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Tobin Tax: "Ready for Implementation"

The feasibility of a Currency Transaction Tax

A new study has been published on the feasibility of a Currency Transaction Tax (CTT), a modified Tobin tax. Its central message is: The CTT is ready for implementation. It is now only a question of political will. The authors, Bruno Jetin and Lieven Denys, and the publisher, the German NGO World Economy, Ecology & Development (WEED), hope for new momentum in the debate with Austria's EU presidency and the Paris conference next week. Thomas Kalinowski presents the study (see reference).

The concept of a CTT has become increasingly sophisticated and has reached a new qualitative level: It is now ready for implementation. New concepts such as the two-tier CTT have overcome some of the weaknesses of the original Tobin tax. Technical developments and centralisation in the financial market have made implementation easier. Furthermore revenues from a CTT could be used to realise the UN Millennium Development Goals (MDGs) and to finance poverty eradication, and by doing so could provide new sources of legitimacy for the tax.

The idea of a CTT was brought forward by James Tobin more than 30 years ago after the Bretton Woods system of fixed exchange rates had been abolished and substituted by floating currencies. The volatility of currencies and financial markets became one of the major causes of crises, especially in the developing world. James Tobin’s idea of a tax on currency transactions (“Tobin tax”) was aimed at curbing volatility and preventing financial crises. More generally, the CTT has been designed to restore national policy autonomy by governing the international foreign exchange market.

* Two-tier CTT
Today the discussion focuses on a two-tier CTT which is a modification of the Tobin tax by Paul Bernd Spahn. The first tier corresponds to the classic Tobin tax, with a very low tax on all currency transactions (e.g. 0.01%) aimed at curbing the day-to-day currency speculation that derives profits from market volatility. This first tier will generate the main tax revenue. However, the first tier is not able to prevent speculation during currency crises, because huge currency fluctuations allow gigantic profits that would not be substantially diminished by such a low tax. This is where the second tier proposed by Spahn comes in.

The second tier is a flexible tax rate that is only applied if a currency crisis occurs. It is used to tax away the profits from speculation and the windfall profits from large currency appreciation or depreciation. According to Spahn’s definition, the tax is automatically applied when a currency exceeds a defined exchange rate band. In combination, both tiers can effectively curb speculation, reduce the volatility in the currency market and help prevent currency crises.

Is the implementation of a CTT feasible? Bruno Jetin, researcher at the University of Paris Nord, offers a detailed analysis of the forex market and the possibility of levying the tax. It is important to realise that the introduction a CTT will benefit from technical progress and the centralisation of the forex system. Today, the electronic brokerage platforms EBS and Reuters handle nearly the entire forex trade. Such a centralisation has always been suggested by proponents of a CTT and previously seemed unrealistic, but has now been achieved by market forces. Collecting a CTT would be as easy as paying the commercial fees for the use of these private electronic platforms. The Security Transaction Tax (STT) that is levied by several EU Member States such as the UK, Ireland and Belgium is already automatically collected through settlement systems - a method that could be used for a CTT as well.

* An electronic tag
Jetin introduces the idea of an electronic tag that is applied to all currency transactions and makes them identifiable through all stages of the transaction. As a currency transaction involves several actors, stages, monitoring and clearing systems, the tag will help to identify each transaction and to ensure that the tax is paid. Thus, each currency transaction can be identified and monitored at a very early stage and the tax can be paid at each stage or at the final one, when currency transactions have already been netted and are settled through an electronic system.

Although tax evasion might still be possible, this danger should not be overestimated and can be curbed by international co-operation. In theory it would be possible to move the forex market abroad if a CTT was levied in the EU but this is highly unlikey as it requires a highly sophisticated infrastructure which only a few places can provide.

The revenue aspect has become more and more important in the debate on a CTT because governments are desperately looking for “innovative sources” to finance their MDG promises. The UN estimates that achieving the MDGs by 2015 would need additional funding of $50 billion every year.

* How much revenue for a new solidarity fund?
The original purpose of a CTT was not to create revenues but to curb potentially dangerous capital flows. However, as with taxes on tobacco or alcohol there is no principle contradiction between creating revenues and sanctioning behaviour which is costly for society. The study uses different scenarios and calculations to estimate the revenue world-wide and arrives at figures between $19 billion and $31 billion for a tax rate of 0.01% and between $34 billion and $125 billion for a rate of 0.1% in 2004. For the Euro zone, the estimates range from $6 to $10 billion for 0.01% and $10 to $46 billion for 0.1% in 2004.

How can these revenues be levied and distributed in a fair and democratic way? In order to minimise new bureaucracy it would be best to collected that tax on the national level by established institutions. However, for the distribution of the revenues a new international body will be needed, as the established organisations such as the UN, the World Bank and the Bank of International Settlement (BIS) lack democratic decision making and accountability. The solution could be a “Solidarity Fund for Sustainable Development”. Unlike previous organisations it has a democratic governance structure and applies a concept of conditionality that differs radically from that of IMF and World Bank. Instead of linking credits to market liberalisation and investor-friendly policies it would link financial distribution to the governments’ performance in fighting poverty and achieving development.

* Legal aspects
Concerning the legal framework Lieven Denys from Brussels Free University shows that a CTT can be implemented within the legal framework of the EU. A CTT would be compatible with the European non-discrimination principle, because it taxes all currency transactions regardless of the currencies involved and of the nationality or residence of the trading parties. As the EU has also no exclusive competence in indirect taxation, individual Member States are free to introduce at least the first tier of the CTT until the EU enacts measures in that area. Belgium took leadership and passed a CTT law in 2004. The first tier of a CTT is also not restricting the EU principle of free flow of capital because of its very low tax rate.

The second tier of a CTT is more tricky as it will intervene in monetary policy. As the EU has the exclusive competence for monetary policies it would need the approval of the EU. It is also the goal of the second tier to interfere in the EU principle of free flow of capital. However, the legal principle of the free movement of capital is not an absolute freedom: A CTT can still be justified by other fundamental EU objectives. Stability of currencies and financial markets as well as financing development are important goals of the EU and thus justify the tax.

According to Denys the best and most realistic way to implement a CTT on the EU level would be a directive similar to the EU VAT directive. This would bind EU Member States to the introduction of a CTT but leave the details of implementation, as well as the administration, to the individual states.

However, eventually the implementation of a CTT will depend on political will and especially on the pressure by the global justice movement on governments and decision makers. The technical feasibility of a sound project does not ensure its implementation, as politics are shaped by interest groups and power struggles. However, the new study shows that there are no more formal, legal or technical excuses behind which opponents or hesitant supporters of a CTT can hide.

Thomas Kalinowski, PhD, is Postdoctoral Fellow at the University of California, Berkeley.

Reference:
* Bruno Jetin/Lieven Denys, Ready for Implementation. Technical and Legal Aspects of a Currency Transaction Tax and Its Implementation in the EU, 238 pp., WEED: Berlin 2006. Find the full study as PDF download >>> here.

* More on the subject >>> here.

(Posted: 23 February 2006)

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