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The Tobin Tax: Regulatory Tool for the
World's Capital Markets?Bread for All Workshop
Summer 1998
Two opposing views presented at the Bread for All Workshop with Kunibert Raffer, professor at the University of Vienna, Austria; Fritz Zurbrügg, department head for IWF and international financing at the Swiss Federal Finance Ministry; and Werner Vontobel (presenter), member of the CASH editorial board.
2nd Article:
Tobin-Tax: Sand in the Wheels of Financial Markets?
Fritz Zurbrügg
In 1972 James Tobin proposed a currency transactions tax to enhance the efficacy of economic policy. He drew attention to its revenue potential later in the 1970s. The debate subsided and started anew in the 1990s. James Tobin was invited to contribute to the UNDP's Human Development Report 1994. Discussion subsided again soon afterwards, mainly because of political censorship. In the Second Session of the 104th Congress of the US Senator Bob Dole and three other politicians introduced a bill to prohibit the UN and UN officials from developing and promoting Tobin's idea or any other international taxation scheme. The Tobin Tax
Kunibert Raffer
Tobin proposed a simple, uniform ad valorem tax to penalise short term transactions, affecting long term investments and trade negligibly. It is a good means to prevent short term interest rate arbitrage and to reduce the attractivity of small exchange rate changes, putting a high surcharge on those 80 % of foreign exchange transactions involving round trips of seven days or less. Clearly, the Tobin Tax cannot serve as a disincentive to large scale speculation against a currency.
The absence of a Tobin Tax has repeatedly provoked other, less market-friendly measures against short term capital flows, such as exchange controls or compulsory deposit requirements, proving the necessity of some sand in the wheels. Countries opposing the Tobin Tax most fiercely - the US and Germany - did apply restrictions themselves. Mexico dismantled most controls on capital movements before the end of 1994. Other countries, notably Chile, discouraged short-term capital inflows in various ways. The Republic of Korea had traditionally maintained strict capital controls, but liberalised recently. Undue and rapid liberalisation brought about the Asian crash of 1997.
Initially 1%, tax rates between 0.25 and 0.1% are proposed presently not to swamp the normal commissions charged. Most estimates of tax revenues range from $90 billion to $270 billion per year. The simplest way of collecting the Tobin Tax would be by the national governments introducing it. They should be allowed to keep part of the revenues, which would relieve pressures on their budgets. The rest could finance international expenditures such as development co-operation.
One main counterargument is that it would have to be implemented by all countries. This is wrong. It would suffice if major dealing sites adopted the Tax, charging punitive tax rates for transactions crossing the border between "Tobin-countries" and "tax havens". If at least the G-7 were determined to introduce the tax, it could be implemented. Naturally, participation by other EU countries, Switzerland, Singapore or Hong Kong would strengthen enforcement. The British securities transactions tax, also called "stamp duty", proves its practicability. A rate of 0.5 per cent, incidentally equivalent to the rate proposed by Tobin in 1994, did not trigger a major flight from spot transactions nor from London, which remained a main financial centre. This tax yielded more than $1.3 billion in some fiscal years. UK and Irish authorities share stamp duty revenues, an interesting precedent for the Tobin Tax. Finally, authorities levy punitive rates (triple the normal rate) to discourage evasion by trading abroad. Furthermore, capital transaction taxes are already levied in quite a few countries. Some tax evasion will occur, but this is hardly a good argument against the Tobin Tax as long as evasion occurs in the case of other taxes (e.g. VAT) as well. Since all currency transactions are documented in accounting books and clients are charged fees, the Tobin Tax could be levied by simple changes of computer programmes. Suggestions to deal with secondary (intra-bank/dealer) transactions were presented, e.g. taxing only transactions with customers, taxing recognised bankers and dealers on the changes in their daily net positions, or different tax rates for retail and other transactions. Basically, the problem involved is the same as in the case of VAT, where it could be solved. It should not be forgotten that financial and capital transactions are relatively undertaxed at present. The Tobin Tax would thus only be fair.
The real and only hindrance is the lack of political will. Tobin's proposal of "sand in the wheels" of international capital movements runs counter to the current neo-liberal tide. This Keynesian idea of providing room for manoeuvre to economic policy cannot be welcome at a time when the role of the state is busily reduced.
The tax, which James Tobin had in mind in 1978 was supposed to tackle two problems at once: First, the transaction costs for short-term, speculative currency deals should be raised relative to long-term deals. Second, national monetary authorities should get back some breathing space, which was lost because of the globalization of the financial markets. While this second target is generally not considered relevant anymore, another target emerged in the 90s, namely, the idea of financing development activities with the revenues of the tax. Tobin-Tax: Sand in the Wheels of Financial Markets?
Fritz Zurbrügg
The assessment as regards the desirability of the Tobin-tax can be divided in two parts: 1) On the one hand, the tax raises some fundamental economic questions. 2) On the other hand, questions regarding the implementation and the general feasibility of the tax have to be considered.
1) It is true that volatile exchange rates can trigger serious economic crises. However, one has to carefully differentiate between the cause and its symptoms. Speculation is rarely at the source of a currency crisis. Usually it is inconsistent economic policies as well as institutional and structural shortcomings. Although the financial markets sometimes tend to overshoot, they basically reflect the assessment of the fundamentals of a country by market participants. To restrict capital flows that are only reflecting the fundamental problems of a country means treating the symptoms instead of the causes. In the long run, a sound and transparent economic policy is the only way to prevent financial turmoil.
2) In addition to this already quite negative assessment of the Tobin-tax from the point of view of economic theory, the practical problems arising from the implementation of the tax appear nearly insuperable. To avoid free-riding, the
Tobin-tax would have to be introduced on an global basis. If only one small island exists somewhere in the Pacific, which refuses to enforce the tax, an important part of currency transactions would simply move there and thus avoid taxation. But even if an international consensus on an global introduction of the tax could be reached, its technical implementation would pose substantial problems. In view of the increasing variety of financial instruments it is difficult to determine which ones to tax and which not. Furthermore, taking into account the huge innovative potential of financial markets, participants would always find some way to create new instruments in order to evade the tax.
Concerning the question of financing development activities, it is true that even a relatively small tax would generate substantial revenues. Nevertheless, the allocation of such huge amounts of money would most certainly cause serious problems. Clearly, the countries hosting the major financial centers in the world would fiercely oppose such a tax, since they would have the most to lose. Furthermore, increasing the financial means of international organizations, which would take care of the distribution of the tax revenues, would provoke heavy political opposition not only in the U.S.A.. Based on this assessment, the introduction of a Tobin-tax appears to be neither economically desirable nor technically and politically feasible.
More Information on Currency Transaction Taxes
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