Tobin Tax

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 economy?

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 national governments?

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 transaction.

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 tax?

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 minimize evasion?

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 or more.

What is the biggest barrier to the Tobin Tax?

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 until recently.

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 the tax.

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 it.

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