Tobin Tax for Social Development
Jasmin Enayati & Minu Hemmati, UNED-UK
The Tobin Tax proposal deserves particular attention in the context of social development due to its potential twofold function - stabilising world financial markets as well as generating funds for international and domestic development.
Globalisation and the trend towards the deregulation of financial and foreign exchange has exacerbated the inherent volatility of world financial markets. Recent turbulence such as in Southeast Asia in 1997, has rekindled interest in the so-called Tobin Tax on international financial transactions as a way to discourage currency trading and reduce exchange rate volatility. Considering that annual currency trading is 10 times the global GNP, such a tax could potentially generate tremendous revenue, which could be used to support development goals.
The Tobin Tax, also referred to as Currency Transaction Tax, was first put forward by Nobel Laureate Professor James Tobin in 1972. The proposed tax would target currency speculation, once per transaction, suggested percentages range from 0.01% to 0.5%. The original purpose has been to discourage volatile short-term trading and its destabilising effect on country currencies, restoring national macroeconomic controls over currency fluctuations. The suggested tax has also generated considerable interest from stakeholders such as governments and development NGOs because of the potential for generating funds.
The Tobin Tax proposal is one of a number of suggestions on new financial mechanisms for global revenue discussed in fora such as the Commission on Sustainable Development (CSD) and the Financing for Development High-Level event in 2001 (CSD NGO Finance Caucus, Position Paper 1).
Because of the sheer size of foreign exchange markets, revenues from the Tobin Tax could be considerable - conservative estimates show the taxes could yield from $150-300 billion annually. Net turnover in foreign exchange markets is estimated at $1.8 trillion a day, 95% of which is speculated on whether currency values and interest rates will rise or fall. Traders can make money either way and they thrive when markets are highly unstable, as they were in Southeast Asia in 1997.
The greater the frequency of transactions, the higher the effective tax rates. This would reduce short-term transactions while neither inhibiting international trade, long-term capital flows, nor currency price adjustments based on changes in the real economy. The tax is designed to help stabilise exchange rates by reducing the volume of speculation and thus minimising shocks from large currency movements. It should be set deliberately low so as to avoid adverse effects on trade in goods and services or long-term investments. As pointed out by Spahn, "a uniform international tax payable on all spot transactions involving the conversion of one currency into another, in both domestic security markets and foreign exchange markets, the Tobin Tax would, in theory, discourage speculation by making currency trading more costly. The volume of destabilising short-term capital flows would decrease, leading to greater exchange rate stability" (Spahn, 1996). Thus, it is argued, the Tobin tax could actually boost world trade by helping to stabilise exchange rates. Wildly fluctuating rates play havoc with business dependent on foreign exchange as prices and profits move up and down, depending on the relative value of the currencies being used.
Since the tax could generate substantial sums, the idea has attracted the attention of those concerned with financing development. At a national level there are growing fiscal challenges to meet development targets, whilst there is increasing recognition of the need for international cooperation over the critical problems relating to poverty, environment and security (see Spahn). 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.
Spahn argues that "the proposed tax would reduce 'noise' from market trading while allowing traders to react to changes in economic fundamentals and policy, and would therefore be more effective than protective measures such as capital controls." (Spahn, 1996).
The tax would enhance global fiscal stability and market efficiency as it would require international coordination of macroeconomic policies. 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.
3. Critical points and possible solutions
Enforcement: Critics argue enforcement will be difficult and that the tax will not stop attacks on currencies that are significantly overvalued. It is believed that "it will be extremely hard to reach consensus on revenue distribution, as countries that are currency trade centres will want to keep the money for themselves rather than fund development." (Stecher, 1999). According to Stecher, problems of enforcement are real but soluble. At present, most currency trading occurs in only a few centres - 82% of all foreign exchange transactions occur in just eight countries - there is already extensive regulation of financial institutions and this could be extended to tax havens. Introducing the Tobin tax in these and a few other countries might initially provide a workable tax regime. Also, tax authorities are experienced in dealing with the evolution of new, tax-avoiding financial products.
Tax evasion: Tax evasion would remain problematic. If the burden of the tax became too great, it would pay many players to shift the booking of their transactions offshore to financial centres which would not impose the tax. However, most taxes - income, value added, property and inheritance - suffer from evasion, and this has never dissuaded authorities from levying them. Furthermore, evasion will be difficult as most foreign exchange transactions are already, or soon will be, electronically traced through the currency settlements system.
Tax collection: Efficient collection of the tax would require full coverage of the markets and instruments, and full cooperation by all governments unless the tax would be imposed voluntarily by some countries. Some critics argue, however, that provided sufficient major trading nations agree, the costs of evasive action are high enough to make universality unnecessary.
