“A Global Agreement towards a United World”, June 1 – 3, 2001, Genoa, Italy
Experience with Currency Transactions (Tobin) Taxes – Debunking the Myths and Building Political Support
by Robin Round, Policy Analyst
The world of finance has become a global gambling casino, where investors seeking quick profits bet huge sums around the clock. Big banks and investment firms are the players, profiting from the minute-to-minute, hourly or daily fluctuations in prices on bond and currency markets around the world. These players are not investing in the `real economy', which generates jobs and produces goods and services, they are investing in the ‘paper economy’ in which money becomes a commodity rather than a means of exchange.
Money trading markets are enormous and are growing exponentially. The trade in money long ago eclipsed the global trade in goods and services. Global foreign exchange transactions alone rose from $4.6 trillion in 1977 to $400 trillion in 1998. From 3.5 times the dollar value of world exports in 1977, foreign exchange transactions rose to 68 times the value of world exports by 1998.[i] The daily trading on foreign exchange markets alone is US$ 2.0 TRILLION PER DAY[ii]. Over 80% of that volume is pure speculation as traders bet on whether currency values and interest rates will rise or fall.
The ease with which enormous quantities of portfolio capital, unconnected to productive investment, move around the globe, coupled with dramatically decreased ability of national governments to control it, threatens the national economic and social security of all nations.
In 1978, Nobel prize-winning economist James Tobin proposed that a small world-wide tariff (1%) be levied by major countries on all foreign exchange transactions in order to allow governments to regain some control over financial markets. The “Tobin tax” is designed to reduce the volume of destabilising speculative financial flows by reducing or eliminating the small margins speculators profit from. The tax rate was designed to be low enough not to have an adverse effect on trade in goods and services or long-term investments but rather to cut into the short-term speculative profits only. By reducing the flow volumes, the tax is designed to help stabilize exchange rates and increase the fiscal and monetary policy autonomy of national governments.
An unintended benefit of Tobin’s original proposal was the enormous revenue that could be generated by the tax. Even with conservative tax rates, an estimated 33% percent shrinkage in global foreign exchange volume and additional reductions for exempted official trading and evasion, a phased-in currency transactions tax could generate between US$ 150-300 billion annually.[iii] In 1998, the United Nations Development Programme (UNDP) estimated that 40 billion US dollars a year for ten years would be enough to guarantee access to basic social services and adequate food, water and sanitation to every person on the planet.[iv] A currency transactions tax, adopted and collected nationally, with a portion of receipts redistributed through a multilateral treaty mechanism or institution, could help eliminate the worst forms of poverty and environmental degradation globally.
In spite of these multiple benefits, the Tobin tax and the new variations that have arisen since 1978 are often dismissed by critics before all the arguments have been heard. They view the tax as too difficult to adopt and too easy to avoid. Much criticism is ill-informed or designed to stifle debate. The Tobin-type tax or currency transactions tax as it is becoming know will reduce the profits of the most powerful banks and investment institutions in the world. The tax is therefore viewed as a threat to financial community privilege and has been met with resistance by a sector with massive political clout. The very idea of putting people ahead of markets challenges the dominant economic paradigm of the early 21st century.
Here are the 4 most common myths about currency transactions taxes:
MYTH # 1 CURRENCY TRANSACTIONS TAXES WILL HIT THE POOR
This myth is designed to play on widespread anti-tax sentiments of the middle class and is blatantly misleading. This tax will not hit the poor; it is a progressive tax, designed to target only those profiting from destabilising currency speculation. The poor don’t flip millions of lira a day on currency and bond markets, the world’s largest banks and investment firms do. The majority of foreign exchange dealing is done by one hundred of the world’s largest commercial and investment banks. The top ten control 52% of the market[v]. Citibank is the biggest with an 8% market share and a 1998 foreign exchange transaction volume that exceeded the GDP of the US at US$ 8.5 trillion[vi]. This tax will hit them.
Contrary to what the myth-makers state, these taxes could lift the poor out of poverty. Individual countries could receive hundreds of millions from the tax to spend on poverty alleviation and environmental protection. The poor would be the primary beneficiaries of a currency transactions tax.
