ATTAC- Ten questions on the timeliness and feasability of a Tobin tax , here and now

Ten questions on the timeliness and feasability of a Tobin tax , here and now

Campaign: "2001. Europe, Tobin now!"

This campaign was launched in France in March 2001. This document is one of several that are part of it. June 9th ATTAC is also launching actions against Tax Havens "Good Havens!". Please see http://attac.org/jersey2001 for more information.

Prudence Dwyer & Jean Pierre Schermann. Sandrine Caquineau, coorditrad@attac.org

Where does the idea of the Tobin tax come from and why has so much been heard about it in recent years?

The seventies saw the World enter a phase of weak growth, interspersed with severe crises, causing unemployment figures to rise. To escape from this situation, the governments of the planet's richest countries believed they had found a solution in the liberal globalisation of economies. In the course of the eighties, they took the political decision to drop, one after another, all the barriers to free circulation of goods and capital. This decision did not allow the countries of the North and the South to take account of growth, or to redress social inequalities On the contrary, it led to economic crises, one after another; the Debt crisis in the countries of the South during the eighties, the failure of the savings banks in the United States, the crisis in Mexico in 1994-95,the crisis in East Asia in 1997, the crises in Russia and Brazil in 1998. These crises brought about social disasters, but they benefited the very rich.

Liberal globalisation led to a fantastic increase in profit-making opportunities for financial enterprises and investors. A new alliance, to the detriment of workers, was formed between the world of finance and that of enterprises. The increase in business profits caused Stock Exchange investments to rise in value rather than producing growth. The freedom to move financial capital enabled speculation to extend throughout the planet.

Resistance to this transformation of the World into mere merchandise for sale and an object of speculation is causing more and more citizens of North and South today to rouse themselves, especially within the Attac association. In the Tobin tax, they have found a simple instrument to oppose one form of speculation, that concerning currencies. Speculators do not hesitate to make profits causing the collapse of a currency, even if this results in millions of people sinking into poverty. To take back part of the profits of speculation, to repair the social damages caused, to make a frontal attack on the partisans of Liberalism, these are the reasons why the Tobin tax has been winning over public opinion.

The principle is very simple. Ordinary currency speculation consists, for example, in selling a currency, then buying it back at a lower price to make a pecuniary profit. By multiplying the purchases and sales of currencies in the course of a day, the speculator seeks to make the highest profit possible. But if, each time he sells a currency and then buys it back, the speculator must pay a tax equivalent to the profit he envisages, the game is not worth the candle. The speculator will be even more discouraged because, since he makes a very large number of purchases and sales, he will be going to the bank quite often. An undertaking trading or investing abroad, makes, by comparison, far fewer currency purchases and sales and so will not be penalised by the Tobin tax. Consequently, the Tobin tax serves its purpose very well, - to penalise speculation but not productive trade.

Furthermore, the Tobin tax, like every fiscal charge, produces receipts which could be used to combat want and under-development. The receipts are potentially considerable and, in any case, sufficient to make a decisive increase to financing programmes for Food, Health, Education and environmental protection in the countries of the South Receipts from the Tobin tax ought not, however, to take the place of Public aid for development which, in recent years, has been continuously decreasing. It remains the duty of every national State to promote policies for social protection and solidarity, education, public health and environmental protection and to provide the necessary funding. The countries of the North are in any case sufficiently rich to take these steps immediately. But in the countries of the South, the receipts from the tax could be added to the funding already available and provide a significant addition to funds for surmounting under-development.

Finally, even if it will not put an end to all forms of speculation and will not solve all the problems, the adoption of the Tobin tax would have an extremely positive political effect. For decades, the liberals have been obstinately seeking to prove that the Economy obeys natural laws and that it is harmful to oppose the all powerful markets. These policies have been applied and have brought about disastrous results but they still persist. If they oppose the Tobin tax with narrow-minded vigour, it is because they have understood the danger it represents. To implement the tax is to admit that speculation is harmful, that the markets are mistaken and that they should be controlled by the public power. Even worse, if the tax was implemented following a victory by its supporters, it would serve as an enormous encouragement on a global level for social campaigns and for all those who believe that another World is possible. The grain of sand could bring the machine to a grinding halt.

In a world where investors speculate on everything, isn't it a fool's paradise to try to reduce speculation?

While it may be true that there is no market free from speculation, it does not necessarily follow that speculators have the right to do as they wish. It is legitimate and possible to limit the field of speculative activity. During the period between the two World wars, speculators had acquired a lot of freedom and they plunged the World into the great Depression of the Thirties. Following World war II, governments had learnt their lesson from this and had decided to restrict very firmly the freedom of financial capital to circulate and the freedom to speculate. As a result, between 1950 and 1975, the World experienced the longest and most vigorous growth of the 20th century. There is no question of returning to the past, for the World of the years 1950-70 was not the best of worlds, but if it was possible to prevent speculation developing at that period, why could it not be done today? The world of Economics is not a world on its own, it is fashioned by major policy decisions.

