The Case For The Tobin Tax

Karl Williams

[2002]

Before beginning my argument in favour of the Tobin Tax (TT), let me first admit that the TT has disadvantages (in the way that all taxes have), but I hope that you'll see that, on balance, they are clearly outweighed by its advantages.

Here's how I'll lay out my case. After a brief description of the TT and its history, I'll attempt to establish its three main advantages, namely:

· it will stabilise increasingly volatile currency markets
· it will - quite painlessly by the standards of most taxes - raise massive revenue urgently needed for a range of worthy causes
· it will largely end the massive speculative profits UNearned by foreign currency speculators at the moment. This is legalised robbery - and we are the unwitting bunnies!

After that, I'll rebut the objections to the TT.

BACKGROUND AND DESCRIPTION

It was in 1978 when (the now recently-deceased) James Tobin, a Nobel prize-winning economist, proposed a relatively small tax on cross-border currency transactions. This aimed to curb the accelerating incidence of speculative dealings which were leading to volatile exchange rates and economic instability. Wildly fluctuating and unpredictable rates play havoc with businesses dependent on foreign exchange. It's not hard to see, then, how the tax was designed to enhance global fiscal stability and market efficiency.

Because speculators deal in high volumes relying on very small margins, a tax of around 0.2% was reckoned to be sufficient to make such activities unprofitable. However, such a margin would not greatly deter genuine commerce - a margin of this size is less than the exchange rate differential banks have when selling currencies (i.e. the difference between the buying and selling rates ordinarily available).

The need is far more urgent now than at the time of proposal. Cross-border currency transactions have increased 70 to 80 times in the last 30 years, with purely speculative dealing comprising around 95% of this total. A staggering US$1.5 to 2 trillion is traded every day.

The explosion of foreign exchange trading has coincided with a string of spectacular currency crises: first in Europe during the summers of 1992 and 1993, next in Mexico at the end of 1994, then in Southeast Asia during the summer of 1997, followed by Russia during the summer of 1998, and most recently in Brazil in January 1999.

These crises are felt far beyond the borders of those currencies which have been devastated - such financial crises can have enormous impact worldwide. For example, the Asian currency crisis lowered the world growth projection for 1998 by one percent and increased worldwide unemployment by 10 million.

VOLATILE CURRENCY MARKETS

As one can easily imagine, the massive volume of speculative transactions has swamped the ability of central banks to manage the wild swings in exchange rates as profit-seekers shove their frenzied snouts from one trough to another.

These speculative attacks lead to incalculable downline human costs - and it's vulnerable Third World economies which have suffered the most. When a currency is devalued, the purchasing power of citizens plummet, food and other basic items become too expensive, the environment is less protected, and jobs are lost.

The problems of instability are exacerbated by the self-fulfilling nature of the current situation. When speculators gamble on the likelihood of an imminent devaluation and sell a currency, this action itself lowers the asking price of that currency in the market and increases the likelihood of devaluation, precipitating the crisis that was feared. Exchange rate depreciation gives rise to further outflows, as panic sets in among international investors. Even if a small number of speculators take the lead, this may produce herd behaviour on the part of other investors. And in times of crisis, the more bets there are the bigger the swings. When a currency is under speculative attack, the force is often irresistible.

To make matters even worse, the big players in this game are now so big that they can themselves manipulate the market to their advantage. Of course, it's in their interests to have privileged access to future government decisions - and even to influence those decisions. George Soros, who made himself a multi-billionaire in this racket, has recently astonished the financial world by openly declaring the practices he performed to be so unfair that they should be outlawed!

We'll discuss later the mechanics of these practices in further depth, as many people are under the impression that currency speculators are harmlessly gambling amongst themselves. Were that only the case!

POTENTIAL REVENUE, PAINLESSLY RAISED

The second main advantage of the TT is the vast revenue that could be raised for many urgently-needed purposed. Importantly, according to the canons of taxation which we Geoists understand so well, the TT is one of the least objectionable.

For starters, the margin of around 0.2% is so small that it will have minimal effect on genuine, long-term, non-speculative transactions. What it will deter, however, is a significant proportion (around 80%, by some guesstimates) of speculative dealings - and this is just what is desired.

Compliance and collection costs will be miniscule. The much-discussed issue of evadability was admittedly a great hurdle, but - as will be seen in the later section dealing with rebuttals - now it seems that the TT can indeed be made largely unevadable.

