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Could the 'Robin Hood' Tax Really Give to the Poor |
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Support for a proposal for an international tax on financial speculation is gaining momentum. Advocates of the "Tobin Tax" are claiming it can reduce global exchange rate volatility, increase the ability of national governments to determine their own financial policies against the power of the international market, and generate enormous revenues to fund global development programs. However, there are doubts as to whether a Tobin-style tax could be effectively implemented. Or whether such a tax could actually generate the enormous revenues its supporters are claiming. Advocates could also be missing the point by assuming the causes of global poverty to lie in short-term financial speculation and not in deeper-rooted underdevelopment. Since the ATTAC group (Action pour une Taxe Tobin d'Aux Citoyens) began campaigning for the tax in France in 1998, support has spread throughout many countries. Many national parliaments have taken the admittedly limited step of endorsing the tax in principle, including Belgium, Canada and France. Others have spoken of how the proposal is worthy of serious debate, including UK Chancellor Gordon Brown, German Chancellor Gerhard Schroeder and the International Monetary Fund. Popular culture has gotten involved, with the charity War on Want creating a pro-Tobin Tax advertising campaign featuring actor Ewan McGregor and rock band Radiohead.
What is the Tobin Tax? First proposed in 1978 by Nobel prize-winning economist James Tobin in order to "throw some sand in the wheels" of currency speculation flows, the Tobin Tax was designed to be a small worldwide tariff of between 0.1 and 0.5 percent. The intention was for the rate to be low enough not to adversely effect trade in goods and services or longer term investments, but to merely cut into the profits of speculators. Largely ignored when initially proposed, it has recently gained support due to the potentially enormous amounts of revenue it is thought to be able to generate. The original article that sparked off the campaign in France estimated that a 0.1 percent tax on currency transactions could raise US$166 billion a year. War on Want calls it a "Robin Hood tax", in that it can be used to take from the rich to give to the poor. How Would it Work? Speed is the major difference between speculative investments and legitimate trade transactions, the latter being those that contribute to the "real economy" by generating employment and creating goods and services. The speculative investments take place in a "casino economy" which goes largely untaxed and where money becomes a commodity in itself as opposed to a means of exchange. Speculators operate within the margins of the daily, hourly and even minute-to-minute fluctuations of currency values and interest rates. The market is huge and extremely volatile. An estimated US$1,5 trillion (that's US$1,500,000,000,000!!!) of various currencies are traded every day. Each trade would be taxed, thus discouraging short term speculation but leaving longer term productive investments intact. Would the Tobin Tax be Practicable? A major source of criticism levelled at the Tobin tax is that it would be too easy to avoid. Although tax-avoidance is commonplace in all tax systems, this form of taxation would in actual fact be harder to avoid than most, despite its global reach. In recent history, banks have collapsed due to "settlement risk", i.e. when they default on currency transactions. Consequently a centralized, formalized and regulated system of settlements has developed in order to reduce this risk. Thus it would be easy to implement a tax within this system. Rogue centers refusing to implement the tax could be effectively shut down by just a few central banks refusing to settle with them. Many critics argue that a political consensus could never be found to adopt the Tobin tax. Yet in reality political consensus can always be found if the need to change is great enough. The world can ill afford another crisis such as the one in 1997 in South East Asia, Russia and Brazil. The increased globalization of our economies mean there is little escape from such a dramatic speculative attack. States have negotiated hundreds of complex trade agreements and environmental treaties. The many states of the European Union launched a common currency in 1999. This shows that a consensus is not insurmountable. If the Tobin Tax were to be implemented, advocates predict the effects on people and the global economy would be as follows: 1) To raise enormous revenue. A Tobin-type tax is estimated to yield anything between US$150 to US$300 billion a year. With the declining commitment to bilateral and multilateral development assistance, the tax could generate important resources to support global environmental and social projects. 2) To reduce exchange rate volatility The crisis in South East Asia in 1997 is one example of how currency market volatility can damage the economic health of millions of people. Tobin's proposed tax may not have prevented that crisis, but it could help to prevent future crises by reducing the overall speculative volume and volatility that feeds speculative attacks. The tax will stabilize exchange rates by reducing the incentives for speculators . As they operate within small margins, a small tax on each transaction would render many speculations unprofitable. This would reduce the currently huge amount of short-term speculative trading and make the exchange rates less volatile. Wildly fluctuating exchange rates are not healthy for businesses trading internationally. If companies cannot be sure what their money is worth, economic planning and job creation is very difficult. If the exchange rate is more stable, businesses need to spend less on buying currencies in anticipation of future price changes, thus freeing up capital for expansion and investment. 3) To increase the power of national governments to determine their financial policies over the power of the market. Traditionally a state's central bank would buy and sell its own currency on international markets to stabilize its value. Currently however, the speculators have cash reserves greater than all the world's central banks put together. As a result, many countries are now unable to protect themselves from speculative attack; they have effectively lost autonomy of monetary policy. The Tobin tax would effectively cut down on the volume of foreign exchange transactions, ensuring central banks could defend their currency and giving governments the freedom to choose their economic policy. Would the Tobin Tax Achieve These Effects? The first effect of a Tobin tax, the huge amounts of revenue created, may be vastly overestimated. The 2001 Survey for the Bank for International Settlements, showed the figure has now fallen to US$1,2 trillion per day, largely due to the introduction of the Euro and consequential removal of 12 national currencies from the market. That would still leave a tremendous amount of capital for redistribution. Yet the numbers quoted in these campaigns are notional. They represent the maximum size of possible transactions, also assuming they were not counterbalanced by transactions in the opposite direction. This is the same in principle in household transactions. For example, in insurance, someone might pay $100 a year to insure their $100,000 house from fire damage. In one sense this is a $100,000 transaction. But only the tiny proportion of policyholders whose houses burn down will ever see that money. They are counterbalanced by the huge number who pay and make no claims, getting no money in return. It is difficult to estimate precisely, but in this way the level of transfers probably runs into billions and not trillions of dollars each day. Thus the idea of foreign exchange markets towering over large national economies remains as ridiculous as it sounds. The second and third effects of the tax appear, at first glance, compelling. A minimal tax on all international financial speculation would be likely to cool the volatile market. But this volatility is only a symptom of more fundamental problems. The increased flow of Western capital into East Asia in the 1990s was due to a slowdown in the developed world. The huge surplus of capital ended up in the financial markets as economic growth slowed in the West, not solely due to the greed of speculators. These Asian countries were still quite vulnerable to external forces, therefore acutely susceptible to foreign currency fluctuation. This vulnerability, although exacerbated by powerful and volatile currency speculation trends, was fundamentally due to underdevelopment. Most of the world's poor economies are actually deemed to be unworthy of speculation. Thus it is only by investing in the productivity of poorer nations that standards there can improve via sustainable economic growth. This would make poorer nations less dependent on external forces. In focusing on financial speculation rather than the deeper-rooted problem of underdevelopment, campaigners in favor of the Tobin tax have overlooked the most important issue. In reality, it is greater encouragement for development that would bring immediate benefits to the world's poorest nations.
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