Supplementary memorandum submitted by
War on Want
NOTE ON THE EVIDENCE GIVEN BY THE CHANCELLOR
OF THE EXCHEQUER AND THE SECRETARY OF STATE FOR INTERNATIONAL
DEVELOPMENT TO THE INTERNATIONAL DEVELOPMENT SELECT COMMITTEE
ENQUIRY INTO FINANCING FOR DEVELOPMENT
One of the key issues often raised is the change
in international financial markets since Tobin suggested his tax
and his apparent acceptance that in the modern system it would
not work. As the Chancellor pointed out, "It is very difficult
to advocate a tax that has been, in a sense, rejected by the person
who put the proposal forward."
It is true that James Tobin became increasingly
concerned at the attention his tax gained as the "focus of
reform and protest movements." He clearly stated that he
had "nothing to do with them and am not informed of their
platforms." However to conclude that he was opposed to the
Tobin Tax is a mistake;
"this disavowal does not mean I disavow
my own proposal. I certainly do not. 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.
James Tobin did not reject his tax only some
of the extremist platforms to which it had become bolted.
Following the work of Professor Schmidt in this
area we contend that any country can in fact introduce the tax
Schmidt argues that the technology and institutions
are now in place "to identify and tax gross foreign exchange
payments, whichever financial instrument is used to define the
trade, wherever the parties to the trade are located and wherever
the ensuing payment is made."
Every foreign exchange trade has two elements;
firstly the payment instructions from traders are handled immediately
in "Real Time Gross Settlement", (RTGS), and secondly,
the two or more counterpart payment instructions are matched to
each other and to the original traders before they are processed,
simultaneously ("payment-versus-payment settlement").
Counterpart payments are matched before being settled and it is
possible to identify each foreign exchange trade. The payments
institutions can then collect the Tobin tax on behalf of the central
bank that issues the taxed currency as appropriate.
The market for trading foreign exchange is supported
by a global infrastructure for making payments to settle such
trades. The interbank or wholesale foreign-exchange payments infrastructure
is highly organized, centralized, and regulated. Netting systems
and clearinghouses located worldwide that deal in assets denominated
in the domestic currency are closely integrated with the large-value
payment system for that currency. That large-value payment system
is located at home and operated or regulated by the central bank
that issues the currency being paid
By taxing the wholesale foreign exchange payments
settlement system a country can unilaterally collect the tax on
conversions of its own currency into foreign currency regardless
of where in the world that trade takes place and no matter which
financial instruments are used to mediate the trade.
Coordination of the Tobin tax across domestic
large-value payments systems, netting systems, securities clearinghouses,
and the individual participants is straightforward, for two reasons.
(1) The Society for World-wide Interbank
Financial Telecommunications (SWIFT) already functions as a centralized
foreign-exchange payments system. SWIFT provides the technology
and payments processing services for all three payments institutions
and the integrated communications system between individual trading
banks, and between them and the payments institutions.
(2) The Continuous Linked Settlement Bank
(CLS) will begin operations in the near future using SWIFT technology
and services to act as a physical global wholesale foreign-exchange
payments system, encompassing both large-value and netting systems,
and processing many currencies in a single system.
A Tobin tax applied to foreign exchange payments
would also be hard to avoid by creative use of foreign-exchange
instruments. Nearly all such instruments, including exotic derivatives,
require payments for settlement. In most cases, these are simple
payments of the principal amounts traded, just as with ordinary
foreign-exchange instruments. Even foreign exchange options are
bought at a price that reflects their value, and the payment made
to buy the option would be taxed.
These systems can be used regardless of the
form of the tax so that the two-tier Spahn suggestion could also
operate with ease. Therefore each country or groups of countries
only need to find the political will to stabilize its own financial
system without waiting "to get agreement right across the
The advantage of Spahn's two-tier tax is that
the two distinct functions of the tax, revenue generation and
"circuit breaking" can be separated out. The Tobin element
of the tax can be imposed at a level that provides the optimal
balance of revenue generation for development and maintaining
a sound tax base.
Moreover, taxes that have a trade-off between
revenue and reducing externalities are not uncommon. Think of
taxes on smoking or fuel. The balance here is ultimately a political
decision and would be dependent on the rate set and objectives
War on Want
4 FT; (Sep 11, 2001), James Tobin. Back