The TT pay-off will be massive, and this alone is why so many international aid agencies and environmental groups are calling for its implementation. Of course, the greater the deterrent effect, the less revenue will be raised. Even still, based on an estimate of about 83% of transactions being deterred by a TT of 0.2%, the revenue raised will still be a massive US$150 billion per year - far in excess of present world aid which totals a mere US$55 billion.

Inevitable disagreements will arise as to how this amount should be spent, but this is a problem with which the world can happily deal! Here are just a few of the proposals, all of which would put the revenue raised to very good use:

· the addressing of environmental problems such as global climate change, loss of biodiversity, erosion of the ozone layer, and the funding of sustainable energy projects
· overpopulation
· HIV/AIDS
· disaster relief (for victims of earthquakes, cyclones, floods, famines etc.)

ETHICAL JUSTIFICATION FOR THE TT

When some Geoists protest about the immorality of taxation such as the TT, they are effectively turning a blind eye to the outrageous theft represented by speculative profits on currency transactions. We should be appreciating the big picture and deciding, on balance, which course of action is least objectionable.

It must be emphasised that the TT will only require a miniscule 0.2% margin to deter much of the currency speculation, while preventing massive unearned profits being made. These speculators neither create wealth nor perform any useful service - far to the contrary!

I'm a dyed-in-the-wool Geoist who condemns as loudly as anyone the immorality of taxes which confiscate the property of the citizenry. However, I see that the relatively small tax margin that undeterred currency traders will pay is a small price to pay to prevent the greater evil of what is the legalised robbery of massive speculative profits.

Currency speculators reap where they do not sow, getting something for nothing. The corollary of this is that someone, somewhere, somehow is getting nothing for something. But who is losing out? One cannot overemphasise the fact that speculators are presently not just gambling amongst themselves, but are pilfering from the citizenry in general, who are mostly unaware of how they've unwittingly been fleeced.

If speculators were only betting against each other, there would be a rapid shake-out until only a few would be standing. But because speculators are now so powerful as to be able to themselves manipulate exchange rates, central bank intervention is now outgunned.

Here we must examine the role of central/reserve banks in attempting to maintain currency stability. To that end, their role has often been to intervene in times of exchange rate volatility to either stabilise or prop up their currencies in time of speculative attacks. They attempt to prop up a currency by aiming to break the cycle of infectious herd selling by going against the trend and selling some of their international reserves to buy their own currency. Later the banks will replenish their reserves by selling their own currencies. If they have "stopped the rot", then the banks will buy back their foreign reserves at around the same exchange rate and therefore won't have lost on the deal. However it's too often the case, especially nowadays when the central banks are so dwarfed by the speculators, that the downward slide has continued. In other words, the central banks far too often are outgunned (or outwitted), and lose vast amounts in this exercise.

Why explain this mechanism? To illustrate how WE THE TAXPAYERS are the downline bunnies who enrich the speculators, through funding the central banks from general revenue. In March this year, it came to light how the Australian Reserve Bank has recently lost around A $5 billion of taxpayers' money. Some of this has been the result of unnecessary gambling in currency swaps, but much of it resulted from the steady decline of the Aussie dollar despite the Bank's intervention.

Nor is the rort of ripping off central banks a game that's open to anybody. Only the big boys have the funds to play it properly, and only they have access to almost negligible exchange rate differentials which ordinarily would make their high-volume/small-margin trading unprofitable. To a lesser extent, businesses, individuals with share market investments, and institutional investors (who act on behalf of superannuation funds) are similarly outgunned and short changed.

So, to return to the third main justification for the TT - it will largely prevent currency traders from continuing to milk most of their ill-acquired gains. These parasites, who produce absolutely no wealth, can rip off in a matter of an hours orders of magnitude more than an ordinary, hard-working person can possibly hope to save in a lifetime. So, any Georgist who protests at the immorality of the TT (because it's a tax) needs to have his other eye prised open!

DEALING WITH OBJECTIONS
"IT'S SIMPLISTIC!"

As I discovered during a recent debate on the TT, many objections or reservations about it are based on very scanty information. Just as our own proposals for Land Value Taxation are often misrepresented as a simplistic "Single Tax", so too is the TT.

The TT has been considerably developed and enhanced since its original proposal, and - given the chance of being implemented - would undoubtedly be further improved. This is not the place to elaborate, except to mention the important augmentation proposed in 1996 by the German economist and IMF consultant, Paul Spahn, who made the case for a two-tiered tax.