Allocation of revenue: Given the difficulty of determining the regional incidence of proceeds, they could be assigned to a supranational body and used to fund the provision of global public goods. Tobin originally proposed the World Bank and the IMF as candidates for this role. However, at the moment we do not have a supranational tax collecting institution and it is highly unlikely that such a body will be introduced in the near future. Moreover, as long as many international institutions lack democracy, transparency and accountability, assignment of tax revenues would confer (un)considerable power to that organisation, unacceptable to vast majorities everywhere.
Governance of the international monetary and trade system should include internationally agreed imposition of a tax, levied at national level and collected by national central banks to fund the provision of public goods or global causes. Creating the appropriate international institutional mechanisms to oversee monitoring and disseminate timely and detailed information on transfers of private capital should be part of the Earth Summit 2002 process or the GA Financing for Development process. These processes could be used to seek an agreement on the Tobin Tax and the allocation of revenues.
It is also important to keep in mind that nations could agree to differentiated commitments. Not all the money raised within developed nations would necessarily need to flow into Official Development Assistance (ODA) but some of the revenue could also be used for domestic purposes such as the eradication of poverty in the North. Developed countries could commit themselves to allocate a certain percentage to international social and sustainable development whereas developing countries could commit to using a certain percentage for the provision of basic social services.
Political will: The biggest barrier to the Tobin tax, however, is 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 discouraging destabilising speculation in currency trading, as a less bureaucratic and more transparent alternative to capital controls and other regulatory approaches challenges the foundations of the current global economic model and those who control it. However, the political appeal of a mechanism that adversely affect financing for development to cash-strapped governments and world-wide agencies cannot be underestimated.
4. Economic Policy Dilemmas
According to Stecher, there is a trade-off between the two objectives of the tax - the more successful the tax as a deterrent to speculation, the less revenue it generates. For the tax to be approved it may be necessary to compromise on the financing development aspect, for example by allowing revenue-collecting governments to keep some of the money but ensuring contributions to multilateral organisations. Stecher argues that "the tax probably does not justify the limelight as a 'stabiliser' but does merit particular attention if one adds the revenue-generating function (Stecher, 1999).
Spahn has established the main problems limiting the effectiveness of the Tobin tax that lie in four crucial areas: establishing the tax base (targeting noise trading but not normal trading which assures efficiency and stability of financial markets); identifying taxable transactions (problem of avoiding the tax by trading in financial derivatives); setting the tax rate (Tobin's proposal calls for a uniform tax rate, however, it can be argued that the tax should ideally operate with a zero rate when the exchange rate for the currencies is in equilibrium and should increase in accordance with the deviation from equilibrium); and the amount of revenues (depending on a number of factors, including the tax base, the tax rate, and the volume of exempt trading. The tax is likely to provoke a significant behavioural response by market participants that is difficult, if not impossible to assess). Feasible solutions to these specific economic points are being suggested by experts such as Spahn.
Because of the way the Tobin Tax is structured, critics argue the proposed tax would impair the operations of the international financial markets and create liquidity problems without deterring speculation. A two-tier structure, as suggested by Spahn, might address this problem: It would consist of a minimal rate on normal transactions (basic rate) and an exchange surcharge (higher rate) on profits from very short-term transactions deemed to be speculative attacks on currencies. Under this scheme, the surcharge would only come into action when the level of currency trading (i.e. the amount within a given time period) passes a certain threshold or safety margin. Once trading enters or passes this margin, traders would be taxed heavily, thus dissuading trading and dampening excessive currency movements. Once the danger has passed, the rate would fall back to the standard level. Exchange rates would thus be kept within a target range through taxation rather than central bank intervention or the depletion of international reserves (see Spahn, 1996).
5. The way forward
The idea of global taxation and regulation should urgently be pursued. Developing an internationally co-ordinated policy response would be an important step forward, particularly in terms of advances in intergovernmental co-operation, global governance, global and corporate citizenship. Political will is the key to successful adoption. Grassroots support is building to urge decision-makers to look closely at this opportunity.
A Currency Transaction Tax has considerable potential but raises questions, some of which discussed and it needs further assessment. These are some of the questions raised:
These questions could be addressed by studying the feasibility of an international currency transaction tax (as proposed by Canada at the 2nd PrepCom to WSSD+5).
It is essential that guidelines be established and priorities be set for the Tobin Tax to become a feasible proposal. NGOs and other civil society organisations are urging to establish international criteria in order to reverse global environmental devastation and the disaster of poverty, such as earmarking funds, which should be administered co-operatively in an open and democratic fashion.
WSSD+5 should adopt a recommendation to the relevant UN and Intergovernmental bodies and processes, such as Financing for Development process towards 2001, Earth Summit 2002, the IMF and the World Bank, urging them to develop consensus on the issue of tax assignment.
Acknowledgements: This paper has been peer reviewed by individuals from various NGOs. Particular thanks goes to Juergen Maier (German Forum Environment & Development), Steve Tibbett (War on Want), Felix Dodds, Rosalie Gardiner and Jenny Jones (UNED Forum) who have commented on the paper.
