An Independent Queensland Regional & Rural
THE TOBIN TAX
In 1978 James Tobin, a Nobel Prize winning American economist, proposed a very small tax on foreign exchange transactions to deter short-term currency speculation. Such speculation wreaks havoc on national budgets, economic planning and allocation of resources. Events including the Mexican peso crisis in 1994 and recent currency devaluations in Thailand and Southeast Asia have led to calls by Governments and citizens for measures to curb currency speculation.
An International Tax on Foreign Currency Exchange
What is the Tobin tax?
First proposed by James Tobin in 1978, the concept of a tax on foreign exchange transactions that would be applied uniformly by all major countries. A small amount (less than 0.5%) would be levied on all foreign currency exchange transactions to deter speculation on currency fluctuation.
While the rate would be low enough not to have a significant effect on longer term investment where yield is higher, it would cut into the yields of speculators moving massive amounts of currency around the globe as they seek to profit from minute differentials in currency fluctuations.
Why is support growing for such a tax?
Interest has grown rapidly in such a mechanism, as the place of foreign exchange transactions and financial deregulation has accelerated over the past decade.
Today approximately US$1.5 trillion worth of currency is traded every day in unregulated financial markets. Less than 5% of this activity is related to trade in goods and services. The other 95% is simply speculative activity as traders take advantage of exchange rate fluctuations and international interest rate differentials.
This kind of financial speculation plays havoc with national budgets, economic planning and allocation of resources. Governments and citizen are becoming increasingly frustrated by the whimsical and often irrational activities in global financial markets that have such an influence over national economies and are seeking some means to curb damaging, and unproductive, speculative activity.
What effect would an international currency tax have on the global economy?
This sounds good, but is it politically possible to implement?
There are two key political issues involved with putting such a tax in place.
First, it would be necessary to forge agreement amongst the major countries to implement a uniform tax, and second, there would have to be agreement on the collection and distribution of the tax revenue.
Developing countries have always been much more vulnerable to exchange rate volatility, but there is for the first time a convergence of interest between industrialised and developing countries as they all seek stronger government autonomy and more effective central bank intervention. To date:
Pressure is building on national governments and international institutions to support this measure from coalitions of non-governmental organizations representing labour, church, environment, women, youth, seniors and poverty groups as they seek to restore democratic control of their national economies.
Perhaps more significant is the fact that many governments face large deficits and strong anti-tax populism among the electorate and are looking for new sources of tax revenue that are not politically suicidal.
Such a minimal tax will not hit "Mr and Mrs Average", but rather "Stock Exchange Speculators". The promise of a new source of revenue will likely be the primary motivation for reaching agreements to implement the tax.
Collection and distribution of the tax revenue is a much trickier question. The tax would have to be applied worldwide at the same rate in all markets. There would also have to be agreement on precisely which transactions would be subject to the tax. Compliance would depend on the banking and market institutions.
Tracking the activity would certainly be possible as the financial industry has the sophisticated technology required to do this but enforcement would rest with the major economic powers and the international financial institutions.
There would certainly be some strong resistance from members of the financial sector some of who have already begun to speak out against the proposal.
It is possible that some members of the financial community might support this tax. The pace and the volumes traded in the markets has added a level of risk to doing business, for as much as great profits can result from speculation so can great losses as in the Barings Bank fiasco. Some experienced business people may see the value of the limited risk of more stable markets, suggesting if not the Tobin proposal, other strategies to limit the volatility of the current global money system.
A viable alternatively to the 'Recommendations' would be a Debit or Transaction Tax initiated at the Country of origin of the speculator. This Tax would be fully regulated and controlled by the origin Country by way of its Electronic Banking System.
The Debit Tax Formula is simply an added percentage, one third of one percent - 0.33% - is suggested, to the amount withdrawn from all accounts by Banking and Financial institutions.
This tax, when cleared, is instantly deposited through the Electronic Funds Transfer (EFT) system into the National Treasury of the Country of origin.
How the National Debit Tax Concept Works
Every hour of the day money is withdrawn from savings accounts, cheque accounts, insurance companies, business and investment organisations, and financial institutions of all kinds. Indeed, ALL monetary transactions are withdrawn from some type of bank or financial institution that holds money in trust.
Just one simple and moderate Debit or Transactions Tax of ONE THIRD OF ONE PERCENT - 0.33% - added on all monies withdrawn will provide the National Treasury of the Country of origin with additional annual revenue, which would be counted in US $Billions.
Not only would a Debit or Transactions Tax be a lifeline to the many struggling, cash-strapped countries around the world in the short term, but would also provide them with economic and social stability in the long term.
At a time of International economic chaos (1999), the question to be asked is:
"What sovereign Nation CAN NOT justify an investigation into the advantages of implying a TAX on the International Economy speculators and multinational conglomerates."
Return to: TAX REFORM
Written and Authorised by Selwyn Johnston, Cairns FNQ 4870