---------- Forwarded message ----------
Date: Thu, 31 Dec 1998 00:13:28 +1300
From: janice <[EMAIL PROTECTED]>
To: [EMAIL PROTECTED]
Subject: The Tobin Tax - Sierra Club
The Tobin Tax
Sierra Club
November 1998
What is the Tobin tax?
In 1978, James Tobin, a Nobel-Prize-winning economist, first proposed
the idea of a tax on foreign exchange transactions that would be applied
uniformly by all major countries. A small amount (less than 0.5%) would
be levied on all foreign currency exchange transactions to deter
speculation on currency fluctuation. While the rate would be low enough
not to have a significant effect on longer term investment where yield
is higher, it would cut into the yields of speculators moving massive
amounts of currency around the globe as they seek to profit from minute
differentials in currency fluctuations.
Why is support growing for such a tax?
Interest has grown rapidly in such a mechanism, as the place of foreign
exchange transactions and financial deregulation has accelerated over
the past decade. Today, approximately US$1.5 trillion worth of currency
is traded every day in unregulated financial markets. Less than 5% of
this activity is related to trade in goods and services. The other 95%
is simply speculative activity as traders take advantage of exchange
rate fluctuations and international interest rate differentials. This
kind of financial speculation plays havoc with national budgets,
economic planning and allocation of resources. Governments and citizen
are becoming increasingly frustrated by the whimsical and often
irrational activities in global financial markets that have such an
influence over national economies and are seeking some means to curb
damaging, and unproductive, speculative activity.
What effect would an international currency tax have on the global
economy?
1. Reduce the volatility of exchange rates.
A uniform tax on foreign exchange transactions would deter speculation
by imposing a small tax on such activity. This would reduce the
volatility of exchange rate fluctuations and provide exporters,
importers and long-term investors a more stable exchange rate in return
for paying the tax.
2. Reduce the power that financial markets have over national
governments to determine fiscal and monetary policies.
The tax would give more autonomy to governments to set national fiscal
and monetary policies by making possible greater differences between
short-term interest rates in different currencies. Such a tax would also
reinvigorate the capacity of central banks to alter exchange rate trends
by intervening in currency markets. By cutting down on the overall
volume of foreign exchange transactions, central banks would not need as
much financial clout to intervene.
3. Raise revenue
This tax would yield enormous sums in receipts. Assumptions vary about
the actual rate of the tax, the decline in volume of trade, the amount
of trade circumventing the tax and transactions which would be exempt.
However, just for illustrations, assuming a conservative tax rate of
0.2% and an effective tax base of $75 trillion annually, the tax would
yield $150 billion annually in receipts. Given the declining commitments
to bilateral development assistance around the world, the tax could
generate important resources to support sustainable human development.
This sounds good, but is it politically possible to implement?
There are two key political issues involved with putting such a tax in
place. First, it would be necessary to forge agreement amongst the major
countries to implement a uniform tax, and second, there would have to be
agreement on the collection and distribution of the tax revenue.
Developing countries have always been much more vulnerable to exchange
rate volatility, but there is for the first time a convergence of
interest between industrialized and developing countries as they all
seek stronger government autonomy and more effective central bank
intervention.
At present, the government of Australia and France have spoken out in
favour of a currency exchange tax. The Prime Minister of Malaysia has
declared that currency trading is "unnecessary, unproductive, and
totally immoral," adding, "it should be stopped." The Canadian
government appears divided on the question as cabinet ministers debate
the issue publicly. The eighteen member countries of the Asia-Pacific
Economic Cooperation are reviewing the proposal.
Pressure is building on national governments and international
institutions to support this measure from coalitions of non-governmental
organizations representing labour, church, environment, women, youth,
seniors and poverty groups as they seek to restore democratic control of
their national economies.
Perhaps more significant is the fact that many governments face large
deficits and strong anti-tax populism among the electorate and are
looking for new sources of tax revenue that are not politically
suicidal. Such a minimal tax will not hit "Main Street", but rather "Bay
Street/Wall Street speculators". The promise of a new source of revenue
will likely be the primary motivation for reaching agreements to
implement the tax.
Collection and distribution of the tax revenue is a much trickier
question. The tax would have to be applied worldwide at the same rate in
all markets. There would also have to be agreement on precisely which
transactions would be subject to the tax. Compliance would depend on the
banking and market institutions. Tracking the activity would certainly
be possible as the financial industry has the sophisticated technology
required to do this but enforcement would rest with the major economic
powers and the international financial institutions. There would
certainly be some strong resistance from members of the financial sector
some of whom have already begun to speak out against the proposal.
It is possible that some members of the financial community might
support this tax. The pace and the volumes traded in the markets has
added a level of risk to doing business, for as much as great profits
can result from speculation so can great losses as in the Barings Bank
fiasco. Some experienced business people may see the value of the
limited risk of more stable markets, suggesting if not the Tobin
proposal, other strategies to limit the volatility of the current global
money system.
Recommendations:
1. A tax to curb speculation in foreign currency exchange is an
innovative and fair proposal that will contribute to restoring
democratic control over our national economies and generate substantial
revenue to build a sustainable future.
2. Governments around the world, the United Nations, the International
Monetary Fund and World Bank should take the steps necessary to
implement a tax to curb currency speculation as soon as possible.
3. The tax should be administered by an accountable democratic structure
such as could be found within the UN system, with the revenue collected
used for genuine social development.
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