Tobin Tax?

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Some US$1.5 to US$2.0 trillion are traded daily on foreign exchange markets.

It is believed that only 5% of this sum is necessary to finance global trade. The remaining 95% effectively amounts to speculative trading, that is, making profit from changes in currency rates.

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In 1972, economist James Tobin suggested what he saw as the need for the global taxation of financial speculation. His work was formalised in 1978, and he was awarded the Nobel Laureate for Economics in 1981.

His proposal , which has now become more clearly defined, and variations devised, is (are) now referred to as 'Tobin-type taxes'.

Tobin referred to this global taxation as ‘sand in the wheels’ of international financial markets, which would serve to reduce their overall volatility.

The volatility of financial speculation is a concern to many, from all walks of life. One of them is George Soros (see, Soros, G. (1999). 'Capitalism’s Last Chance?' Foreign Policy Winter 1998-1999).

Soros argues in this paper that deregulated international financial markets are the cause of many financial problems, though he was writing specifically in the context of the 1997 Asian Financial Crisis. Until the Thai crisis, emerging markets did well by opening up capital markets, and investment was simply flooding in. But since the Asian Crisis, capital flows have been reversed, draining these markets of capital. This has adversely affected markets in both the centre and the periphery, both directly (credits and portfolios) and indirectly (MNCs).

In free, unregulated capital exchange, capital investment can enter countries freely, prompting investment, which, for the most part, would not be avoided. However, Soros points out that if capital can enter easily, than it can be withdrawn easily. Ostensibly this is because capital is always being invested and shifted, in the hope of finding the most efficient and productive location for it. It is assumed that this capital moves in response to equilibriums; there is either too much or too little in certain places. However the speed at which this can occur is alarming, and this was made very apparent in the rapid currency withdrawals of the 1997 Asian Financial Crisis. Soros himself has been blamed by Malaysian authorities for withdrawing his investments in the Ringgit at the earliest hint of a currency devaluation. Rapid withdrawals on a global scale can create economic busts that are self-sustaining and damaging; one persons’ withdrawal prompts another’s, and so on. When these busts (and the same applies to booms, which entail over-investment) progress beyond a certain stage, they can destroy the capital infrastructure of a nation, and markets can never return to the situation they enjoyed previously. Rather than behaving like a pendulum, Soros says that modern global markets have more in common with a wrecking ball. While both developed and developing nations lose from crises such as this one, developed nations are in a better position to recover, and developing nations may not.

Simply, currency trading destabilises economies and nations. As Jeffrey Sachs commented, in our technological, global world, trillions of dollars (literally) is able to move in and out of countries daily. This money is not without significant ramifications for the places it 'visits'.

The idea of a Tobin-type tax is to reduce this volatility.

But is has a crucial, second motivation. To reduce -- or even eliminate -- global poverty.

Tobin-type taxes are usually suggested to involve a levy of around 0.20% to 0.25% on currency-speculative financial activities. This would presently yield US$250 billion per annum. This is over five times the total amount that is given in aid around the world.

It has long been estimated that as little as US$8 billion per year would be enough to establish universal primary education on a global basis.

Meanwhile the UNDP has calculated that US$80 billion is needed to eliminate the worst forms of global poverty. Furthermore, the Jubilee 2000 campaign argued that US$160 billion per annum would be the cost of wiping out the Global South’s unpayable debts.

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In the late 1990s, the NGOs War on Want and Oxfam, as well as the governments of Canada, France and Belgium, moved to support the introduction of a Tobin-type tax.

Critics of globalisation argue that it is characteristic of the extreme pro-globalists that while they argue for global free trade, they are often noticeably less global in their outlook on other important issues. For example, such commentators are frequently far less keen on the unrestricted movement of labour across borders.

It also appears that, generally, those very politicians who espouse globalisation are those who dismiss out of hand a globalised tax to tackle world poverty.

Notably, the possibility of global taxation is not even mentioned in the UK Government’s White Paper in dealing with globalisation and poverty reduction.

In the words of Larry Elliot, The Guardian's economics editor, who has been with the paper since 1988: “It is politics that is the killer...the political will for a Tobin tax is absent in the places which matter: Washington, London, Tokyo, Frankfurt.”

EDIT: In terms of practicality, it is generally argued that revenues should be collected by national central banks, and then deposited with a UN body, such as the UNDP, or UNESCO.

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So, how about it, a Tobin-type tax? Solve poverty and volatility? Tax an incredibly small proportion of the exchanges which do not even occur in the real economy (no goods -- none at all -- are produced directly through currency exchange, which only serves to make rich people richer)?

EDIT: I apologise if this makes little sense. I've had a long day. If you want me to expand on or clarify anything, please tell me.

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Source: Potter, Binns, Elliott & Smith (2008). Geographies of Development: An Introduction to Development Studies (3rd ed.). Essex, England: Pearson Education Limited.