| James Tobin | ||||||
“For every complicated problem,” the American journalist HL Mencken wrote, “there is a solution that is short, simple – and wrong.” The foreign exchange market’s view of the much-mocked, formerly dismissed but now resurrected Tobin tax follows the Mencken line. The idea of a tax on foreign exchange transactions is misconceived, most commentators and market participants agree.
Such a tax cannot work in practice, critics argue. Indeed, as a distorting intervention in the marketplace it would actually damage the functioning of foreign exchange markets, and make any perceived problems – of speculation and volatility – worse. Tobin’s tax would provoke unintended and harmful consequences. It should be put back in the old filing cabinet from which it has recently been withdrawn.
For all that, with calls for greater regulation of flows of funds that are part of the response to the terrorist attacks on the US, the Tobin tax is being seen in some circles as an effective part of the arsenal of control.
Even before September 11 it was clear that Europe’s politicians weren’t listening to arguments against the Tobin tax. Their consideration of it has now been formalized. At the end of September at their meeting in Liège, Belgium, Europe’s finance ministers called for the speedy preparation of a report, to be produced in time for the EU summit in Ghent in December, on the feasibility of introducing a new tax or levy on foreign exchange transactions. At the instigation of the French prime minister, Lionel Jospin, and with the support of Germany’s chancellor, Gerhard Schröder, the EU will now make a serious contribution to a debate that many had considered essentially frivolous and unlikely to be sustained.
Why the sudden change in climate? The political will behind the renewed interest in the Tobin tax – in Europe at least – is strong. Prime minister Jospin is seeking election next year as president of a France that, more than any other G7 or OECD country, feels uneasy about globalization and the workings of modern international capitalism. Looking to his left, chancellor Schröder echoes some of Jospin’s concerns. But more remarkably even the UK’s finance minister, Gordon Brown, usually regarded as one of the EU’s leading Atlanticists, and a professed admirer of Rupert Murdoch’s economics guru Irwin Stelzer, joined in the European chorus last month, urging another serious look at Tobin.
At the same time, in the US, a new crackdown is being promoted on tax havens, to get tough on money laundering in certain offshore (and onshore) financial centres. It is just another example of the way in which life has changed utterly since the appalling attack on New York and Washington on September 11.
| Avinash Persaud | ||||||
As long ago as 1971 James Tobin, a professor emeritus of economics at Yale University who once served on president John F Kennedy’s council of economic advisers, discussed a taxation rate of 0.05%, which he regarded as modest in itself but sufficient to bring about greater stability. The Tobin tax was never designed to raise revenue for any particular purpose. Nor was it conceived as a subversive, “soak the rich” policy. “Indeed,” Tobin wrote in the Financial Times, on the very day of the terrorist attacks. “I aimed to diminish the volume of taxable transactions.”
But anti-globalization protesters and campaigners for third world development have dusted down the Tobin tax as a tool with which to further their aims. There is a website (www.tobintax.org) and a rapidly growing body of literature that holds up the tax as a Mencken-style simple solution to several complicated problems. It is not too fanciful to suggest that, in this context, Tobin himself does not even really agree with the “Tobin tax”. As he wrote: “I cannot control the use of the words ‘Tobin tax’. While I assume that most advocates mean well, I deplore the tactics of some extremists. I am in favour of free trade … I regard the World Bank and the IMF as essential institutions – while critical of some of their policies and actions, I favour expanding their resources and functions.”
The arguments usually deployed against the introduction of a Tobin tax focus mainly on its impracticality. A Tobin tax would have to be introduced simultaneously, globally, with agreement in all key financial centres, and with the possibility of tax havens and offshore trading being ruled out. With WTO rounds of negotiations likely to take years to complete, and with the remnants of the Kyoto protocol on environment protection now drifting off into the atmosphere like so much greenhouse gas, the omens for signing an international agreement of this kind are not good.
But the new champions of Tobin, the anti-globalization protesters, are undaunted. (Tellingly, activists from the pro-Tobin camp met UK Treasury officials in the run-up to the Ecofin meeting in Liège.) Their eyes light up at the thought of taxing some of the $1.5 trillion of foreign exchange transactions that are conducted every day. Set at 0.1% rather than Tobin’s own suggested 0.05%, a levy could raise as much as $7.5 billion a week. This money, it is claimed, could go straight to development programmes around the world, while also throwing some “sand in the wheels” of speculative market activity. Only 2% of foreign exchange deals are directly related to international trade in goods and services. The rest of the deals are bets taken on future movements in exchange rates.
For some of the tax’s supporters it goes even further than that. They see a brave new regulatory world emerging from the dust of the awful events of September 11. They have free-market principles themselves in their sights. How could terrorists move and launder their money so easily, ask these critics. The free movement of capital is blamed. And the US government’s response? A crackdown on tax havens and offshore financial centres. Why is it necessary to bail out so many struggling airlines in the wake of September 11, ask the critics? Their answer again: the free market has failed, and the state must intervene. Why was security for domestic US flights so poor? The market again is at fault – the reference being to privatized security firms.
It is a very long way from this ad hoc arrangement in times of profound national crisis to the establishment of a Tobin tax in normal trading conditions. But perhaps a Rubicon has been crossed.
Avinash Persaud, managing director of global markets research for State Street bank, says proponents of the Tobin tax share a number of misconceptions. “Transaction costs are really very small in basis-point terms,” he says. “If you put up higher barriers to capital flows to the developing world, with aid budgets being slashed, you actually make things worse. The developing world isn’t suffering from too much capital, but too little.” Persaud continues: “The foreign exchange market really isn’t a physical place that can be taxed. If you don’t have uniformity across the world the deals will be made elsewhere. It’s true, the chances of international cooperation right now are higher than for some time, but I still think a Tobin tax is unlikely. Long-term capital flows are a good thing, there should be more foreign direct investment and private capital, so we need to reduce barriers to capital, not put them up; we should be attracting capital, not sending it away.”
But before the masters of the universe chuck the file marked Tobin back into the bin, they might reflect once more on why it is being discussed again at this time. The post-September 11 world is different. Previously unthinkable propositions are suddenly not quite so weird. The stop the world tendency is making most of the running in the continuing debate on globalization; politicians seeking re-election cannot ignore those voices of protest indefinitely.
