SANE Views

Vol.4 No.10, 21 September 2004

Steps Towards a Tobin Tax

Margaret Legum

The Belgian Parliament has passed legislation to introduce a currency transaction tax, otherwise known as a Tobin tax after its original promoter thirty years ago. This represents a success for the popular global Tobin Tax movement. Belgium follows Canada, which passed Tobin Tax enabling legislation about five years ago.

The Belgian law has two purposes: revenue raising; and putting a damper on speculative trading in currency. These require a two-tier tax.

There will be a low rate – about 1% of the transaction value – in normal trading times, to raise the revenue needed to meet the global Millennium Goal of halving poverty by 2015. Considering that globally over a trillion dollars are traded daily - currency trading is the most lucrative trading in the world - even this low rate will raise billions of euros.

But when there is a sharp change in the value of a currency, the top tier will kick in, raising the rate to as much as 8% as an anti-speculation mechanism. It will act as a circuit-breaker to prevent currency crashes that have ruined many economies in the past decade. The Asian crash alone cost ten million jobs world-wide, according to the International Labour Office.

There is precedent for this type of tax revenue: security transaction taxes are already levied in six developed countries. They are easily collected because trading is mostly electronic, so the ‘evasion’ argument is overcome

South Africans have cause to wish the rand were less easily traded, less volatile, less unpredictable and more related to the real economy. A two tier Tobin Tax could have the same benign effects here as the Belgian legislation envisages – not to mention the revenue raised.

Sadly the Belgian precedent is not yet much use in encouraging such action here, because it is not to be implemented until the rest of the EU agrees to do the same. And inquiries yield virtually no sign that the Belgian government is currently actively advocating the Tobin Tax to other EU governments: their European Embassies seem unaware of any instruction to promote it there. It seems the drag effect on radical change in the financial system has slowed the process almost to a halt.

So for the time being the legislation, while important in principle, is ineffective. The British Chancellor, Gordon Brown, is not a fan of the Tobin Tax. He advocates using the International Financing Facility (IFF) to raise capital for the Millennium Goals. But this is another means to create debt, since it is about borrowing from banks for development finance. The last thing we need is more debt in the developing world: only banks would benefit.

It may be that this is the reason why the global banking fraternity opposes such simple, obvious means to raise funds as the Tobin Tax: if revenues can be raised without borrowing, banks lose a source of profit.

It is a real pity that the Belgian government is not pushing for an EU-wide Tobin Tax. It would be part of a badly-needed process to restore governments’ capacity to respond to their own electorates to alleviate poverty – even in Europe. Certainly it is fear of the punitive response of the financial sector that has prevented governments reasserting their control the behaviour of capital. The myth is that foreign direct investment will be punitively withdrawn if governments tamper with free capital in any way.

It is a myth because the countries that have most meticulously placated foreign capital have suffered more than most: the Asian ‘Tigers’, Argentina, Russia and Turkey among them. South Africa has not been rewarded with FDI as a result of its open capital markets.

Indeed, the country that receives the most foreign capital is China, which has hardly any capital market and a fixed exchange rate. It has the most hair-raising bureaucracy for borrowing and investment; but still they pour in. India and Taiwan also do well, despite regulation. Why? Because the type of investors they are attracting is interested in production and trading in the real economy – the kind that creates jobs. And those investors seek stability and predictability, rather than the opportunity to make a fast speculative buck.

But is it not precisely that kind of investor that South Africa is seeking? The kind that puts bricks and mortar on the ground, and employs people? If so we may be reassured that they are more, rather than less, attracted to countries where the government is in control of the main parameters of the economy. Despite the currently becalmed Belgian example, South Africa should be considering a Tobin Tax.