Select Committee on Treasury Appendices to the Minutes of Evidence


Further Memorandum by War on Want



  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.


  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

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