A currency transactions tax can help address the inherent inequity in national tax systems. Taxation for redistributive purposes is central to the concept of civilization and is the material basis for national sovereignty. In many countries, however, tax revenues are in decline as corporate tax rates plummet. Some of the biggest corporations, including banks, pay little or no tax at all. Currency transactions taxes can be viewed as a tool to help redress these unfair tax practices.
MYTH #2 SPECULATORS WILL FIND WAYS TO EVADE THE TAX
All taxes are avoided to some extent and never fully capture the entire revenue stream they target. This fact has never prevented governments from taxing but has spurred efforts to minimize evasion to ensure compliance. Detractors would have us dismiss the currency transactions tax before it was enacted because it might not work perfectly. If we followed this flawed logic, laws would not be made because laws might be broken.
The fact is, a currency transactions tax could be quite difficult to evade. A tax collected through the wholesale market between banks[vii] improves on Tobin’s original concept by making evasion near impossible and collection relatively easy. Banks conduct thousands of transactions with each other daily, which are totaled or “netted” at centralized sites so that a net payment can be calculated and transferred or “settled”. Settlement systems around the world are becoming increasingly centralized, formalized and regulated as central and commercial banks work together to reduce and eliminate the risk of payment default. Banks have collapsed because of this risk, known as “settlement risk”.
By October 2001, there will be one centralized global settlement system linked to the domestic payments systems in most countries. All transactions are electronically recorded at the settlement sites and on the books of the central bank where payments between banks are actually made. Tracking and taxing will be administratively easy.
Implementing a tax in the domestic payments system would allow a participating country’s central bank to refuse to settle payments between non-cooperating systems (ie. tax havens). Thus, the Cayman Islands would no longer be able to buy or sell Italian lira, for example, if Italy adopted a currency transactions tax. Several countries refusing to settle with rogue centres would effectively shut them down.
Critics argue that speculators could evade the tax by shifting into other financial instruments. Because this proposed variation is a tax on net payments between two institutions, the type of financial instrument being bought or sold is of little relevance. Derivatives, a variety of financial instruments whose value is “derived” from that of an underlying asset such as a commodity or currency, were once viewed as a means to escape Tobin’s originally proposed tax on cash exchanges. This is because the currency is never actually purchased when a derivative is purchased, only the right to purchase is bought and sold. This variation on Tobin’s original proposal ensures that if a derivative instrument is paid for, the tax takes effect.
MYTH #3 THE CURRENCY TRANSACTIONS TAX WILL UNDERMINE NATIONAL SOVEREIGNTY
Critics maintian that the tax is a global tax that would threaten a government’s right to collect and administer taxes. This is simply not true. The tax would be collected by national governments under the terms of national legislation. No new supra-national tax authority threatening national sovereignty would be created. National governments would make all the decisions regarding revenue collection and redistribution. A portion of the revenue would be kept by nations for internal uses. A portion would be redistributed through an agreed process by a multilateral organization with representation from all participating governments.
Multilateral cooperation on tax revenue collection and redistribution is not new and unproven. The European Union has been individually collecting, and jointly administering and redistributing the Value Added Tax among its 15 members for years. The European Union funds its infrastructure from the collection of the tax, with each member state retaining ten percent of the revenue it collects and all agreeing on the allocation of the remainder.
What the critics don’t want to tell you is how currency transactions taxes will enhance national sovereignty. The total reserves of all the world’s countries are now less than one day’s trading in foreign exchange markets.[viii] What this means is that most countries can no longer defend themselves against a concerted attack by financial speculators and have effectively surrendered monetary and economic policy sovereignty to private traders, investment houses and large banks. By cutting down on the overall volume of foreign exchange transactions, a Tobin-type or currency transactions tax would reduce the volume of reserves necessary for countries to defend their currency, thus freeing capital for development. These taxes would allow governments the freedom to act in the best interests of their own economic development, rather than being forced to shape fiscal and monetary policies in accordance with the perceived “demands” of fickle markets.
