Archive for February, 2010

Have Gordon Brown, Nicholas Sarkozy, Angela Merkel and other EU leaders dropped their support for a Tobin tax, or will they press home the idea in the near future?  This question is crucial, particularly now that there are widespread plans for swingeing ‘budget cuts’ in many EU member states, coupled with possible rises in VAT.

A Tobin tax (also known as a ‘Robin Hood Tax’) would be a fairer and more effective money-spinner than raising VAT. Such a tax was first suggested in 1971 by the American Keynesian economist, James Tobin, and was designed to slow down the volume of  speculative currency dealing by traders—what Lord Turner has recently termed ‘socially useless’ activity.  Although the idea was rejected by the Commission in 2002, much has changed since then; most particularly, currency speculation has risen by several orders of magnitude.

The Bank of International Settlements (BIS) estimates that in 2007 the world’s yearly currency transactions totalled US$800tr (that’s fifteen time world GDP or nearly a quadrillion dollars) of which 80% is purely speculative. Of this total, foreign exchange trade in euros is estimated to be worth nearly US$300tr (€220tr) per annum.  A 0.1% tax on euro trading would raise over €200bn a year—and that’s based on a tax rate of €1 per €1000, one-tenth the rate originally proposed by Tobin, or roughly double the size of the EU budget.

Why Not?

The usual argument against a Tobin tax is that all countries must agree to it if it is to work; ie, that if an Eurozone member state imposed it, all currency traders would move to Switzerland or the Caymans. There are two answers to this. First, the EU’s main currency trading member-state, Britain, already has a form of Financial Transactions Tax:  the stamp duty on share dealings is 0.5% per trade—five times 0.1%—and share dealers have not fled the UK.

Secondly, even if traders migrated, this objection has been overtaken by technology. Currency trades today take place on computer screens, and these can be monitored wherever they are physically located. Most important, for a currency trade to take place there must be an official settlement: unless the tax were paid, authorisation would be withheld and the trade could not take place.

A London foreign exchange brokerage firm, INTL Global Currency, has already run successful trials of a software program which tracks computer-based foreign exchange trading wherever it takes place.

Another objection is that a Tobin tax alone would not achieve its objective of deterring risky economic activity. Again, there are at least two replies: first, one can experiment with variable rates for different types of trades. Secondly, a Tobin tax could be complimented by a new bankruptcy regime requiring unsecured creditors and other counterparties to be forcibly and swiftly converted into shareholders, until the failed institutions are adequately recapitalised.

It’s quite feasible

In short, a Tobin tax on euro, dollar, sterling, yen or other currency transactions is perfectly feasible.  If such a tax were introduced for the euro, it is almost certain that other countries including the USA would follow. Clearly, a tax levied on all currencies would raise vast sums—according to a recent Austrian government study, a tax of just 0.05% would raise US$700bn per annum. Half of such a sum would finance the Millennium Development Goals; half could pay for a Green New Deal; ie, a major programme to stop global warming!

We need a Tobin tax. Why should ordinary citizens be made to pay for the financial sector’s gambling debts? After all, currency speculation is just another form of gambling. The proposal to tax bankers’ bonuses is a small step in the right direction, but we need far bolder measures. A Tobin tax on euro transactions would more than finance a Eurozone Treasury and is a good alternative to the ‘European tax’ (Lamassoure proposal) currently being debated. If EU member states have the courage to seize this opportunity, it could lay the basis for genuine economic sustainability.