December 11, 2004

The Tobin Tax (kind of a feasible Robin Hood initiative)

Now, I am certainly no economist, but the 'Tobin Tax' has been persistently brought to my attention over the past year and seems to be a fantastic idea that needs to be brought into mainstream awareness. I understand that in our 'virtual' financial market, trillions of dollars change hands every day. I also understand that despite great wealth in the world, thousands of people die from poverty every day. This is lunacy at it's most disgusting level. The Tobin Tax actually seems to benefit our own economies by offering stability, and it is a huge opportunity to generate aid for the third world. Below I will explain the reasoning behind it and the international support that it is receiving. It was talked about a great deal at the European Social Forum which I attended, and my Dad has banged on about it for a while now.
The information below was taken from
War on Want
Tobin Tax

ORIGIN - Proposed by Nobel-prize-winning economist James Tobin in the 1970s.

Over one trillion dollars ($1,000,000,000,000) changes hands every day on global foreign exchange markets. More than 80% of this trading is speculative – buying and selling money for the sake of profit. It involves financial institutions betting on changes in exchange rates in short periods of time.
An internationally agreed tax on currency transactions would be positive. A Tobin Tax would help calm speculation on markets while simultaneously producing revenue to combat world poverty.
We are only talking about a minimal tax, say 0.1%. This would not hold back productive business transactions for trade and investment, but speculative transactions would be hit harder because they rely on very small margins of difference between currencies.
Presently 84% of all foreign exchange transactions occur in just nine countries. A Tobin Tax introduced in these nine would initially provide a workable regime.
The idea is being considered by the UN and EU. Several national governments have called for it's introduction. It has the support of over 350 economists and 900 parliamentarians around the globe. The Canadian Government are pioneering the idea internationally, and France have agreed to introduce the tax when other EU countries sign up to it. Gordon Brown has said the UK have 'an open mind' to the idea but has been non-commital.
The Tobin tax could fund a huge increase in anti-poverty programmes and provide aid in the form of education, healthcare, food, water and sanitation. Estimates predict that a minimal tax of 0.1%, even after it's calming effect, could provide between $50 and $300 billion a year. This pot of money could be governed and distributed by a new democratic body under the UN. Such a body would have to work transparently, with genuine partners in developing nations.
The Tobin Tax would mean a system with more stability and less poverty.

WINTER 2004 - The Presidents of France, Brazil, Spain and Chile with UN Secretary General, Kofi Annan, have said that: “a tax on foreign exchange transactions is technically feasible on a global level”.
Presidents Chirac, Lula and Zapatero then made a formal declaration on hunger and poverty, saying "the greatest scandal is not that hunger exists, but that it persists even when we have the means to eliminate it. It is time to take action. Hunger cannot wait”.

2005 is an unprecedented window of opportunity for the currency transaction tax to be at the forefront of ways to finance international development as Britain hosts both the G8 summit and the presidency of the European Union.

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  1. Dan

    The Tobin Tax is The Way Forward. It's certainly more viable than debt relief, seeing as it doesn't threaten the fabric of the world economy. Trouble is, it requires full commitment from every country and with George Bush (and probably Congress) regarding any form of multilateral cooperation with suspicion and contempt, I fear the TT will take a long time to be realised.

    11 Dec 2004, 19:25

  2. That would be great if that happened, however, would they really use the tax money for such a good cause?

    14 Dec 2004, 09:34

  3. A 0.1% tax on $1,000,000,000,000 is still a billion dollar per day tax bill. As I've heard a number of people point out in the past, do you really think that currency speculators would just sit back and let that happen or just stop trading? Of course not – they'd simply move off-shore or to tax havens like the Cayman Islands. At a stroke a large chunk of our financial services industry (which makes up a significant portion of our GDP and generates billions in tax revenues) would be gone. I can't see Brown signing up to that idea, no matter how much he might want to to for humanitarian reasons.

    Technically it might be feasible but practically and politically it isn't.

    14 Dec 2004, 10:05

  4. An interesting idea. But as Richard says, it's not really feasible – it only requires one party not to co-operate for the whole thing to go tits-up. The forex market makes up a huge amount of the trading which takes place in the City, and this would suffer greatly at the hands of a Tobin Tax (all trading would move to offshore tax havens). This would have a knock-on effect on the entire British economy, meaning we import fewer products from the third world, meaning everybody loses.

    The real winners would be those countries which didn't co-operate with the tax, since they'd see a vast amount of capital flowing in.

    Other practical problems include the question of how the money would be distributed. Do we hand it to third world governments, so they can build bigger palaces and buy more weapons? Who oversees the body which has power over this vast pot of gold?

    There's also the moral question of whether we should be encouraging third world countries to live off aid in the first place. Our focus is completely mis-aligned. We should be looking to get the third world to a state where it can sustain itself, without having to rely on the West (e.g. through education). A tax such as this would be a step backwards.

