Tobin Tax: Necessary, desirable, feasible
Contribution to the Panel Discussion of the Swiss Federal Finance Administration by Bruno Gurtner, senior economist, Swiss Coalition of Development Organisations (Alliance Sud).
The discussion about an international Currency Transaction Tax (CTT) is highly controversial. Most of the arguments against the CTT are based on the original model developed by James Tobin. They are less or even no more valuable for newer models such as the two-tier model of Prof. Paul Bernd Spahn.
The Swiss Coalition of Development Organizations argues (together with other international NGOs and repudiated scientists) that a CTT is feasible, desirable and necessary, both to reduce harmful speculation and to mobilise additional funds to tackle the massive global challenges that exist today. The international community urgently needs both more stable financial markets and new, innovative instruments for financing the development.
The Public Finance Case for a CTT
The Monterrey Conference on Financing for Development (FfD) confirmed the huge gap between the need for additional financial funds to finance international development and the commitments made by governments.
The UN Millennium Summit of September 2000 committed to achieving a set of concrete measurable global development goals by the year 2015, such as halving the proportion of the world’s population living in extreme poverty. The World Bank and the UNDP warned that on current trends over 70 countries, a majority in Africa, are likely to fall short in meeting these goals.
Additional 50 billions US Dollar in annual aid are needed to meet the Millennium Development Goals by 2015. The Monterrey FfD Conference only brought a small part of it.
Currently, foreign exchange transactions worth US$ 1.5 billion take place every day. Even a very low tax of 0,01 percent would mobilize immense funds to tackle the global challenges. Prof. Spahn estimates in his newest study that the CTT applied within the EU and integrating Switzerland would generate revenue of 20 billion Euro. UNDP estimates the worldwide revenue of a CTT on 150 billion US $ a year based on a tax rate of 0.1 percent and on 1996 currency transactions, the triple of present worldwide ODA figures.
Therefore: a CTT is necessary!
Many critical problems with global implications (environmental degradation, climate change, spread of diseases, stability of the international financial markets, organised crime, terrorism, migration etc.) need global, concerted action including the will to bear the necessary financial costs of it. National financial instruments should be complemented by global sources of finance. Very often sovereign states default on their contribution to global effort, in the expectation that others will act first and save them the trouble and cost (free ride).
A logical consequence of global economic activities are global taxes. The international financial markets belongs to the most globalized markets and should therefore submitted with high priority under internationally agreed taxation. CTTs are well adjusted forms of international taxes.
Such international taxes could also address the problem of harmful tax competition which has contributed to an erosion of national tax bases and to a shift of tax burdens away from mobile factors to less mobile factors.
CTT is only one of several proposals of international taxes and innovative financial resources discussed in the preparation of the Monterrey FfD Conference. These include among others international air transport tax, taxation on aviation fuel, carbon tax, a tax on luxury goods, taxing global public goods like international waters, seabed mining, international airspace, outer space, electromagnet frequencies, bit taxes, arms exports. All possibilities should be further examined and explored.
Therefore: a CTT is desirable
Reduce Harmful Speculation
Short term capital flows are a key cause for exchange rate volatility fostering speculative bubbles and aggravating financial crisis. Developing countries are highly vulnerable to external shocks. Short term capital flows must thus be limited. A two-tier CTT à la Spahn serves this purposes.
But a CTT will not prevent exchange-rate collapses resulting from maintaining massively overvalued fixed exchange rates and other bad outcomes resulting from bad policy.
A two-tier CTT will work best when introduced as part of an overall financial architecture, if it is part of a package of other reform measures like private sector involvement, sovereign debt restructuring mechanism, re-regulation of damaging short term capital flows.
A main task is the reduction of the dramatically increased potential for destabilizing currency attacks. The overhasty and disordered world-wide liberalization of international capital flows has facilitated global financial speculative behaviour. Large amounts of money can move uncontrolled and untaxed around the globe in the shortest amount of time in search of the highest possible return.
This detachment of the financial flows from any basis in the real economy has led to a self-referential system. Prices and rates are driven by short-term profit expectations resulting in unanticipated reactions of exchange rates. This leads again to renewed incentives to exploit these exchange rate movements for more profits.
A two-tier CTT would raise transaction costs and therefore help to reduce volatility. Taxation will make all currency transaction more costly. But short term transactions will be charged relatively harder than long term transactions (degressive structure). Undesired hot money is held back while long term liquidity needed for productive real economic activity is charged in a minimal, neglected way. A CTT may work as a "built-in-stabiliser” due to the fact, that rules are fixed in advance and for a long period, providing better transparency and secureing information for all market participants.
Again: therefore a CTT is desirable!
Feasibility: The new study, written by Prof. Paul B. Spahn, and ordered by the German Ministry for Development, refutes some main objections raised against a Tobin Tax. It makes sense from an economics angle in terms of its contribution to the stabilization of exchange rates. A two-tier CTT is technically feasible.
As consequence, the Swiss Coalition urges the Swiss Authorities to rethink their present position and to play a constructive role in supporting further investigations in not yet solved questions . Switzerland should start discussion with interested EU-countries and should also examine how our country could help developing and transition countries to introduce and implement a CTT.
Contact: Alliance Sud