MYTH # 4 POLITICAL CONSENSUS COULD NEVER BE FOUND TO ADOPT A CURRENCY TRANSACTIONS TAX
Political consensus is the most serious barrier to the adoption of currency transactions taxes, yet it is not insurmountable, particularly as public support grows and myths dissolve. Many larger, more complex issues, requiring greater degrees of international co-operation, have been addressed in recent years. Nations around the world have negotiated hundreds of trade agreements and adopted and implemented many complex international environmental treaties. European nations launched a common currency on January 1, 1999. Critics said many of these agreements could never be reached.
Three factors are moving the debate forward:
1. FUTURE CRISIS ARE INEVITABLE UNLESS CONTROLS ARE ENACTED
The problems with financial markets are systemic. Borrowers and can never obtain sufficient information about future prices and costs to enable them to estimate risks accurately – these are inherently subjective judgements. Markets behave irrationally, driven by panic selling and herd behavior that does not arise from empirical evidence. As the Asian crises clearly demonstrated, currency values plunged far in excess of what underlying economic fundamentals would have indicated. Speculators have a vested interest in creating and maintaining volatility as profit potential increases in volatile markets.[ix] Wild market swings are here to stay unless something is done to control them.
Further, proposals by the G7 and G20 to ‘repair the financial architecture’ in the wake of the crises have been dangerously inadequate, as they fail to address the supply side of the problem and focus on reforming developing country markets to better meet the demands of liberalized foreign capital flows. Proposed solutions including increased transparency and data reporting, as well as increased IMF surveillance and control of developing country financial systems, are therefore fundamentally flawed. Developed country governments are effectively setting the stage for future crises by both failing to address the problem and providing false assurances to the world that they have.
As the frequency of crises increases, the ability of the world to ignore the problem declines. Nations can ill-afford to repeat the economic devastation, social turmoil and untold human suffering of recent years. In the wake of speculative attack, prices for goods skyrocketed, wages fell, companies unable to pay debts denominated in foreign currencies went bankrupt and joblessness soared. Three decades of poverty reduction and economic growth was wiped out in South East Asia; thirty million people were thrown into poverty[x]. Living standards in these countries have not recovered post-crisis. The human crisis in affected countries is an ongoing one and will take decades to reverse. In the end, political consensus can always be found when the need for policy coordination outweighs the risk of continued inaction.
2. PROMISE OF ENORMOUS REVENUE STREAMS IS APPEALING
The political appeal of this tax to cash-strapped governments world-wide cannot be underestimated. Many governments face large deficits, declining income and strong anti-tax populism and are looking for new sources of revenue. Given the declining commitment to bilateral and multilateral development assistance around the world, the tax could generate important resources to support environmentally and socially appropriate development. Revenue from currency transactions taxes represents a significant new source of public finance for world development.
At a time when income disparity and social inequity are increasing, the Tobin tax represents a rare opportunity to capture the enormous wealth of an untaxed sector and destructive sector and redirect it towards the global public good.
3. COORDINATED GLOBAL PUBLIC PRESSURE IS ADVANCING THE DEBATE GLOBALLY
Tobin’s original proposal sat on a shelf in a university library until the Mexican peso crisis of 1994, when it was discovered and revived by the non-governmental community. Since that time, a global social movement has emerged which challenges the dominant “globalization” ideology that asserts markets know best and governments are powerless to intervene. A currency transactions tax is viewed as a key element in re-asserting national authority over the global public good that is financial stability.
All the political victories to date can be traced directly or indirectly to the activities of this movement:
- in March 1999, Canada became the first Parliament in the world to pass a motion calling for a Tobin tax by a resounding 2:1 margin with all party support;
- in August 1999, the Brazilian parliament held hearings on the Tobin tax. President Cardoso proposed to implement a Tobin tax to stem the exodus of capital in late 1998 but the IMF would not allow it;
- Throughout late 1999 and 2000, the UK, French, Belgian and European Parliaments held debates and votes on the tax and more are on the way;
- Finance and Foreign Affairs Ministers from Finland and Belgium have publicly endorsed the tax;
- June, 2000, over 160 governments agreed to undertake a study on the feasibility of a currency transactions tax at the UN Social Summit in Geneva.
