The Tobin Tax: an Idea Whose Time Has Come?

Plan to Discourage Financial Speculation Has Fans and Foes

PARIS, SEPT. 22, 2001 ( Should international money movements be taxed to discourage speculation and to finance development in poor countries? Some leaders think so, among them French Prime Minister Lionel Jospin and German Chancellor Gerhard Schröder.

The proposal goes by the name of the Tobin tax, named after its designer, James Tobin, a Nobel Prize-winning economics professor at Yale University.

Estimates on global financial flows vary, but most fall in the range of a daily cross-border movement of $1.5 trillion to $1.8 trillion. The Tobin plan would levy a tax of about 0.25% every time money crosses an international border. The idea is to discourage short-term currency trades, mostly speculative, while leaving long-term productive investments intact. The revenue generated could go into trust funds to finance urgent international priorities.

Jospin speaks out

The Tobin tax is supported by many of those in the anti-globalization movement, but is far from a fringe idea. In August, Prime Minister Jospin declared his readiness to impose a surcharge on international capital movements. Days later, Sept. 5, the Financial Times reported that German Chancellor Schröder called for his country and France to lead a debate on speculative international capital flows.

Schröder said there was a need to recognize “weak spots” in the international financial system, such as offshore centers, hedge funds and derivatives. The chancellor did note some shortcomings with the Tobin tax. “For example, how do you distinguish speculative financial flows from those related to genuine trade finance?” he asked.

But he described the Tobin tax as one of many instruments which could be used. Schröder said such issues needed to be discussed by Europe´s finance ministers “with all clarity.”

The renewed debate over the tax has caused the matter of financial markets and the Tobin tax to be included on the agenda of the meeting that was scheduled for today by European Union economics and finance ministers at Liège, Belgium.

Criticism of the tax

The Financial Times was openly critical of the proposal and affirmed that Spain and Italy are opposed to the Tobin tax. The paper quoted Spain´s Ministry of Economy, headed by Rodrigo Rato. “If we really wish to address the economic imbalances created by globalization,” Rato said, “we should be thinking about strengthening multilateral and international institutions,” rather than imposing the tax.

The Economist in its Sept. 8 issue called the tax “unwise and unworkable.” The magazine acknowledged that only about 2% of the daily foreign-exchange transactions reflect direct trade in goods and services or investment in real assets; the rest being, in some sense, speculative. The Economist argued that speculators could easily avoid a Tobin tax, unless every country on the planet agreed to implement it. Traders could operate tax-free through offshore banks and use financial derivatives to skirt national laws.

The Spanish paper El País on Sept. 8 reported that the head of France´s central bank, Jean-Claude Trichet, maintained that his fellow central bank directors believe the tax has more disadvantages than advantages.

Across the Atlantic, both the Washington Times and the Washington Post, in an unusual display of unity, declared their opposition to the proposal. In a Sept. 5 article for the Times, Bruce Bartlett characterized Jospin´s declarations as a cynical exercise in political point-scoring, motivated by the need to shore up his support with the left wing. Bartlett also emphasized the practical difficulties of collecting the tax.

A Sept. 10 editorial in the Post opined, “The new focus on the Tobin tax is certain to be fruitless.” It affirmed that while the surcharge may reduce the volume of foreign-exchange transactions, it would not necessarily reduce the volatility of currencies.

Tobin speaks out

In a Sept. 3 interview with the German publication Der Spiegel, reprinted by El País, James Tobin clarified that his proposal had nothing to do with the sometimes-violent protests against globalization. He explained that personally he is in favor of the free market and supports the work of institutions such as the World Bank and the International Monetary Fund.

Tobin, who has been at Yale since 1950, explained that his proposal is designed to discourage short-term currency speculation, principally to avoid the dangers this presents for the economies of poorer countries when faced with a sudden withdrawal of funds. When currency speculators leave a market all at once, as happened in the 1990s in Mexico and the countries of Southeast Asia, governments are forced to raise interest rates to ruinous levels in order to attract funds.

The money raised by the tax should be spent, explained Tobin, on helping the poor. Regarding the implementation of the tax, Tobin is in favor of the IMF being the body in charge, given its experience in international financial matters.

Pipe dream or practical proposal?

Even the United Nations has its doubts about the Tobin tax. Last June 28 an international panel of 11 experts under the chairmanship of former Mexican President Ernesto Zedillo issued a series of recommendations on how to ensure stable development and fight against poverty.

The panel was appointed last year by U.N. Secretary-General Kofi Annan to identify practical means of fulfilling international commitments to fight poverty, set out last September by world leaders at the Millennium Summit in New York.

On the matter of imposing an international taxation for development the “Report of the High-Level Panel on Financing for Development” recognized that “taxing for the solution of global problems will be much more difficult than taxing for purely domestic purposes.” However this difficulty “should be assessed carefully against the alternative scenarios, including the very dangerous one of continuing polarization, exclusion, confrontation and insecurity in the world.”

The panel noted that a number of problems in implementing a tax on currency movements and concluded that “further rigorous technical study is needed before any definitive conclusion is reached on the convenience and feasibility of the Tobin tax.” For the sake of the Third World, it might be a study well worth the effort.

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