Leaving aside, in this thread, whether the Tobin tax is "Marxist" or
unmarxist, I would appreciate some comments, for and against, on this
article from the ATTAC website on its practicability.
Chris Burford
Is the Tobin Tax Practicable?
Rodney Schmidt VEEM - North-South Institute - Vietnam Economic and
Environment Management North-South Institute 55 Murray Street, Suite 200
International Development Research Centre Ottawa, Ontario, Canada K1N 5M3 -
Vietnam Economic and Environment Management 40 Nguyen Van Ngoc Hanoi
Vietnam Fax: (613) 241-7435 Fax: (84-4) 766-0469 E-mail: [EMAIL PROTECTED]
Other documents published on this website written by the same author Taxing
International Short Term Capital Flows Feasibility of the Tobin tax A
Feasible Foreign Exchange Transactions Tax
The proposed Tobin tax is a percentage of the quantity of domestic currency
converted into foreign currency. It would be collected on all such
conversions of domestic currency, and would be treated by participants in
the foreign-exchange market as an added cost to each foreign-exchange
transaction. The tax cost would be equivalent to the payment processing
costs which, though very small, are currently paid on each foreign-exchange
transaction.
In current discussions, the Tobin tax is put forward as a partial solution
to the problems of managing international financial crises; moderating
capricious exchange rate behavior; or raising revenue for international
public projects. These are distinct objectives, and the ability of the
Tobin tax to achieve them should be addressed in their separate contexts.
However, the dominant issue of the day is whether the Tobin tax is
practicable, and this issue encompasses all these objectives. On one hand,
if the Tobin tax can be only partially implemented, or is easily evaded, it
is unlikely to achieve any of its purposes and may well do more harm than
good. Most evaluations of the Tobin tax are based on the argument or
presumption that it is not practicable. On the other hand, if the Tobin tax
can be shown to be practicable, it remains to show that it can achieve its
objectives.
The argument that the Tobin tax is not practicable may be summarized as
follows: The market for trading in foreign exchange is decentralized,
unregulated, highly mobile, and innovative. If any particular country tries
to impose the tax, trading of its currency will simply move offshore. Thus,
a globally coordinated tax is required. It would be hard to achieve the
necessary political consensus for that, especially as there are strong
incentives for individual countries to opt out and offer a tax-free haven.
Even if a global tax were successfully implemented, it would be hard to
collect the tax on the many financial and foreign-exchange assets that can
be used to mediate a foreign-exchange transaction. For any particular
version of the tax, new financial instruments may be expected to be created
to avoid it.
The market for trading foreign exchange is supported by a global
infrastructure for making payments to settle such trades. In contrast to
the preceding characterization of the trading market, the interbank or
wholesale foreign-exchange payments infrastructure is highly organized,
centralized, and regulated. It has become so through technological
innovation and the combined efforts of central banks and major
foreign-exchange trading institutions, so as to cope with the huge volume
of foreign-exchange trading that occurs every day while safeguarding the
integrity and stability of the international financial system.
We contend that the Tobin tax is practicable if it is assessed on wholesale
foreign-exchange payments as they are processed to settle foreign-exchange
trades. Specifically, a country can unilaterally collect the tax on
conversions of its own currency into foreign currency, no matter where in
the world the trade takes place, and no matter which financial instruments
are used to mediate the trade. In this way, the Tobin tax can satisfy the
requirements of efficiency, being applied uniformly and comprehensively in
all markets and on all foreign-exchange assets. It would also be
transparent and inexpensive to implement, since it exploits existing
payments processing technology.
The international wholesale payments system consists of up to three
components: a domestic large-value payment system for each currency;
domestic or offshore netting systems; and, to the extent that financial
assets are used to make payments, clearinghouses for securities exchanges.
Note that each financial or foreign-exchange trade results in at least two
counterpart payments made to settle the trade. For this reason, each of the
three institutions of the wholesale payments system processes financial and
foreign-exchange payments as follows: first, payment instructions from
traders are treated individually as they arrive at the system ('Real Time
Gross Settlement', (RTGS)), and second, the two or more counterpart payment
instructions are matched to each other and to the original traders before
they are processed, simultaneously ('payment-versus-payment settlement').
