Tobin Tax: a tool for global justice - by Tony Colman MP

Summary:

Global poverty is a key priority for Labour. Yet, the question of how to finance International development has yet to be comprehensively answered. Tony Colman MP outlines the arguments for the introduction of a Tobin Tax as an innovative solution for financing international development.

The uncertainty that came with the full flotation of currencies after 1971 prompted some economists to propose methods to calm currency markets. In 1972, the American economist James Tobin led the way when he suggested a low level tax on currency speculation could be used to protect economies from the ravages of modern day capitalism.

Today most economists believe that the low rates of tax proposed, ranging from 0.01 per cent up to 0.5 per cent would have a negligible effect on currency markets and the tax would not, therefore, serve its purpose as a stabilising force. Yet interest in the tax is stronger than ever before.

The ‘Tobin’ Tax has been adopted by a different agenda: that of international development. In the face of unacceptable levels of poverty, extra finance is necessary to meet poverty reduction targets, to fund the United Nations, to assist in post-conflict reconstruction and other essential tasks to improve the quality of life of poor people across the globe. Current levels of Overseas Development Assistance (ODA) are shamefully low. Might Tobin hold the key to a whole new source of finance for development, essential to realising the Prime Minister’s vision of global justice?

The core question we must ask ourselves in this debate is whether such a tax on currency speculation is really viable. For decades we have heard financiers and governments alike calling the idea impractical, yet more recently a split is emerging and the concept is being considered in serious terms by governments in Europe, with the French Prime Minister Leonard Jospin being its most obvious supporter.

The Tobin Tax is no longer unpractical, it is a viable method of raising the much needed funds to reduce global poverty, invest in our environment, prevent conflict and finance multilateral institutions. In March, in Monterey, Mexico, the UN Financing for Development conference will put the tax on the top of the international agenda.

The UN and Finance for Development

The Zedillo Commission, set up by Kofi Annan to look into possibilities to find extra finance for development, made its report to the UN in June, and seemed rather lukewarm on Tobin. More stress was put on the potential of a carbon or fossil fuel tax, in essence a practical extension to the Kyoto Protocol. Yet the collection of such taxes would appear even more complex than a currency transaction tax. The fact of the matter is that 80 per cent of such transactions are carried out in only 8 countries and 50 per cent in just two (the UK and the US).

The Financing for Development paper repeats the call for meeting of Overseas Development Assistance targets of 0.7 per cent of GDP. The UK currently spends 0.20 per cent of its GDP on ODA and growth in this department is at a snail’s pace. In many countries development budgets are actually shrinking. Extra funds are required. Can the Tobin Tax provide these extra funds? Figures from the Bank for International Settlements suggest that $US 264 trillion may be taken as an indicator of current levels of total annual global currency speculation(1). If a tax were fixed at 0.1 per cent and it had no effect on the tax base, it would raise revenue in the order of $US 264 billion. In the unlikely event of the tax base being reduced by 50 per cent, $US 132 billion would still be raised, which is more than double current ODA from OECD countries and multi-lateral institutions. Even at a rate of 0.02 per cent around $53 billion would be raised(2).

Tobin is not a development panacea. Foreign direct investment, local domestic financial resources and world trade are also fundamental. But, to kick-start essential ‘global goods’ - such as education and health - funding is needed now. Domestic tax bases will not be sufficiently developed to provide such services in many developing countries for decades to come.

Is Tobin Viable?

In August, James Tobin repudiated the applicability of his tax. Indeed, to quote the man himself:

‘Having a tax of this kind adopted depends on international agreement, and since the US is dead against it, it is not going to happen.’

Other doubts expressed by international financiers centre on issues of practicality. How would the tax be implemented and policed?(3) How would the funds be distributed and who would oversee the likely international squabbles produced? Would the tax have too large a negative effect on trading centres such as New York and London, in effect reducing the tax base significantly? More to the point would the 0.5 per cent, or lower, tax rate actually have the capacity to reduce instability when a Third World currency can crash 10 per cent in a single day?

Yet, in spite of these doubts, John Langmore of the UN, on 21 August 2001, issued a technical note to the Zedillo Commission in which he wrote of the greater difficulties of the Zedillo recommendations ranked ahead of the Tobin Tax. On the proposed International Air Transport Tax, he felt that developing countries dependent on tourism could be catastrophically hit. He supported a carbon tax, but felt it could come out of further Kyoto negotiations and should be earmarked to support renewable energy world wide, rather than ODA fundraising.

On the Tobin Tax, or currency transaction tax, he is very positive. Langmore argues that it is in fact generally agreed that the tax would not have a detrimental effect on trade or long term investment. Yet there are still genuine fears that the tax may have the effect of reducing its base, that is it may discourage such transactions. For this reason Langmore recommends that the initial tax rate might be very low with the option to be raised in fully agreed small steps. In this way the elasticity of the tax base can be assessed gradually and realistically, leading eventually to a more fixed rate. Langmore states that it seems most likely that the level of currency transactions under any of the tax rates considered would generally continue to grow. The value of such transactions is already 500 times that of foreign direct investment.

With regards enforceability and administrative feasibility, the banking context is changing. Centralisation of the settlement system has already begun and in the second half of 2002 the Continuous Linked Settlement (CLS) system will come into force and increase manageability in numerous ways.

If the tax were collected at the point of bank settlement, Langmore’s technical note argues that enforcement and administration would be relatively inexpensive. Currency deals world wide already carry a small charge in the main exchanges, to cover administrative costs. So a precedent has been set for some time, in terms of administrative feasibility.

