What is a financial transaction tax?

A financial transaction tax is a small tax charged each time a financial asset is bought or sold. Examples include shares, bonds and derivatives. The UK already has one on shares: 0.5% stamp duty on most share purchases. Proposals to extend it to other trades are sometimes called a Robin Hood tax.

Stamp duty on shares dates back to the 17th century. Today, buyers of shares in UK companies pay 0.5% through stamp duty or stamp duty reserve tax. It raises several billion pounds a year. Some trades, such as those by market makers, and shares on growth markets like AIM, are exempt. It is one of the oldest taxes still in use in the UK.

Campaigners have proposed extending the tax to bonds, derivatives and currency trades. The idea goes back to the economist James Tobin in the 1970s, who suggested taxing currency trades to calm speculation. Eleven EU countries tried to agree a wider financial transaction tax from 2011, but the plan has stalled. Sweden tried a similar tax in the 1980s, but trading moved abroad.

Supporters argue such a tax could raise large sums from the finance sector and discourage short-term speculation. Critics warn that trading can easily move to other financial centres, reducing revenue and damaging London's markets. Some argue the existing share stamp duty already discourages investment in UK firms and should be cut. Others say the City is resilient and the tax is hardly noticed by ordinary savers.

Who it affects: Traders in bonds, derivatives and currencies