Belgium clears path to developing world prosperity
Monday July 5, 2004
Tony Blair calls Africa a scar on the conscience of the world. Gordon Brown has a means for healing that scar through a doubling of aid. The chancellor says his international financing facility (IFF) is the only game in town, but so far the teams are still stuck in the dressing room.
Last week, Belgium tried a different approach, when it passed legislation for a currency transaction tax (CTT) that could pave the way for billions of dollars in revenues to benefit the world's poorest people. The CTT is a blueprint for the achievement of two substantial outcomes. Firstly, it shows how governments can raise significant income to meet their millennium pledge to halve world poverty by 2015. Secondly, it contains a mechanism to guard against financial shocks that often cause poverty in the first place. Both goals require different tax rates and the Belgian legislation accommodates this by enshrining into law for the first time a two-tier tax.
In normal trading conditions the CTT would be set at a low rate to generate revenue for aid. This would be in the region of one basis point levied at the point of settlement of all currency trades. However, in the event of a sharp change in the value of a currency the second tier of the tax (which could be as high as 80%) would come into effect. This punitive rate of tax would act as a circuit-breaker, making it unprofitable to trade in the currency and thus preventing currency crashes. The need for such an anti-speculative mechanism is illustrated by the Asian crisis six years ago, which cost 10m jobs worldwide, according to the International Labour Organisation.
Currency trading is the most lucrative in the world. More than 1 trillion worth of dollars, pounds, euros and yen are traded every day. Security transaction taxes are part of financial systems and are levied in six of the G10 economies, including the 0.5% stamp duty reserve tax levied in the UK which raised £4.5bn for the Treasury in 2001.
The second tier of the tax is conceptually identical to the circuit breaker that was introduced into the New York Stock Exchange after the Black Monday crash in 1987. Nowadays, if a share price moves too dramatically, sale in the stock of that company is automatically suspended. Components of Belgium's CTT are grounded in mainstream thinking.
The crucial step in last week's legislation in Belgium has been the recognition that for such a tax to be feasible it must operate at a sufficiently low rate for a market which operates on thin margins despite its enormous size. Most commentators have conceded that since the market is electronic and most trading is now centralised through the CLS bank the tax could be implemented effectively at very low cost.
In the light of the Belgian progress, the key question is why not do the same here? The Treasury acknowledges we need new income streams to pay for the UN millennium development goals. It is pushing hard for the IFF, where the richest countries group together, to borrow from the banks to create development finance. Yet there is a palpable lack of will by the US, Germany and the Scandinavians for such an initiative. The IFF may at best only partially succeed. If Gordon Brown's stirring words about addressing world poverty are to be more than rhetoric it is now time to adopt currency transaction taxation to provide at least some of the sums required.
· David Hillman is coordinator of the Tobin Tax Network