Time for a Tobin Tax
by Robin Round
excerpted from the book
edited by Kevin Danaher and Roger Burbach
Common Courage Press, 2000
On 23 March 1999 the Canadian Parliament voted to "enact
a Tobin Tax in concert with the international community."
For three intense months people from across the country had written
letters, signed petitions, penned newspaper articles and spoken
out at public meetings. And now we had won. Canada had become
the first country in the world to declare that currency speculators
must be stopped.
During that time campaigners ran into the same basic questions
from ordinary people who were just beginning to hear about global
currency speculation and to get some sense of its dangers. Here
are some of the key concerns raised and our responses to them.
So what is currency speculation and why is it a problem?
The world of international finance has become a global casino
where investors seeking quick profits bet huge sums around the
clock. Unlike investments in goods or services, speculators make
money from money alone. No jobs are created, no services provided,
no factories built and no widgets produced.
Investors play the bond and currency markets, profiting from
the minute-to-minute, hourly or daily fluctuations in prices around
the world. And the game is big-$1.5 trillion is traded every day,
95 per cent of which is bet on whether currency values and interest
rates will rise or fall. Traders make money either way and they
thrive when markets are highly unstable, as they were in Southeast
Asia in 1997.
International investment banks are the big winners, but the
game has far-reaching impacts on the losers. As the Mexican, Southeast
Asian, Russian and Brazilian financial crises demonstrated, an
enormous human toll is extracted from the citizens of these countries
when investors panic and run for the exits.
As national economies become more integrated, future financial
crises are inevitable unless changes are made.
What is the Tobin Tax?
In 1978 Nobel Prize-winning economist James Tobin proposed
that a small worldwide tariff (less than half of one per cent)
be levied by all major countries on foreign-exchange transactions
in order to "throw some sand in the wheels" of speculative
flows. For a currency transaction to be profitable, the change
in value of the currency must be greater than the proposed tax.
Since speculative currency trades occur on much smaller margins,
the Tobin Tax would reduce or eliminate the profits and, logically,
the incentive to speculate. The tax is designed to help stabilize
exchange rates by reducing the volume of speculation. And it is
set deliberately low so as not to have an adverse effect on trade
in goods and services or long-term investments.
How would a Tobin Tax benefit the global economy?
It could boost world trade by helping to stabilize exchange
rates. Wildly fluctuating rates play havoc with businesses dependent
on foreign exchange as prices and profits move up and down, depending
on the relative value of the currencies being used. When importers
and exporters can't be certain from one day to the next what their
money is worth, economic planning- including job creation-goes
out the window. Reduced exchangerate volatility means that businesses
would need to spend less money "hedging" (buying currencies
in anticipation of future price changes), thus freeing up capital
for investment in new production.
Tobin's proposed tax would not have stopped the crisis in
Southeast Asia, but it could help prevent future crises by reducing
overall speculative volume and the volatility that feeds speculative
How would the Tobin Tax benefit national governments?
It is designed to reduce the power financial markets have
to determine the economic policies of national governments. Traditionally,
a country's central bank buys and sells its own currency on international
markets to keep its value relatively stable. The bank buys back
its currency when a "glut" caused by an investor selloff
threatens to reduce the currency's value. In the past, most central
banks had enough cash in reserve to offset any selloff or "attack."
Not any longer. Speculators now have more cash than all the world's
central banks put together. Official global reserves are less
than half the value of one day of global foreign-exchange turnover.
Many countries are simply unable to protect their currencies from
By cutting down on the overall volume of foreign-exchange
transactions, a Tobin Tax would mean that central banks would
not need as much reserve money to defend their currency. The tax
would allow governments the freedom to act in the best interests
of their own economic development, rather than being forced to
shape fiscal and monetary policies according to demands of fickle
How would the Tobin Tax benefit people?
By making crises less likely, the tax would help avoid the
social devastation that occurs in the wake of a financial crisis.
It could also be a significant source of global revenue at a time
when foreign aid is decreasing and strong domestic anti-tax sentiments
are reducing the ability of governments to raise revenue. In the
face of increasing income disparity and social inequity, the Tobin
Tax represents a rare opportunity to capture the enormous wealth
of an untaxed sector and redirect it towards the public good.
Conservative estimates show the tax could yield from $150300
billion annually. The UN estimates that the cost of wiping out
the worst forms of poverty and environmental destruction globally
would be around $225 billion per year.
Who will be taxed ?
