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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?
- Reduce the volatility of exchange rates.
A uniform tax on foreign exchange transactions would deter speculation by imposing a small
tax on such activity. This would reduce the volatility of exchange rate fluctuations and
provide exporters, importers and long-term investors a more stable exchange rate in return
for paying the tax.
- Reduce the power that financial markets have over national governments to determine
fiscal and monetary policies.
The tax would give more autonomy to governments to set national fiscal and monetary
policies by making possible greater differences between short-term interest rates in
different currencies. Such a tax would also reinvigorate the capacity of central banks to
alter exchange rate trends by intervening in currency markets. By cutting down on the
overall volume of foreign exchange transactions, central banks would not need as much
financial clout to intervene.
- Raise revenue.
This tax would yield enormous sums in receipts. Assumptions vary about the actual rate of
the tax, the decline in volume of trade, the amount of trade circumventing the tax and
transactions, which would be exempt. However, just for illustrations, assuming a
conservative tax rate of 0.2% and an effective tax base of $75 trillion annually, the tax
would yield $150 billion annually in receipts. Given the declining commitments to
bilateral development assistance around the world, the tax could generate important
resources to support sustainable human development.
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.
Recommendations:
- A tax to curb speculation in foreign currency exchange is an innovative and fair
proposal that will contribute to restoring democratic control over our national economies
and generate substantial revenue to build a sustainable future.
- Governments around the world, the United Nations, the International Monetary Fund and
the World Bank should take the steps necessary to implement a tax to curb currency
speculation as soon as possible.
- The tax should be administered by an accountable democratic structure such as could be
found within the UN system, with the revenue collected used for genuine social
development.
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