The Tobin tax is often criticised for having limited effectiveness. But how could a minimal tax be expected to prove adequate? Several possible cases have in fact to be distinguished. The first possibility to be envisaged is where ordinary speculation, such as that which causes daily slight fluctuations in the price of currencies, degenerates into a major speculative attack. When a handful of influential speculators test the strength of a currency and make large profits, they may draw a growing number of speculators. in their wake. The benefit of the Tobin tax is that it serves as a preventive measure, making the first speculative operations unprofitable. By nipping it in the bud, it reduces the likelihood of a small speculation developing into hyper-speculation.

But cases can also be envisaged where a large number of speculators act in concert from the outset to make a currency fall by 20% or 30% in a matter of weeks. They are sometimes able to call upon greater sums than those the central Bank of the concerned country has at its disposal for its defence. By way of example, there was the concerted attack by the big banks of the London City on the sterling Pound in 1993. The answer consists in imposing a variable rate tax. The stronger the speculation, the higher the rate of tax and inversely. It is even possible to envisage the central Bank announcing in advance that as soon as the exchange rate of the currency in its charge is devalued or appreciated by a certain percentage, (-5% and +5% for example), the tax rate will increase to a much higher level with possible exemptions for exchange transactions linked to trade and productive investment. Not only would the deterrent character of the tax be reinforced, but also its punitive character, because the speculators would be still more heavily penalised. This idea is sometimes associated to the creation of an international monetary system where the principal currencies would be allowed to fluctuate within certain limits negotiated in advance (-5% and +5% for example). This is, in particular, the suggestion of a German economist, P.B.Sphan.

Finally, if these measures proved inadequate, it is possible to envisage re-establishing exchange control, as it existed some time ago in France and in other European countries. Exchange control made the conversion of the currency of one country into that of another one subject to administrative authorisation. The purpose is to check the benefit accruing to the economy from the exchange operation, to detect and prevent speculation against the national currency and to prevent fligths of capital. Malaysia adopted exchange control after the outbreak of the Asia crisis in 1997. These measures have proved efficacious and have not led to the departure of foreign businesses which, on the contrary, have benefited from the stability of the currency.

Isn't it technically impossible to implement in face of new communication technologies

New technologies may possibly provide investors with new opportunities for not paying the Tax, but it also provide additional means for government authorities to compel them to pay the Tobin tax. The exchange market is first and foremost a wholesale market, where banks carry out about 90% of transactions. The retail market, which concern individuals, does not account for much. The banks carry out their transactions through national payment systems which are subject to strict national regulations, supervised by the central banks of each country. These national payment systems to a great extent employ new technologies, to such an extent that they can be described as electronic payment systems. They make it possible to identify a financial transaction drawn up in two different currencies, as well as the identity of the banks dealing with the transaction. It is therefore technically possible to identify an exchange transaction and to recover the tax by making the necessary modifications in the software programmes for this to take place automatically. The cost of collection would therefore be very low. Within the European Union, a system of electronic banking communication has been installed to make all the payment systems of the Member States compatible. A more ambitious project, steered by the world's 20 largest banks, aims to create a globally centralised bank for settlements, (Continuous Linked Settlement, CLS Bank). All these initiatives will make collecting the Tax even easier .

It is a generous idea; is it possible to put it into effect in a single country alone ?

No, and nobody seriously envisages one country alone taking the initiative to implement the Tobin tax unilaterally. This does not mean, however, that the only way to implement the Tax would be for all countries of the Planet to adopt it simultaneously. The exchange markets are effectively concentrated on a global scale and if the principal countries of the Planet implement the Tax, this would suffice to cover the Planet as a whole. The 8 major countries account for more than 80% of world exchange transactions, the foremost 4 for 65%. In the London City, the largest financial centre with 33% of the world total, the 10 foremost banks account for 50% of transactions, as against 80% in Paris. Despite this natural advantage, one world region will need to take the initiative to break with the all or nothing philosophy.

Attac proposes that the European Union (and not only the Euro-zone) should take the initiative and create what could be called a "Tobin zone". The European Union carries economic weight equivalent to that of North America and represents about half the world exchange market. It therefore possesses enough economic and political importance to apply the Tax as between the Euro and all other currencies. The European Union initiative, in order to be effective, should be backed by a dynamic effort to convince other European countries and countries in other continents to join this "Tobin zone". An incentive scheme can be thought up. All exchange transactions between currencies belonging to the "Tobin zone" tax would be levied at a lower rate than that applied between a currency belonging to the Zone and a currency that did not belong to.

It is unlikely that there would be a long term flight of capital from the European Union and thus permanent decentralisation, for this would involve giving up an immense market. All this only to escape the Tobin tax ?