The majority of foreign-exchange dealing is by 100 of the
world's largest banks. The top 10 control 52 per cent of the market
and are mostly American, German and British. Citigroup tops the
list with a 7.75-percent market share and a 1998 volume of foreign
exchange transactions which, at $8.5 trillion, exceeded the GDP
of the United States. These banks operate in their own interest
and on behalf of large corporate and private investors, insurance
companies, hedge funds, mutual funds and pension funds.
What will be taxed ?
Only specialized financial transactions known as "spots,"
"swaps," "futures" and "forwards"
will be taxed. With the exception of spot transactions, these
instruments are known as derivatives because their value is derived
from the value of an underlying asset which is not bought or sold
in the transaction.
Tourists exchanging dollars to pay for their holidays abroad
would not be subject to a Tobin Tax. Debate continues as to whether
the tax should apply to any transaction less than a million dollars.
How does the Tobin Tax work?
The tax would target only speculative currency transactions.
Because it is not easy to determine which types of transactions
are speculative and which are associated with legitimate trade
in goods and services, the tax hinges on the speed of a transaction.
Speed is the primary difference between speculative and legitimate
trade. Productive investment works on the medium-to-longterm while
speculators flip investments like pancakes, profiting by the daily,
hourly and minute-to-minute fluctuations in interest rates and
currency values. Eighty per cent of all speculative transactions
occur within seven days or less 40 per cent occur in two days
A Tobin Tax would automatically penalize short-term exchanges,
while barely affecting the incentives for commodity trading and
long-term capital investments.
Won't speculatorsfind ways to evade the tax?
Inevitably. However, this has never dissuaded governments
from collecting taxes, particularly sin taxes designed to stem
unacceptable behavior. The real question is, how do you minimize
A Tobin Tax could be difficult to evade. Because currency
transactions are tracked electronically, in theory the tax would
be easy to collect through the computer systems that record each
trade. While the amount of money is enormous, the number of centers
where trading occurs and the number of traders is not. Eighty
per cent of foreign-exchange trading takes place in just seven
cities. Agreement by London, New York and Tokyo alone would capture
58 per cent of speculative trading.
Won't speculators shift operations to offshore tax havens?
Agreement between nations could help avoid the relocation
threat, particularly if the tax were charged at the site where
dealers or banks are physically located or at the sites where
payments are settled or "netted." The relocation of
Chase Manhattan Bank to an offshore site would be expensive, risky
and highly unlikely-particularly to avoid a small tax.
Globally, the move towards a centralized trading system means
transactions are being tracked by fewer and fewer institutions.
Hiding trades is becoming increasingly difficult. Transfers to
tax havens like the Cayman Islands could be penalized at double
the agreed rate or more. Citizens of participating countries would
also be taxed regardless of where the transaction was carried
What is the biggest barrier to the Tobin Tax?
It's not technical or administrative. It's political. The
tax is seen as a threat by the financial community and has met
with stiff resistance by a sector with massive political clout.
The very idea of putting people ahead of markets challenges the
foundations of the current global economic model and those who
Can the opposition be overcome?
In the wake of recent global financial crises, governments
everywhere are examining their faith in free markets. Even the
World Bank and the International Monetary Fund recently praised
Malaysia's use of capital controls to jump-start its battered
economy. This is a fundamental shift in attitude, unimaginable
only a year ago.
The political appeal of this tax to cash-strapped governments
and multilateral agencies worldwide can't be underestimated. And
voters will likely respond well to a campaign to tax big banks,
which are widely viewed as under-taxed.
Who supports the Tobin Tax?
The international trade union movement, the Canadian Parliament,
the Finnish Government and a growing number of academics and elected
representatives. In Brazil politicians recently launched the "Parliamentary
Front for the Tobin Tax." And citizens' movements for a Tobin
Tax are active around the world, including CIDSE in Europe, Attac
in France, the Halifax Initiative in Canada, KEPA in Finland,
War on Want in Britain, and the Tobin Tax Initiative in the United
States. These and other groups have established the International
Tobin Tax Network to share information and coordinate actions
as they work to build public and political support for the tax.
This is only one aspect of the fundamental reform of the global
financial system and is not a panacea for the world's financial
ills and development woes. The democratization of economic decision-making
and the equitable redistribution of wealth must become the central
principles upon which governments act in the new millennium.
The victory in Canada is an important first step, but the
real work has just begun. Citizens and politicians around the
world must not let the powerful forces who oppose the Tobin Tax
stifle, manipulate and ultimately undermine an essential public
debate on controlling global financial markets.
The Tobin Tax deserves a fair hearing. Only widespread popular
support and public pressure can ensure it.