Key literature and links:
ATTAC. Newsletter (December 22, 1999). Seattle opens way for Tobin Tax. http://www.globalpolicy.org/socecon/glotax/currtax/tobin.htm
Cassimon (January 1999). Taxing excessive currency speculation to prevent social crisis and finance global challenges. http://www.globalsolidarity.npaid.org/tobintax/cidse.pdf
CSD NGO Finance Caucus. Finance Background Papers. http://www.igc.org/csdngo/finance/fin_back_paper.htm
CSD NGO Finance Caucus. NGO Position Paper 1. New financial mechanism for sustainable development - green taxes for global needs? http://www.igc.org/csdngo/finance/fin_pos_paper1.htm
Coalition for Global Solidarity and Social Development. Coalition for Global Solidarity and Social Development. Currency Transaction Tax - A Canadian Proposal. http://www.globalsolidarity.npaid.org/cantobtax.html
DeFazio, P./ Wellstone, P. Joint Resolution on Taxing Cross-border Currency Transactions to Deter Excessive Speculation. http://www.ceedweb.org/iirp/ushouseres.htm
Ecumenical Coalition for Economic Justice. Currency Transfer Tax. http://www.ecej.org/CTT%20briefing.htm#TITLE
Hayward, H. Costing the Casino. The real impact of Currency Speculation in the 1990s http://www.waronwant.org
House of Lords Hansard. (June 2000). Tobin Tax. Unpublished manuscript
New Internationalist. Issue 320 - January-February 2000. Robin Round. Time for Tobin! http://www.globalpolicy.org/socecon/glotax/currtax/tobtime.htm
New Internationalist. Issue 320 - January-February 2000. Sputnik Kilambi. There is an enormous demand for action and for acting together. http://www.globalpolicy.org/socecon/glotax/currtax/attac1.htm
Overseas Development Institute - Briefing Paper 1/96. New Sources of Finance for Development. http://www.oneworld.org/odi/briefing/odi_briefing196.html
Schmidt, R. (July 1999). A Feasible Foreign Exchange Transaction Tax. http://www.globalsolidarity.npaid.org/tobintax/tobintax.pdf
Spahn, P.-B. (1996). The Tobin Tax and Exchange Rate Stability. Finance and Development, Vol. 33, June, pp 24 -27 http://www.igc.org/csdngo/finance/fin_tobin.htm
Stecher, H./ Bailey, M. (May 1999). Time for a Tobin Tax? Some practical and political arguments. http://www.oxfam.org.uk/policy/papers/tobintax/tobintax.htm
Tobin Tax Initiative. Tobin Tax Initiative List of Principles. http://www.ceedweb.org/iirp/princ.htm
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UNDP. Global Public Goods. 1999. Kaul, I./ Grunberg, I./Stern, M. (eds.). New York: Oxford University Press
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ATTAC, France (Association for a Tobin Tax in Aid of Citizens), 9bis, rue de Valence - 75005 Paris +33.(0)126.96.36.199.54 - Fax : +33.(0)188.8.131.52.26, email@example.com, http://www.attac.org/ang/index.html
(International Cooperation for Development and Solidarity), Rue StÚvin 16,
B-1000, Brussels, Belgium
Tel:+32-2-2307722, Fax:+32-2-2307082, firstname.lastname@example.org, http://www.cidse.org/en/index.html
Coalition for Global Solidarity and Social Development, Tel: (47) 22 03 77 59, Fax: (47) 22 17 70 82, email@example.com, http://www.globalsolidarity.npaid.org/coalition.html
Ecumenical Coalition for Economic Justice, 947 Queen Street East, Suite 208, Toronto, Ontario, CANADA M4M 1J9 Telephone: 416-462-1613, http://www.ecej.org
Global Policy Forum, 777 UN Plaza, Suite 7G, New York, NY 10017, US, Tel: +1 212 5573161, Fax: +1 212 3165, firstname.lastname@example.org, http://www.globalpolicy.org/socecon/glotax/index.htm
Halifax Initiative Canada, 1 rue Nicholas Street, Suite 1200, Ottawa, Ontario, CANADA K1N 7B7, Tel: (613)789-4447, Fax: (613)241-5302, email@example.com, http://www.web.net/~halifax/index.htm
Tobin Tax Initiative,
Center for Environmental Economic Development, CEED/IIRP, PO Box 4167
Arcata, CA 95518-4167, Tel: (707) 822-8347, Fax: (707) 822-4457, firstname.lastname@example.org, http://www.tobintax.org
War on Want, Campaign against World Poverty, UK, Fenner Brockway House, 37-39 Great Guildford Street, London SE1 OES, Tel: 020 7620 1111 Fax: 020 7261 9291, http://www.waronwant.org
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