Vol.5 No.7, 13 April 2005
A Tobin Tax on South Africa's Foreign Exchange Transactions
In the late ‘70s, Prof. James Tobin, who became the 1981 Nobel Laureate for Economics, designed a scheme for, as he put it, ‘throwing some sand into the wheels of the foreign exchange markets’. The purpose was to rein-in market volatility, to raise revenue and to restore some national sovereignty over currency. Today, the problem of currency volatility has seriously worsened: about 95% of all currency transactions are purely speculative and not related to underlying 'real' economic activities.
What became known as the Tobin Tax is a small levy on all foreign exchange transactions, including spot and forward transactions, hedge funds and derivatives. It is in effect a 'transaction tax' on foreign exchange. It could be varied in size according to how long the funds remained in one place, thus privileging funds used to buy currency for genuine trade or investment.
The rate recommended by the international movement for a Tobin tax is between 0.1 % and 0.25%, which would discourage all speculation at profits less than those percentages. It would therefore have a relatively calming effect. Even the smallest tax would raise, on the current daily transactions of around $2 trillion, some $250 billion every year. Compare this with the $160 billion that Jubilee 2000 reckons to be the cost of wiping out the unpayable debt of South countries. It could also address the $80 billion the UNDP estimates would be needed to eliminate the worst forms of poverty. A Tobin Tax would net these amounts each year. If the tax served the purpose of reducing speculative transactions, the take would decline - which could be offset by raising the tax.
About R9 billion is the daily turnover on the SA foreign exchange market. At a mere 0.1% transaction tax, done by bank computers, this could bring the government two-thirds of current revenue, some R200 billion. Education and health could then be fully funded and taxes lowered
Opinions vary as to who should receive and administer the tax. The countries in which the transactions take place could use it. Or it could become the property of the international community as a whole. The only international organisation that represents all nations at present is the United Nations and its specialised agencies. The tax would have to be collected nationally, backed perhaps by the Continuous Linking Settlement Bank, established in 2000 to track all international deals round the clock. Evasion is a possibility with all taxes, but perhaps least of all where it is international and by law made through registered banks. Heavy penalties for evasion could be applied.
The international campaign for a Tobin Tax has made considerable headway. At the June 2000 Social Summit in Geneva, the Canadian government - the first government to have committed itself to promoting a Tobin Tax - achieved agreement that the UN host a study on ‘a currency transactions tax’. All 160 governments represented agreed to the study.
Meanwhile in 2000 over 200 members of the European Parliament narrowly missed a majority in favour of a Tobin tax, voting 225 to 229. And a supporting motion in the British Parliament received over 100 signatures from MPs of all six parties. The Canadian and the Belgian governments have passed legislation and the French and German governments have all indicated their governments’ intention to study the implications of a Tobin Tax. The French Parliament adopted the proposal in principle in November 2001, noting that at their proposed maximum rate of 0.1%, the return on a tax on the Paris Bourse would be 50m euros a day. Even the US Congress is facing a motion by Congressman Peter deFazio proposing a comprehensive Tobin tax resolution.
Appearing before a House of Lords economic affairs committee in 2003, British Chancellor Gordon Brown said the Tobin tax had ‘big problems attached to it’. Most of these appear to be about enforcement - though the problem of evasion has not discouraged governments from imposing taxes that they support. Brown’s chief economic adviser, Ed Balls, commenting on the possibility that a Tobin tax might limit the destabilising effect of currency speculation said: "Well-designed, short-term capital controls could actually be more effective".
Here perhaps is a chink in today's solid armour of footloose capital. As a matter of fact, a Tobin Tax and capital controls are not mutually contradictory. It depends, in practice, on how much (politically) you want or need to please the owners of capital.
© South African New Economics Network 2007. Page generated at 10:15; 03 August 2007