excerpted from the book
No-Nonsense guide to Globalization
interview with Robin Round
Director of the Tobin Tax
campaign of the Halifax Initiative,
a coalition of Canadian NGOs
What is the Tobin Tax?
In 1978 Nobel Prize-winning economist
James Tobin proposed that a small worldwide tariff (less than
half of one per cent) be levied by all major countries on foreign-exchange
transactions in order to 'throw some sand in the wheels' of speculative
flows. For a currency transaction to be profitable, the change
in value of the currency must be greater than the proposed tax.
Since speculative currency trades occur on much smaller margins,
the Tobin Tax would reduce or eliminate the profits and, logically,
the incentive to speculate. The tax is designed to help stabilize
exchange rates by reducing the volume of speculation. And it is
set deliberately low so as not to have an adverse effect on trade
in goods and services or long-term investments.
How would a Tobin Tax benefit the global
It could boost world trade by helping
to stabilize exchange rates. Wildly fluctuating rates play havoc
with businesses dependent on foreign exchange as prices and profits
move up and down, depending on the relative value of the currencies
being used. When importers and exporters can't be certain from
one day to the next what their money is worth, economic planning
- including job creation - goes out of the window. Reduced exchange-rate
volatility means that businesses would need to spend less money
'hedging' (buying currencies in anticipation of future price changes),
thus freeing up capital for investment in new production.
Tobin's proposed tax would not have stopped
the crisis in Southeast Asia, but it could help prevent future
crises by reducing overall speculative volume and the volatility
that feeds speculative attack.
In what way would the Tobin Tax benefit
It is designed to reduce the power financial
markets have to determine the economic policies of national governments.
Traditionally, a country's central bank buys and sells its own
currency on international markets to keep its value relatively
stable. The bank buys back its currency when a 'glut' caused by
an investor sell-off threatens to reduce the currency's value.
In the past, most central banks had enough cash in reserve to
offset any sell-off or 'attack'.
Not any longer. Speculators now have more
cash than all the world's central banks put together. Official
global reserves are less than half the value of one day of global
foreign-exchange turnover. Many countries are simply unable to
protect their currencies from speculative attack.
By cutting down on the overall volume
of foreign exchange transactions, a Tobin Tax would mean that
central banks would not need as much reserve money to defend their
currency. The tax would allow governments the freedom to act in
the best interests of their own economic development, rather than
being forced to shape fiscal and monetary policies according to
demands of fickle financial markets.
How would the Tobin Tax benefit people?
By making crises less likely, the tax
would help avoid the social devastation that occurs in the wake
of a financial crisis. It could also be a significant source of
global revenue at a time when foreign aid is decreasing and strong
domestic anti-tax sentiments are reducing the ability of governments
to raise revenue. In the face of increasing income disparity and
social inequity, the Tobin Tax represents a rare opportunity to
capture the enormous wealth of an untaxed sector and redirect
it towards the public good.
Conservative estimates show the tax could
yield from $150-300 billion annually. The UN estimates that the
cost of wiping out the worst forms of poverty and environmental
destruction globally would be around $225 billion per year.
Who will be taxed ?
The majority of foreign-exchange dealing
is by 100 of the world's largest banks. The top ten control 52
per cent of the market and are mostly American, German and British.
Citibank tops the list with a 7.75 percent market share and a
1998 volume of foreign exchange transactions which, at $8.5 trillion,
exceeded the GDP of the US. These banks operate in their own interest
and on behalf of large corporate and private investors, insurance
companies, hedge funds, mutual funds and pension funds.
What will be taxed ?
Only specialized financial transactions
known as 'spots', 'swaps', 'futures' and 'forwards' will be taxed.
With the exception of spot transactions, these instruments are
known as 'derivatives' because their value is derived from the
value of an underlying asset which is not bought or sold in the
Tourists exchanging dollars to pay for
their holidays abroad would not be subject to a Tobin Tax. Debate
continues as to whether the tax should apply to any transaction
less than a million dollars.