While in theory, transactors could attempt to avoid the banking settlement system, and therefore increase the difficulty and costs of enforcement, the banking risks associated with such avoidance are likely to act as a deterrent. Tax havens have long offered an opt out mechanism to those wishing to work outside the main exchanges; but we are also seeing changes here.

Post 11 September, there is a common call to phase out tax havens. Such loop holes in international taxation have assisted in the financing of terrorist networks. Such a crack down cannot occur overnight because our predecessors in policy making encouraged certain developing countries to become tax havens – and these countries now rely on such hot money movements. Could we use the finance raised from the Tobin tax to finance initiatives to crack down on tax havens? If so, the tax could pay for its own policing.

There has to be a world agreement on the Tobin Tax. There is already a move to set international standards for accounting transparency, yet another factor that theoretically increases the feasibility of the Tobin tax.

As well as significantly reducing the risks associated with foreign exchange transactions, CLS has the potential to revolutionise the world's financial services market. The CLS system, its inventors claim, has the potential to increase the speed, efficiency and indeed safety, of foreign exchange transactions. Such increased operational efficiency, and the decrease of failed transactions will bring long term cost benefits.

Distributing the Proceeds

It is interesting that the bigger problem is agreeing how the tax, once raised and collected, should be spent. In its literature, CREED (Centre for Environmental and Economic Development), the main US NGO campaigning for Tobin, devotes 1 paragraph to implementation and 4 pages to how to distribute the funds raised!

The easiest answer is for each country collecting the tax, to agree that a certain proportion is hypothecated and should form that countries additional spending on ODA, over and above that country’s 0.7 per cent target. While developed counties might agree to pledge to ODA, say, 80 per cent of the money raised, developing nations could be permitted to keep a larger proportion, to be spent on public services, internally. However the sums are worked out, all the proceeds must go to improving people’s quality of life across the globe.

Thus, the Tobin tax is now feasible and holds excellent prospects for increasing ODA and decreasing global poverty. But, will it actually work to decrease market instability, the purpose for which it was originally intended? At the low rates suggested it is difficult to see how a tax on currency speculation could really tackle the financial instability that so deeply effects poor people all across the globe.

The world has moved on since the seventies – and since the currency shocks of 1998. It is now acceptable for individual countries to put up their own currency barriers. The actions of the Malaysian government in 1998 were much maligned at the time but with hindsight, have been accepted as legitimate.

The other change since the seventies has been the move towards blocks of countries sharing the same currency. It might well be that the US Dollar will become the UN dollar this century. Already we see the ‘dollarisation’ of the Americas moving forward.

At the World Bank meeting in Prague last year talk was on the prospect of four or five global currencies:

The Dollar, (which included the Middle East in its area of use)
The Rupee
Chinese Yuan
The Japanese Yen
And of course the Euro (covering all of Europe, Russia and Africa).

It is possible to use an ATM machine in Ouagadougou, Burkina Faso, to get local currency fixed on CFA Franc values, in turn fixed with the French Franc (guaranteed by the French government); what this in fact means is that millions of Francophone Africans have their interest rates set by the ECB in Brussels. While backed by the French rather than European tax payer, the situation may well be a clue to the nature of future currency blocks and the feasibility of backing up currencies badly hit by large scale speculative transactions, without the need for a Tobin Tax.

And if it is in British economic interest we, no doubt, will join the Euro and not need the Tobin Tax to discourage a run against sterling. And, perhaps Commonwealth Africa would like to have the same arrangements as CFA Africa.

It appears, then, that the Tobin Tax, in terms of a currency stabiliser, may in the future, be at least partially overtaken by such developments. But both developments have the potential to help to protect the poor, and indeed the wealthy, from devaluations which rapidly inflate the cost of essential imports.

Is now the time for Tobin?

New developments in the banking system are paving the way for the feasible administration of an internationally collected tax on currency speculation. A new political will is developing in which the real effects of globalisation are prompting us, the rich west to respond to our responsibilities to the poor.

As chair of the IMF and a leading thinker on the Tobin Tax in the UK, I call on Gordon Brown to reconsider the UK’s stance. Indeed, following the path trodden by Lionel Jospin is not a dangerous option but would be popular and realistic in today’s global climate.

The events of 11 September make the Tobin Tax more likely. The Americans now want to close those tax havens and keep a close eye on all money flows. In November last year the WTO displayed its enthusiasm to assist rather than burden poorer countries by scheduling another development round.

Implementation of Tobin will require a rules based organisation based on one country: one vote. With the reform of the WTO on the agenda, Tobin should be born in mind in future meetings. In his Speech at the Lord Mayor’s Banquet in November 2001, Tony Blair made it clear that since 11 September we in the west cannot live in luxury and isolate ourselves from the disadvantages of so many others. The UN Financing for Development Conference takes place in Mexico, in March. It is here, following the terrible events of last September and the more hopeful signs from the WTO in November, that the real political sign up to Tobin can take place.

In short, a tax on currency speculation is no longer a call from NGOs on the periphery of policy making. In the twenty first century, the Tobin Tax is a real possibility; it is being considered in national and international forums for its recognised potential to combat world poverty, conflict and global environmental protection.

And if James Tobin wishes to discard his brainchild, I would rename it the Langmore Tax. For it is John Langmore who has admirably done most to prepare the key world governments for its applicability and feasibility.

Tony Colman is MP for Putney (1997-). He is a member of the International Development Select Committee and of the Inter Parliamentary Union Sustainable Development Committee.

Notes

Langmore 21/08/01: 8
ibid
See for example comments by IMF economist Janet Stotsky 1996

Tobin Tax: a tool for global justice - by Tony Colman MP

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