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TOBIN TAX

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WHAT IS TOBIN TAX?

Named after Nobel winning US economist JamesTobin, proposed in 1971

Taxes on cross-border currency transactions.

Enacted by national legislatures, followed bymultilateral cooperation for effectiveenforcement.

It is a tax on capital inflows

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WHY IS IT LEVIED?

To discourage currency flows and help stabiliseexchange rates

Helps to eliminate incentive for speculation

Amount (less than 0.5%) would be levied on allforeign currency exchange transactions to deter

speculation on currency fluctuations.

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WHY IS SUPPORT GROWING FORSUCH A TAX?

Today approx $1 trillion worth of currency istraded in unregulated financial markets

Only 5% of this activity is related to trade and

other real economic transactions

Other 95% is simply speculative activity

This speculation plays havoc with nationalbudgets, economic planning and allocation ofresources.

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Due to Tobin tax, speculative transactions

would be taxed at a tiny percent of volumeonce per transaction.

Discourage overnight or short-term currency

trades, while leaving longer-term investmentsbarely effected.

Dangerous currency volatility would thus be

reduced and national macroeconomicautonomy restored.

Parts of the revenue would go to international

trust funds & national budgets

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IS THERE AN OPTIMUM TOBINTAX RATE?

James Tobin stated the tax to be close to 0.5%

However, Economists proposed transaction rate

to range between 0.05% to 1%

Even a 0.5% tax applied per transaction incurrency market would discourage trade, as

spread in many of these transactions are as lowas 0.005%

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This sounds good, but is itpolitically possible?There are two key political issues involved withputting such a tax in place.

1. It would be necessary to forge agreement

amongst the major countries to implement auniform tax, and

2. there would have to be agreement on thecollection and distribution of the tax revenue.

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Perhaps more significant is the fact thatmany governments face large deficits and

are looking for new sources of tax revenuethat are not politically suicidal.

The pace and the volumes traded in themarkets have added a level of risk todoing business, for as much as greatprofits can result from speculation so cangreat losses as in the Barings Bank fiasco.

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EFFECT OF CURRENCY TAX ON

GLOBAL ECONOMY Reduce the volatility of exchange rates

Reduce the power that financial markets haveover national governments to determine fiscal &monetary policies

Raise revenue

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PRINCIPLES OF TOBIN TAX

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PRINCIPLES

To alleviate human suffering like expensive food andbasic items, widening gap between rich and poor, thestrain on the global environment, and high rates ofunemployment occurring due to currency devaluation.

To help government central banks to adequatelyprotect the currency of their own nations as foreigncurrency exchange has grown recently to over atrillion dollars .

To shrink the volume of daily currency trading from its

present trillion dollar daily level and restore eachnations ability to control its own currency, as well asgenerate revenue.

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PRINCIPLES

Need to be adopted by major currency nations , to beeffective, rather than universal adoption.

Since the revenue could be quite large, over onehundred billion by some estimates so basic humanneeds and basic environmental needs must be metfirst, such as those addressing environmentallysustainable development, climate change, andhunger.

Administering agencies should cooperate with local

civil society to provide actual services for basic needs,such as disaster aid and food distribution, small-scaleagriculture and reforestation, health clinics anddisease prevention, local water systems and pollutioncontrol mechanisms with the help of revenue

generated.

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PRINCIPLES

Proposals range from .1% to .5% per transaction.Longer-term investments occur less often, so wouldnot be adversely affected by this small tax, and theoverall remaining volume would be enough to createsizable revenue.

Should be Political will for successful adoption, andgrassroots support to educate decision makersregarding this opportunity.

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ADVANTAGES

By placing a tax on currency trades, it makescurrency trading slightly less attractive. Bymarginally increasing the cost of currency tradingthere should be a reduction in speculative trading,leading to greater exchange rate stability in floating

exchange rate systems.

A tax set at 0.01% on just Sterling trades would raise2bn a year. A tax on global currency trades couldraise significant sums.

After damage created by speculative investmentssuch as derivatives and futures trading, there hasbeen greater support for intervention to reducespeculative buying in financial markets.

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DISADVANTAGES

Difficult to tax all transactions, it may encourageinvestors to find ways around the tax.

Decline in currency flows may harm functioning ofmarkets and lead to poor liquidity in currencymarkets.

Tax may be insufficient to prevent speculative flowsand currency movements which are driven byeconomic fundamentals.

A tax may discourage 'hedging' which is a way ofinsuring against currency movements rather thandiscouraging speculation.