Every day almost four trillion dollars changes hands in the international currency markets, as we explored in the previous post. With these kinds of numbers, even a tiny tax on these transactions would raise hundreds of billions of dollars a year at the international level.
A tax on currency transactions was first proposed by economist James Tobin in the 1970s, and despite several rounds of improvements to the original idea it is still best know as the Tobin Tax. The basic idea of that a very small percentage, Tobin suggested 1%, the latest incarnation just 0.005%, would be levied against every currency transaction. If taxed at a middle-ground 0.25% or so, still a negligable sum in context, it would raise over $300 billion a year.
Because these funds would not belong to any particular government, it has been suggested that they be collected by the UN, and used to alleviate poverty. It would triple the money available for aid at a stroke, with enough change to plough into conservation and climate change adaptation. Little wonder the campaigns for the Tobin Tax have been led by NGOs and charities.
Technically, it would be very easy to implement, since foreign exchange transfers are all electronic anyway. Politically it is more challenging. It would need every country to sign up to it at once, otherwise traders would be able to switch to non-participating currencies. It would certainly need the major currencies of the dollar, the euro, the pound and the yen. Individual currencies could be taxed unilaterally otherwise – economics think tank Intelligence Capital produced a report (pdf) showing how a Sterling Stamp Duty could be applied to all sterling transactions that would raise around $4 billion a year at no cost to the UK economy.
As well as raising a large pot of international cash, the Tobin Tax would have a stabilizing effect on the markets. Under one possible configuration, tax percentages could be raised when a currency looked in trouble. This would deter speculators from raiding it and creating the self-fulfilling prophecies of a crash that we saw with Iceland last year. As it is Iceland temporarily had to freeze trading on the krona, but were unable to save it. A temporary high percentage tax on krona transactions would have worked better if it had been possible, slowing the effects and preventing profiteering. Since protecting an economy from attack safeguards jobs and homes, it fights poverty by prevention. By preventing speculative crashes and raising funds for development, the Tobin Tax would thus be a two-pronged attack on poverty.
So why hasn’t it happened? The simple reason is that there isn’t the political will. The nearest we got to the tax was a proposal to the European Parliament in the summer of 2005. It lost by just six votes, voted down by British delegates unwilling to risk even the tiniest loss of profit in the City of London.
Following that loss, the Tobin Tax campaigns appear to have petered out, after a decade of campaigning that started in earnest with the bursting of the Asian bubble. The French organisation ATTAC (Association for the Taxation of financial Transactions for the Aid of Citizens) spearheaded the campaign internationally. War on Want and then Stamp out Poverty took it up in the UK. Various countries made commitments to the tax in principle, from Belgium to Brazil, Venezuela to Argentina.
Perhaps the Tobin Tax became too caught up in the anti-globalization movement, which made it too easy to shoot down. I don’t know. What I do know is that events of the last twelve months show yet again what can happen when currency speculators are allowed to play fast and loose with shaky economies. With large sums of money needed for climate change and conservation, as well as fighting poverty, the tax has never been more important. And yet the campaigns have gone quiet.
I think it’s time it was revived. It’s not a magic bullet for solving all the world’s problems, but it is a great idea, and maybe this is its time. If it only failed by six votes last time, surely it has a very real chance now that the City has been shamed. Anyone want to try again?