    14 Dec 2004, 13:47

  5. What strikes me – and I'm sure it's a very naive point – is that skimming money like this doesn't obviously equate to physical aid. A simple monetary transfer doesn't solve a problem, that money must be converted into food, resources, infrastructure (?) and all sorts of tangible items to benefit the recipient country. In everyday life we don't think about where these things come from, we just accept that money can buy them. In a third world country, I doubt the same is true. I'm not talking about the availability of supermarkets, I refer instead to international trade, an area where the businesses and financial institutions being skimmed from certainly have some weight.

    It strikes me that obtaining the money is only half of the problem, and the simpler half at that. Remember what money IS.

    14 Dec 2004, 18:03

  6. I think Tobin's idea was more about stabilising international currencies than skimming money. His tax is meant to put a brake on currency speculation that (he argued) serves no purpose and makes life difficult for the central banks of developing countries.

    14 Dec 2004, 18:15

  7. Ah yeah, that makes sense.

    14 Dec 2004, 18:27

  8. Alex S

    The Tobin Tax would be a tax on the exports of poor countries. In fact, because the currencies of poor countries are generally quoted against the dollar, they would end up being taxed twice as harshly as rich countries. The money poor countries get for their exports to Britain, for example, would face the Tobin Tax first when Pounds Sterling is converted to US Dollars, and then again when converted into the poor country's currency.

    19 Jan 2005, 22:03

  9. It seems that only two problems have been raised directly with the Tobin Tax:

    Firstly, it is stated that the Tobin Tax would be tax on the exports of poor countries, and this is quite true given the point made. However when the overall effect of the Tobin Tax is considered, you quickly realize this is rubbish and that thirld world countries (and thus their exporters indirectly) will be net gainers! As Nicola stated at the start, 80% of currency trading is speculative, so only one in every five pounds (or dollars as i should say) raised will come from and exporting or importing nation anyway. Further – of that 20%, much of it will be raised by trade between first world countries, whose levels of trade, both in quantity and value of goods, far exceeds levels involving third world exporters. Less than 10% of the money raised by the Tobin Tax (TT) will come from exporters of poor countries, so for every dollar paid, over ten dollars will be recieved. Hardly a return to critisize?

    The point is also made that the intoduction of the TT will raise costs for city traders and send them away: "they'd simply move off-shore or to tax havens like the Cayman Islands. At a stroke a large chunk of our financial services industry (which makes up a significant portion of our GDP and generates billions in tax revenues) would be gone". Seriously, i find this comic. The scale is big – perhaps a $billion a day will be raised, but this needs, again, to be kept in context. The author firstly assumes all of this will come from Britain, and in particular the City – if only this were true: America as always leads the way, and as stated at the start, 84% of all transaction occur in 9 countries – at a crude estimate then the figure would be a tenth of the size for Britain. Then of course, consider the size of the tax – a proposed 0.1%. As a traders expenses come from a variety of sources (which we can assume for arguement sake all remain constant), the rise in his or her actuall costs will be less than even 0.1%. Firms don't move all their operations abroad if their costs rise by 0.1%. Add on top of that the pull to stay of the synergy of 'the City' in London (for the British) and the push away from moving that countries to move to may have poor infrastructure etc, as mentioned in point 5

    14 Mar 2005, 20:55

  10. The broader question of what to do with the money raised can now be considered, although is such an important topic it really should have its own blog. Two good points have been raised.

    Firstly it is not money, but what money can buy that is important. A stable currency is the first step to effective aid – It needs to be known that aid given will keep its value. For effective function society then needs good infrastructure – by working on big scales costs to firms, and thus prices to consumers can be reduced… that is the essence of how todays society works. To do this however an infrastructure is required where firms can safely and cheaply work on these bigger scales, and this is where poor countries often fail.

    Here in the UK, i can buy anything, at importantly a cheap, competitive price – if i wanted to start a delivery company for example, by looking online, i could find the cheapest and best priced vans, and know that through a variety of couriers it could be dropped off safely outside my house. My experience in the thirld world however would have been quite different – corrupt governments firstly often put restrictions on new business, requiring among other things 'fees' and long waiting ques before a business is authorized [thus aid needs to be given to non-corrupt sources]. Next, to choose my mode of transport for delivery, i would have few resources upon which to compare prices. Finally i wouldn't even be sure that the van among other goods I ordered would arrive at house…if i even had a house [thus aid should be spent on building tangiable infrastructure such as roads, telephones etc to allow sustainable business to be created and grow within the poor/third world countires]. And even if after all this I managed to start a business, the chance anyone else had started a business and wanted a courier would be slim. Thus the requirement to give aid to non corrupt recipitents who would spend the money on infastructure ties in well with the second poind: that aid should create a self sustainable economy, and not cause countries to live off aid.

    14 Mar 2005, 21:00

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