Further Memorandum by War on Want
RESPONSE TO THE TREASURY ANNUAL REPORT TO
PARLIAMENT ON UK OPERATIONS AT THE INTERNATIONAL MONETARY FUND
This short submission is intended to raise specific
points about the section in the Annual Report that looks at proposals
on taxing currency transactions (Tobin Tax, page 13).
War on Want is pleased that the Treasury has
given consideration to this issue in this report. This we believe
is recognition of the enormous public interest in the Tobin Tax
proposal and the international attention that is increasingly
being paid to the topic.
The section of the report that deals with the
Tobin Tax makes points about the proposal in three areas: the
effect of the tax on the market, the supposed inability of the
tax to separate out "good" and "bad" transactions
and the scope for evasion/lack of coverage. Generally we do not
feel that these points constitute a convincing case against the
proposal. We deal with these points individually below.
One factual inaccuracy in the Report is that
the G7 is not unanimous in its scepticism about the Tobin Tax.
The Canadian government (mandated by its parliament) is a well-known
supporter of the proposal and as such has raised the issue at
several key international events.
The Report makes two separate, but related,
points about the effect of the Tobin Tax on the market. One is
that it would distort the market, making it move more slowly and
that it would not adequately reduce market volatility and in fact
might increase it.
On the first point, it is true to say that the
tax will distort the market in the sense that any tax would do
this. The Central aim of the Tobin Tax is to slow the market down
in order to "lengthen the horizons of traders" in other
words to make traders think about the longer-term future of a
particular currency before making a trade. Any proposal to regulate
or adjust capital markets would to some extent distort their behaviour:
the question is would the distortion be desirable? In the case
of the Tobin Tax it would.
The second point on the ability of the tax to
reduce volatility is complex but, the weight of evidence points
to the tax having the potential to significantly reduce the numbers
of the volatile players in the currency market (by taxing them);
see The Tobin Tax: Coping with Financial Volatility, (1996),
ed Kaul, Grunberg and Haq.
There is also a more sophisticated adaptation
to the tax as proposed by Dr Paul Bernd Spahn of the University
of Frankfurt. The "Spahn Mechanism", basically a two-tier
Tobin Tax with a minimal tax rate on all transactions (basic rate),
and a higher rate (surcharge) which is only activated in times
of exchange rate turbulence, would help to prevent most crises.
The surcharge would only come into action when the level of currency
trading passes a certain threshold or safety margin. Once trading
enters or passes this margin, traders will be taxed heavily, thus
dissuading trading and dampening excessive currency movements.
Once the danger has passed, the rate will fall back to the standard
level. Such a mechanism would act as a kind of circuit breaker
in times of severe volatility (see Spahn P B: International
financial flows and transactions taxes: surveys and options.
International Monetary Fund, 1995).
The Tobin Tax would apply to all currency transactions.
It would be impossible to distinguish between different "kinds"
of transactions. The point of the tax is to penalise those transactions
that are most unnecessary and speculative. By setting the rate
of taxation very low, those transactions that are more speculative
(ie are very short term) are hit hardest. Furthermore trade and
long-term investment themselves would benefit from a more stable
economic environment and this would more than compensate for the
small extra cost imposed by the tax itself.
Although total global coverage would be difficult
to achieve, such coverage is not necessary for an effective tax.
Some 84 per cent of transactions occur in just eight countries
and most commentators believe that this represents a workable
tax regime. Most developing countries would join a "Tobin
Zone" as it would be in their interests to do so. Those countries
not joining could be penalised or marginalised. If offshore centres
choose to trade in obscure currencies this impacts on the global
economy. To suggest that major currencies could be traded via
offshore centres and so avoid the tax is to misunderstand the
tax as it is now generally conceived. The groundbreaking work
of Dr Rodney Schmidt (R Schmidt, A Feasible Foreign Exchange
Tax, 1999) in the area of collection and coverage, shows that
any currency transaction dealt anywhere in the world could be
taxed, via the settlements infrastructure that already exists,
and is increasingly centralised and integrated.
A NOTE ON
It is worth noting that the Report does not
deal with the revenue-raising potential of the tax. Although the
main thrust of arguments for the tax revolve around stability
and volatility, and this is clearly also the main interest of
the Fund and Treasury, estimates of the revenue that could be
raised by the tax ($150-$300 billion on a 0.1 per cent rate) would
impact enormously on funds available for development and poverty
eradication (one of this Government's key commitments).
18 January 2001