- In 2001, the Belgian Senate passed a resolution mandating a study of currency transactions taxes;
- Hundreds of Parliamentarians and economists from around the world have signed declarations calling for a Tobin tax. (http://www.attac.org/fra/asso/doc/doc18en.htm).
CONCLUSION
At a time when a handful of unaccountable money brokers can threaten the economic security of tens of millions with a stroke of a keyboard, currency transactions taxes represents a critical opportunity to reassert democratic governance over the gambling casino that is global finance. Citizens can and must re-assert sovereignty over money and over markets. Markets are not the best source of social regulation nor do capital and its returns constitute the ultimate criteria for defining value. Finance can and must be made to serve people in the interest of development.
Twenty-three years after it was first proposed, the currency transactions tax is an idea whose time has finally come. It is not a panacea for the world’s financial ills and developmental woes, but rather one part of a coordinated strategy to fundamentally reform the global financial system to place people ahead of markets. A currency transactions tax is but one critical component of a new global financial order. The democratization of economic decision-making, the cancellation of developing country debt and the equitable redistribution of wealth must become the central principles upon which governments act in the new millennium.
[i] Felix, David. Foreign Policy in Focus. “Repairing the Global Financial Architecture – Painting over Cracks vs. Strengthening the Foundation”. September, 1999.
[ii] Based on Bank for International Settlements 1998 Survey.
[iii] Felix,David. “On the Revenue Potential and Phasing in of the Tobin-type Tax” in UlHaq, Mahbub. The Tobin Tax - Coping with Financial Volatility. Oxford University Press. 1996.p236-243. Based on tax rates of between .1% and .25% on the major currencies and 1995 Bank for International Settlements (BIS) volumes (which were 26% lower than 1998 BIS figures). Estimates assume a 35% reduction in the tax base to account for exempted official trading and evasion and a 33% reduction in overall trading volume as a result of the tax.
[iv] Felix,David. “On the Revenue Potential and Phasing in of the Tobin-type Tax” in UlHaq, Mahbub. The Tobin Tax - Coping with Financial Volatility. Oxford University Press. 1996.p236-243. Based on tax rates of between .1% and .25% on the major currencies and 1995 Bank for International Settlements (BIS) volumes (which were 26% lower than 1998 BIS figures). Estimates assume a 35% reduction in the tax base to account for exempted official trading and evasion and a 33% reduction in overall trading volume as a result of the tax.
[v] They include Citibank/Salomon Smith Barney(US), Deutche Bank(Germany), Chase Manhattan Bank(US), Warburg Dillon Read (US), Goldman Sachs(US), Bank of America (US), JP Morgan(US), HSBC (UK), ABN Amro (Netherlands) and Merill Lynch(US) from Hayward, Helen. The Global Gamblers - British Banks and the Foreign Exchange Game. War on Want. 1998.p.14.
[vii] as proposed by Canadian economist Rodney Schmidt in “A Feasible Foreign Exchange Transactions Tax”. North-South Institute March, 1999. and “Efficient Capital Controls”. International Development Research Centre, Government of Canada. April 2000.
[viii] Ul Haq, Mahbub. The Tobin Tax - Coping with Financial Volatility, Oxford University Press, 1996.p292. Based on 1995 Bank for International Settlements, New York Federal Reserve, IMF and Bank of England statistics.
[ix] According to Standard Chartered Bank’s 1998 Annual Report, “the result from Treasury was outstanding...their ability to continue trading, during periods of high volatility in the foreign exchange markets resulted in exceptional dealing profitability.” Hayward, Helen. The Global Gamblers - British Banks and the Foreign Exchange Game. War on Want. 1998.p.2-3.
[x] UNCTAD.Trade and Development Report 2000.p.66 from World Bank “East Asia Recovery and Beyond”, table 1.2.