A minimal tax rate would apply on all transactions, and a higher rate would be activated at times of market turbulence, to calm greater market volatility. Under this scheme, an exchange rate would be allowed to move freely within a band, but overshooting the band would result in a tax on the discrepancy between the market exchange rate and the closest margin of the band. Exchange rates would thus be kept within a target range through taxation rather than central bank intervention (and consequent depletion of international reserves).

The two-tiered system would thus function as an automatic circuit-breaker whenever speculative attacks against currencies occurred (if they occurred at all under this regime). The two taxes would thus be fully integrated, with the former constituting the operational and computational vehicle for the latter. Unlike the original proposal, which would indiscriminately tax all transactions at the "wrong end" and therefore penalize normal liquidity trading, the exchange surcharge would apply much more heavily on transactions at the "speculative end" and would not affect normal trading.

It should be added that the TT's purpose is to allow the smooth adjustment of exchange rates to economic fundamentals, not to restore an ailing economy to health. The TT would not be able to prevent speculative trading triggered by sudden fears of payment defaults or political crises - nor would this be desirable. In other words, the TT would do little to extend the lives of unsustainable currency regimes and will not stop attacks on currencies that are significantly overvalued.

"IT'S UNWORKABLE!"

There are a number of somewhat valid concerns here. Firstly is the issue of whether the TT would work if there wasn't global cooperation to implement and enforce its collection.

Well, global cooperation could be brought about in a number of ways and, even if it couldn't, a localised version of the TT would still operate effectively.

Tobin himself argued that cooperation might be enforced by allowing national governments to keep some of the tax revenue - a big sweetener like this would go a long way to inducing governments. One only has to reflect on how easily our state governments have been bribed into accepting a take of the socially-destructive new forms of legal gambling profits to see how they could cooperate with the TT.

In any case, agreement amongst just a few of the major financial powers could bring about implementation, as the UK and USA account for 50% of all transactions and the top 9 nations answer for 82%.

Furthermore, a plan has been proposed which would see Europe (where a large measure of support for the TT is rapidly growing) capable of going it alone. In this case, the TT will not be applied directly to the currency trading itself (i.e. the exchange of euro against, say, dollar), but when national currency is remitted to a foreign country. The purchase tax thus becomes an exit tax. By this means, we see that:

· there are no insuperable technical problems
· it has the same effect as a direct taxation of currency trading
· it affects foreign payments and direct investments in the same way as the TT
· it is an effective means to prevent the circumvention of the TT by transferring national currency to an account abroad.

Such a situation would, in practice, make it unprofitable for "scalpers" to avoid the TT by dealing in euros abroad. It would be necessary for scalpers to keep large amounts of quickly liquidatable (thus low paying) euros in foreign countries in order to use them when convenient for the purpose of speculation, and the cost of this would exceed the low TT rate.

Practical proposals include the use of designated settlement sites for collection of the TT, and the use of increasingly sophisticated electronic tracking mechanisms which have kept pace with the financial engineering of derivate instruments, to apply the TT to forward, futures, and swap transactions in addition to spot transactions.

To oversee these arrangements, an international agreement to impose a tax regime could be generated by a ratifiable convention that is renewed regularly. The international agreement could be coordinated and supervised by the IMF. That or another (or new) international organisation could be authorised to draft a tax code, to amend and interpret the code and to collect the taxes for stipulated international programs. The IMF, with expertise in "maintaining interest rate stability and orderly exchange arrangements among its members" might be the most appropriate institution for implementing the tax.

CONCLUSION

I trust you've been able to appreciate the 3 main advantages of the TT enough to agree that they outweigh its drawbacks, real and imagined. I'm still the same fervent advocate of Henry George's proposals while at the same time strongly advocating the TT. I believe our movement is should not be preoccupied with and hung up on land, but should move ahead with developments (or degeneration, as the case may be) in economic conditions. The land problem will remain with us for as long as the Law of Gravity holds, but we must also be on the lookout for all forms of privilege. If Henry George took incarnation today as the second Dalai Henry, I reckon he'd be on the podium and thumping his fist for the urgent implementation of the TT.

Certainly old Henry would identify with the motives of most of today's advocates of the TT - basically, most of the Good Guys in the social justice, environmental, progressive liberal and Third World Aid movement. The opponents of the TT are basically the big speculators, various plutocrats, the lunar-right International Chamber of Commerce, the IMF, WTO and World Bank. Need I say more?