U.N. General Assembly in September of that year, French President Francois Hollande declared that France would also commit at least 10 percent of the tax’s revenues to development, citing Unitaid as inspiration and saying: “Let’s introduce this tax across the world and ensure that revenues go towards development.”

The 11 states planning to adopt an FTT should take their cue from France and allocate some revenues for development aid; but crucially, they should avoid the French error of not prioritizing global education within that assistance. Improving educational attainment in developing countries in particular is a powerful cornerstone of sustainable global growth that the G-20 has been focused on promoting.

Writing in Foreign Affairs in Nov/Dec 2010, U.S. Secretary of Education Arne Duncan put it succinctly: “Education has immeasurable power to promote growth and stability around the world. Educating girls and integrating them into the labor force is especially critical to breaking the cycle of poverty. It is hard to imagine a better world without a global commitment to providing better education for women and youth – including the 72 million children today who do not attend primary school.” Duncan emphasized that rich countries benefit from poor countries’ improved educational levels since better-educated populations overseas means greater markets abroad for U.S. and European goods. More important are the global trends he identified, including that “the widening gap between the economic fates of workers with college degrees and the fates of those without underscores that knowledge today is an international public good.” Demography has already made evident that the majority of global talent in the future will come from the developing world –India alone is estimated to provide 25 percent of global talent by 2030. The children born today who will enter developing country educational systems will constitute the mobile global labor force that companies everywhere will compete to hire. 

EU tax commissioner Algirdas Semeta called the EU’s concerted decision “a major milestone for EU tax policy” and indicated that it would be levied on both sides of any stock or bond trade involving a buyer or seller based in the vanguard transaction tax bloc.  The tax, often called a Tobin Tax for the economist who originally devised it some 40 years ago, would likely be charged at a rate of 0.1 percent of the value of any trade in shares or bonds, and 0.01 percent of any financial derivative product. Negotiations on its exact specifics may stretch over months or even years, but some countries are pushing for the tax to be in place as soon as next year. Countries supporting the financial transactions tax at present are Austria, Belgium, Germany, Estonia, Greece, Spain, France, Italy, Portugal, Slovenia and Slovakia, while the agreement enables the possibility for other EU states to opt in later. Former Labor Secretary Robert Reich tweeted, “Most of Europe will now tax financial transactions, generating billions for hard-pressed budgets. U.S. should do the same.”  Previous numbers for back-of-the-napkin revenue estimates for a European FTT across the full 27-nation bloc were in the neighborhood of €57 billion a year, and the 11 nations pushing ahead with the idea represent roughly two-thirds of the EU’s economy.

If part of the impetus behind the creation of mechanisms like the FTT is to foster sustainable, stable growth, then there is clear logic and symmetry in dedicating some of the FTT revenue to global education.  For countries that are cutting their bilateral aid to education, such as the Netherlands, moving to pledge a portion of this extra public revenue to education should be a natural step. Moreover, these revenues can enable the EU to contribute to the targets of the Education First initiative, the U.N. campaign designed to massively increase political and financial support for education.  With the support of the current French presidency of the G-20, the introduction of a financial transaction tax at global level could be on the table at the next G-20 summit in Cannes in November 2013.

The promise of a progressive tax on an activity engaged in only by the affluent, which also taxes it so lightly as almost to escape notice, has the potential to raise hundreds of millions for a sector that, alongside health, underpins the development trajectory of all nations –yet lags severely in dedicated, long-term financing. Creating new funds for development should be part of the rationale for instituting a European FTT, and education is the key ingredient for success.  Civil society groups within the 11 European states and their governments must work to keep education on the table. In an ever more interconnected world, they must not repeat the mistake of France and omit funding for education. Education is fundamental for development.  Arne Duncan, again: “Education, in short, is the new game changer driving economic growth.”