Ideas Bank - Global Currency Transaction Tax

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Idea title

Global Currency Transaction Tax - Tobin Tax

Theme(s)

International Finance

Proposal summary

A levy of 0.1-0.5% on international currency transactions would: i) deter short-term speculation, thus stabilizing exchange rates and ii) generate a new source of revenue that could be redistributed as finance for development.

Implementing institutions

Governments; International Financial Institutions; Parliaments; UN Organizations

Origin

James Tobin, 1978

Further info. sources - text

James Tobin, 1978, "A Proposal for International Monetary Reform," in Eastern Economic Journal, Vol.4 (July, Oct) pp.153-159
Paul B Spahn, 1996, "The Tobin Tax and Exchange Rate Stability," in Finance and Development, June 1996.
Rodney Shmidt, 1995, "Feasibility of the Tobin Tax" Canadian Department of Figornance

Further info. sources - URLs

- ATTAC web site;
- Ceedweb page on the Tobin Tax, includes a bibliography on the Tax;
- Oxfam policy paper on the Tobin Tax;
- War on Want website

Policy Brief

Problem statement

On any day an estimated US$1.5 trillion changes hands in foreign exchange markets. In less than a week foreign exchange transactions exceed the annual value of world trade. The majority (95%) of these transactions are short-term: over 40% of currency market transactions are concluded within 3 days and 80% within 7 days. A sudden reversal of capital flows can trigger the collapse of a currency and rebound negatively on financial markets, causing a financial crisis. The economic and social impact of a financial crisis can be devastating.

Analysis

Tobin's original proposal (1978) was for a worldwide tax on all foreign exchange transactions that would reduce exchange rate volatility and improve macroeconomic performance. The objective was to slow down short-term speculative transactions without affecting goods or service exchanges or longer term investments. The proposal was for a low levy on gross transactions: currency tax would be paid twice, once when buying foreign exchange and again when selling. Double taxation at a fixed rate would automatically discriminate against short-term capital flows - even a modest 0.1% tax would require huge interest differentials to justify one-day bets on exchange rates. Tobin¿s formulation aimed to preserve and promote the autonomy of States and Central Banks over their national macroeconomic and monetary policies. The GCTT would require the international coordination of macroeconomic policies and would thus also enhance global fiscal stability and market efficiency. From a liberal economic point of view, it is an attempt to make markets function more efficiently through some form of regulation.

A second objective (not key for Tobin) was to create a significant source of global revenue, possibly to be used for financing development. This became the primary objective espoused by NGOs and international organizations advocating the "Tobin Tax". This view advocates that wealth generated by currency speculators should be used to reduce poverty. Given the difficulty of determining the regional incidence of proceeds, these could be assigned to a supranational body and used to fund the provision of global public goods. Tobin originally proposed that the World Bank and the IMF play this role. The Zedillo Report (submitted to the UN Conference on Financing for Development, in Monterrey, 2002) recommended the establishment of an International Tax Office. Some argue that the revenue created could enable the UN to achieve the Millennium Development Goals.

Significance of Policy Proposal

Deterring short-term speculation through a Global Currency Transaction Tax (GCTT) would reduce the likelihood of a financial crisis and its devastating social impacts. In addition, a GCTT would generate a new source of revenue estimated (depending on the formula) at US$ 150-300 billion annually. This could be used to finance development.

Critique

A GCTT is hard to implement given the scope of worldwide transactions in the foreign exchange market. International cooperation would be necessary to implement a GCTT. The financial community expresses little or no support for the tax. Tobin argued that allowing national governments to retain a large share of the tax revenue might induce cooperation. Another difficulty in implementation is the definition of a foreign exchange transaction. Spot transactions and derivatives such as currency swaps, forwards and futures would need to be taxed (since these are substitutes for, and supplements to, spot transactions).

It could be equally difficult to reach consensus on revenue distribution. Countries that are currency trade centres would want to keep a sizeable portion of revenue rather than use it to finance development. There is at present no supranational tax-collecting institution and it is unlikely that such a body will be introduced in the near future, especially as many international institutions are perceived as lacking democracy, transparency and accountability.

An alternative formulation of the "Tobin Tax", the two-level "Spahn variant", attempts to address these concerns by using a lower tax band for distributive goals and a higher tax band (up to 50%) for volatility goals when currencies reach pre-defined limits.

Time Line and further development of proposal

The "Tobin Tax" received a new lease of life in the wake of the currency devaluations in the 1990s, notably those triggering the Asian crisis of 1997-1998, but also the collapse of the Mexican peso in 1994, the Russian rouble in 1998 and the Brazilian real in 1999.

Advocated since 1994 by NGOs, it has developed significant momentum. In over 20 countries NGOs are now campaigning for a "Tobin Tax" and received general support from the international trade union movement in the run-up to the 2002 UN Conference on Financing for Development. Nevertheless, any explicit references to a GCTT were omitted from the Monterrey consensus text.

The tax's revenue-raising potential has also attracted the attention of national governments. Between 1999 and 2000, Belgian, French and UK governments and the European Parliament held debates and voted on the tax. The Brazilian and Canadian governments and the Finance and Foreign Affairs Ministers of Belgium and Finland have publicly endorsed it. Parliamentary working groups have been created in Belgium, France and Italy to promote the "Tobin Tax". In June 2000, over 160 governments agreed to a GCTT feasibility study at the UN Social Summit in Geneva. In September 2001, the European Commission announced it was examining the issue and in 2002 the German Ministry for Economic Cooperation and Development completed a feasibility report on taxing foreign exchange transactions.

Comments

Rolph van der Hoeven note on Tobin tax and related international taxation issues prepared for CM3.

Keywords

Capital Flows (view other ideas related to Capital Flows...)

Development Aid (view other ideas related to Development Aid...)

Financial Policy (view other ideas related to Financial Policy...)

Tax policy (view other ideas related to Tax policy...)

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Updated 18 February 2004