All this occurs automatically and electronically. This payment process was
implemented relatively recently to eliminate settlement risk, which refers
to the possibility that one party to a trade makes an irrevocable payment
to discharge its obligation under the trade, and then does not receive the
obligatory payment from its counterpart in the trade.
Since counterpart payments are matched before being settled anywhere in the
wholesale payments system, it is possible to both identify the originating
trade, and to distinguish foreign-exchange from domestic-financial
transactions (in the case of the former, the counterpart payments are
denominated in different currencies). The payments institutions can then
collect the Tobin tax on behalf of the central bank that issues the taxed
currency as appropriate.
These payment processes are regulated and enforced by the central bank that
issues the currency being paid, whether the processing institution is at
home or offshore. The reason is that netting systems and clearinghouses
located worldwide that deal in assets denominated in the domestic currency
are closely integrated with the large-value payment system for that
currency. That large-value payment system is located at home and operated
or regulated by the central bank. This must be so, since the wholesale
payment system for the domestic currency depends fundamentally on the
services of the central bank, including its supervision, legal, credit and
'lender-of-last-resort' facilities, to function as such, and on the
domestic currency liquidity available only in the domestic money market.
For the same reasons, individual participants in offshore netting systems
and clearinghouses are also members of the domestic large-value payment
system, and are subject to central bank regulations. These enforcement
mechanisms can also be used to unilaterally implement the Tobin tax worldwide.
Coordinating the Tobin tax across domestic large-value payments systems,
netting systems, securities clearinghouses, and the individual participants
in them so as to avoid leakage is straightforward, for two reasons.
First, in nearly all cases the technology and payments processing services
for all three payments institutions is provided, either individually or
together, by a single, dominant, third party, the Society for World-wide
Interbank Financial Telecommunications (SWIFT). SWIFT also provides the
standardized and integrated communications system and services between
individual trading banks, and between them and the payments institutions.
Thus, SWIFT is already functionally a virtual global centralized
foreign-exchange payments system.
Second, in the near future a physical global wholesale foreign-exchange
payments system, encompassing both large-value and netting systems,
designed to process many currencies in a single system, and using SWIFT
technology and services, will begin operations. It will be known as the
'Continuous Linked Settlement Bank'.
A Tobin tax applied to foreign-exchange payments would also be hard to
avoid by creative use of foreign-exchange instruments. Nearly all such
instruments, including exotic derivatives, require payments for settlement.
In most cases, these are simple payments of the principal amounts traded,
just as with ordinary foreign-exchange instruments. The exception is the
foreign exchange option, which may never be executed. However, options are
bought at a price which reflects their value, and the payment made to buy
the option would be taxed. Further, the price of the option responds to the
tax, in two ways. First, the price depends on the potential for executing
the option, and the decision to execute depends on the tax. Second, the
price depends on the cost of alternative, 'synthetic', ways to reach the
same foreign-exchange position, by buying and selling the underlying assets
denominated in domestic and foreign currencies.
The immediate effect of the enforceable Tobin tax on foreign-exchange
payments would be to increase bid-ask spreads in the foreign exchange
market. The spread results from both transactions costs, such as the Tobin
tax, and from exchange rate, credit, and other risks taken on by dealers in
foreign exchange. Thus, the size of the increase in the spread depends on
the net changes in costs and risks as a consequence of the tax. In ordinary
times the increase in transactions costs would dominate. In extraordinary
times, when foreign exchange, liquidity, and credit risks arising from a
potential crisis become much more significant, the effect of the tax on
those risks would also be reflected by the spread.
In fact, there are two foreign-exchange bid-ask spreads, one for the retail
market and one for the wholesale market where the dealers are active. Most
of the Tobin tax would be likely to appear in the retail spread, to the
extent that short term speculation originates in the retail market. The
reason is that a large share of dealer foreign-exchange trading in the
wholesale market consists of activity to hedge risks taken on in the retail
market. Dealers responding to retail speculation would pass on the tax paid
on their own resulting hedging activity to the retail market. To the extent
that dealers themselves initiate speculative trades, the Tobin tax would
also appear in a rise in the wholesale spread.