How does the Tobin Tax work?
The tax would target only speculative
currency transactions. Because it is not easy to determine which
types of transactions are speculative and which are associated
with legitimate trade in goods and services, the tax hinges on
the speed of a transaction. Speed is the primary difference between
speculative and legitimate trade. Productive investment works
on the medium to long term while speculators flip investments
like pancakes, profiting by the daily, hourly and minute-to-minute
fluctuations in interest rates and currency values. Eighty per
cent of all speculative transactions occur within seven days or
less - 40 per cent occur in two days or less.
A Tobin Tax would automatically penalize
short-term exchanges, while barely affecting the incentives for
commodity trading and long-term capital investments.
Won't speculators find ways to evade the
Inevitably. However, this has never dissuaded
governments from collecting taxes, particularly 'sin taxes' designed
to stem unacceptable behavior. The real question is, how do you
A Tobin Tax could be difficult to evade.
Because currency transactions are tracked electronically, in theory
the tax would be easy to collect through the computer systems
that record each trade. While the amount of money is enormous,
the number of centers where trading occurs and the number of traders
is not. Eighty per cent of foreign-exchange trading takes place
in just seven cities. Agreement by London, New York and Tokyo
alone would capture 68 per cent of speculative trading.
Won't speculators still operations to
offshore tax havens?
Agreement between nations could help avoid
the relocation threat, particularly if the tax were charged at
the site where payments are settled or 'netted'. Globally, the
move towards a centralized settlement system means transactions
are being tracked by fewer and fewer institutions. Hiding trades
is becoming increasingly difficult. Transfers to tax havens like
the Cayman Islands could be penalized at double the agreed rate
What is the biggest barrier to the Tobin
It's not technical or administrative.
It's political. The tax is seen as a threat by the financial community
and has met with stiff resistance by a sector with massive political
clout. The very idea of putting people ahead of markets challenges
the foundations of the current global economic model and those
who control it.
Can the opposition be overcome?
In the wake of recent global financial
crises governments everywhere are examining their faith in free
markets. Even the World Bank and the International Monetary Fund
praised Malaysia's use of capital controls to jump-start its battered
economy in 1997-8. This is a fundamental shift in attitude, unimaginable
The political appeal of this tax to cash-strapped
governments and multilateral agencies worldwide can't be underestimated.
At the UN Social Summit +5 in Geneva in June 2000, 160 governments
agreed to conduct a rigorous analysis on new and innovative sources
of funding for social development, including a currency transaction
tax. NGOs from around the world fought hard for this crucial study
and believe it will make a significant contribution to the intergovernmental
debate on a Tobin Tax.
Who supports the Tobin Tax?
The international trade union movement,
the Canadian Parliament, the Finnish Government and a growing
number of academics and elected representatives all support the
tax. The European Parliament, and parliamentarians in the UK and
France have held debates on the Tobin proposal and groups of parliamentarians
are active in Brazil and throughout Europe. Over 400 parliamentarians
from 21 countries have signed a World Parliamentarians Call for
a Tobin Tax and 160 economists from 29 countries signed a similar
appeal launched in June 2000. Citizens' movements for a Tobin
Tax are active around the world. These include: CIDSE in Europe,
the Halifax Initiative in Canada, KEPA in Finland, War on Want
in Britain, ATTAC in France and Brazil, CCEJ in Korea and the
Tobin Tax Initiative in the US. These and other groups have established
the International Tobin Tax Network to share information and coordinate
actions as they work to build public and political support for
This is only one aspect of the fundamental
reform of the global financial system and is not a panacea for
the world's financial ills and development woes. The democratization
of economic decision-making and the equitable redistribution of
wealth must become the central principles upon which governments
act in the new millennium.
The real work has just begun. Citizens
and politicians around the world must not let the powerful forces
who oppose the Tobin Tax stifle, manipulate and ultimately undermine
an essential public debate on controlling global financial markets.
The Tobin Tax deserves a fair hearing.
Only widespread popular support and public pressure can ensure