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Tobin tax

Tobin tax

A Tobin tax is the suggested tax on all trade of currency across borders. Named after the economist James Tobin, the tax is intended to put a penalty on short-term speculation in currencies. The original tax rate he proposed was 1%, which was subsequently lowered to between 0.1% and 0.25%.

On August 15, 1971, Richard Nixon announced that the US dollar would no longer convert to gold, effectively ending the Bretton Woods system. Tobin suggested a new system for international currency stability, and proposed that such a system include an international charge on foreign-exchange transactions.

The idea lay dormant for more than 20 years and was revived by the advent of the South East Asia economic crisis in the late 1990s. In 1997 Ignacio Ramonet, editor of Le Monde Diplomatique, renewed the debate around the Tobin tax with an editorial titled "Disarming the markets". Ramonet proposed to create an association for the introduction of this tax, which was named ATTAC (Association for the Taxation of financial Transactions for the Aid of Citizens). The tax then became an issue of the antiglobalization or alter-globalization movement and a matter of discussion not only behind academic institutions but even in the streets and in parliaments around the world, such as the UK and France.

Tobin Tax projects around the world

It was originally assumed that the Tobin tax would require multilateral implementation, since one country acting alone would find it very difficult to implement this tax. Many people have therefore argued that it would be best implemented by an international institution. It has been proposed that having the United Nations manage a Tobin tax would solve this problem and would give the U.N. a large source of funding independent from donations by participating states. However, there have also been initiatives of national dimension about the tax.

In Europe the Tobin tax idea was the subject of much discussion in the summer of 2001. On June 15, 2004, the Commission of Finance and Budget in the Belgian Federal Parliament approved a bill implementing the Spahn tax (a version of the Tobin tax proposed by Paul-Bernd Spahn). According to the legislation, Belgium will introduce the Tobin tax once all countries of the eurozone introduce a similar law. In July 2005 former Austrian chancellor Wolfgang Schüssel called for a European Union tobin tax to base the communities' financial structure on more stable and independent grounds. However, the proposal was rejected by the European Commission.

In Canada, it was revived largely through the efforts of Canadian activists in the 1990s, and in March 1999 the Canadian House of Commons passed a resolution directing the government to "enact a tax on financial transactions in concert with the international community."

In the UK, the proposed Tobin tax was initially spearheaded by development charity War on Want who campaigned for its introduction from 1998 and who set up the Tobin Tax Network in 2002. At that time, global trade on the foreign exchange markets was running at $1,500bn every day. . From the development lobby's point of view, the Tobin tax had the advantage of combining regulation of the international financial system with a means of raising money for development to counteract the falling aid budgets of most rich countries.

Whilst finding some support in countries such as France and Latin America, the Tobin tax proposal came under much criticism from economists and governments, especially those with a large international banking sector, who said it would be impossible to implement and would destabilise foreign exchange markets.

In 2005 the Tobin tax was developed into a modern proposal by the UK NGO Stamp Out Poverty. It simplified the two-tier tax in favour of a mechanism designed solely as a means for raising development revenue. The currency market by this time had grown to $2,000 billion a day. The possibility of a currency transaction tax for the UK was investigated by City of London firm Intelligence Capital, who found that a tax on sterling wherever it was traded in the world, as opposed to a tax on all currencies traded in the UK, was indeed feasible and could be unilaterally implemented by the UK government.

The Sterling Stamp Duty, as it became known would be set at a rate 200 times lower than Tobin had envisaged, so that it would not adversely affect currency markets and could still raise huge sums of money. The global currency market has since grown again to $3,200 billion a day in 2007, or £400,000 billion per annum with the trade in sterling, the fourth most traded currency in the world, worth £34,000 billion a year. A sterling stamp duty set at 0.005% would therefore raise in the region of £2 billion a year. The All Party Parliamentary Group for Debt, Aid and Trade published a report in November 2007 into financing for development in which it recommended that the UK government undertake rigorous research into the implementation of a 0.005% stamp duty on all sterling foreign exchange transactions, to provide additional revenue to help bridge the funding gap required to pay for the Millennium Development Goals.

In Latin America, the Tobin tax has been supported by the president of Brazil, Luiz Inácio Lula da Silva, and the president of Venezuela, Hugo Chávez; President Chávez announcing his own interest in a Tobin tax in January 2003. Recently, a regional Tobin tax was adopted by the Bank of the South, after an initiative of Presidents Chavez and Néstor Kirchner from Argentina.

Original idea and antiglobalization movement

In an interview given to Der Spiegel on 2001, James Tobin distanced himself from the antiglobalization movement and continued to state the validity of his proposal, although some opponents of the Tax claimed the contrary.

"I have absolutely nothing in common with those anti-globalisation rebels. Of course I am pleased; but the loudest applause is coming from the wrong side. Look, I am an economist and, like most economists, I support free trade. Furthermore, I am in favour of the International Monetary Fund, the World Bank, the World Trade Organisation. They’ve hijacked my name ... The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied - let's say, 0.1% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, South East Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets." (See or. )

Tobin observed that, while his original proposal had only the goal of put a brake on the foreign exchange trafficking, the antiglobalization movement had stressed the income from the taxes with which they want to finance their projects to improve the world. He declared himself not contrary to this use of the tax's income, but stressed that it was not the important aspect of the tax.

ATTAC and other organizations have recognized that, while they still consider Tobin's original aim as paramount, they think the tax could produce funds for development needs in the South, and allow governments, and therefore citizens, to reclaim part of the democratic space conceded to the financial markets.

Debate on the tax and critics

Opinions are divided between anti-globalizationists who applaud that the Tobin tax could protect countries from spillovers of financial crises, and pro-globalizationists who stress that the tax would also constrain globalization and dry up world liquidity.

Unexpected, though qualified, support for the Tobin tax has come from the multi-billionaire speculator George Soros, who stated that, while the tax goes against his personal interests, he thinks that its introduction could have positive effects on the world economy. However, he advocates a variation to the Tobin tax: Special Drawing Rights or SDRs that the rich countries would pledge for the purpose of providing international assistance.

The "City Notebook" column in the British broadsheet The Guardian, August 30, 2001, put the case against such a tax in straightforward terms. It said that currency speculators are "an exceptionally useful lot, working day-in, day-out, risking their own wealth to supply a thing called liquidity. Without liquidity, markets dry up, prices become volatile and goods become difficult to shift." If a Tobin tax were in place, the editorial continued, that useful work would not be as well accomplished. "The net result is that everyone involved — producer, trader, buyer — becomes poorer, not richer", wrote The Guardian.

See also

References

Further reading

  • Kaiser, Johannes, Thorsten Chmura, and Thomas Pitz (2006): The Tobin Tax - A Game-Theoretical and an Experimental Approach
  • Harald Hau (2006), The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse, Journal of European Economic Association (June 2006).
  • Heikki Patomäki (2003), Democratising Globalisation: The Leverage of the Tobin Tax, Zed Books

External links

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