Fraud will affect the Tobin tax as it has affected all existing taxes up till now. In a general way, every measure imposing constraint on individual economic agents is liable to fraud. Labour law, for example, is open to continual violation. Must the conclusion be that labour law should be abandoned and enterprises left to make decisions unilaterally ?

Civil Society is not without resources to combat fraud. The State with the backing of the public, can fight back effectively, without counting the trade unions and other associations that can exercise effective supervision.

In the case of the Tobin tax in particular, there are several opportunities for fraud:

The most serious, perhaps, is to be found in the possibility of multinational enterprises and banks using the Internet to set up their own private payment systems for so as to avoid paying the Tobin tax where it is collected through official payment systems. This possibility exists, but it is not so easy to put into operation because there are security problems and costs to be solved.

International law and new technology make it reasonable to hope that this type of fraud may be effectively resisted. Since 1990, there have been international agreements, known as the "Lamfalussy minimum standards", after the name of the President of the Commission of the Bank of International Settlements (BIS, the "Central Bank of Central Banks" located at Basel in Switzerland), signed by the central banks of the 10 principal countries and confirmed in 1998. They allow the central banks of every country to refuse access to the domestic payment system of which they have charge, to any financial agent, individual, national or foreign, who refuses to apply national rules, for example the Tobin tax. They go so far as to authorise a central bank to penalise individual agents resident in their territory. Supposing that the Tobin tax was applied in the United states; this would authorise the central Bank (the Federal reserve or FED) to prohibit access to the official payment system of the United States to any multinational enterprise or bank which was using a private international transfer system in order to avoid tax. It is difficult to conceive of such individual systems unable to deal with an exchange transaction, lacking access to the national payment system.

The second major opportunity for fraud originates in financial innovation. Every year, some tens of new financial products are invented (including those known as derived products), some make it possible to avoid classic exchange transactions.

If the general principle is that the Tax is payable at the point of settlement, it is no longer necessary to determine whether the exchange is made by way of a classic exchange document or some other financial product, for, as regards the payment system, it is all the same once the transaction entailing foreign currency exchange has taken place. If a transaction concerning any kind of product involves currency exchange, then that exchange will be taxed via the payment system. If a derived product makes it possible to evade the exchange market, the Tax will not be collected, but the exchange rates will not be affected, which is exactly the object sought after by the Tobin tax. In a general way, it is possible to imagine more and more complex and confidential derived products, but they are likely to be more and more expensive and less and less easy to employ, because of their more and more specific character. All this to avoid a modest tax on the exchange market! Very soon the game is likely not to be worth the candle.

The third problem concerns the danger of decentralisation abroad especially in tax heavens.

This is too often exaggerated. Why is it that all the exchange markets are not already to be found in the tax heavens since taxation is virtually non-existent and banking secrecy absolute ? The fact is that there are other reasons that persuade a bank to locate its marketing premises in a particular country, especially in the most important countries of the global economy.

Besides, States are not without resources, solutions exist. Half-hearted decisions have just been taken by the rich countries asking for a minimum of transparency and judicial cooperation from the tax heavens. It is possible to go a great deal further. Members of the French and European Parliaments, as well as the Judges of the Geneva court of Appeal, defend the proposition that every transaction involving a tax heaven should be declared illegal on the territory of the European Union. It is also possible to envisage imposing a prohibitive tax rate on every exchange transaction destined for or coming from these tax heavens. In the context of the European Union, the creation of a European tribunal would make it possible to prosecute every financial agent fraudulently evading the Tax. In this domain as in others, it is only political will that is needed.

To start off, it is important to know how the exchange markets are organised and who the speculators are. When an individual changes his national currency to leave for abroad, this is dealt with by the retail exchange market. It is not a big matter. What is really important is the wholesale exchange market, where only very high amounts are exchanged. The banks are the principal and necessary actors. Even multinational firms cannot operate directly in the exchange market. They are legally obliged to apply to a bank.

Who speculates? There are of course specialised funds for speculation, but apart from these, speculators do not form an easily identifiable separate group, because everyone speculates, the banks, the big firms and some individuals, generally rich ones.

The banks speculate daily, when, for example, they wait, perhaps for some hours, before selling to their customers a currency they have just bought, if they are hoping for an advantageous development in exchange rates during the interval. Sometimes, they set up informal arrangements aimed at making a currency fall (for example the attack on the pound sterling in 1992). Finally, banks charge relatively high exchange commissions on the speculative operations undertaken by their clients.

Who are these clients? Basically, undertakings and other financial non-banking agents (insurance companies, pensions funds etc...). Jacques Calvet, former chairman of PSA Peugeot-Citroen became notorious for having caused his company a heavy financial loss by speculating on the Pound, in the event of Tony Blair would be elected.

Another peculiarity of speculators. There is no question of a foreign conspiracy. In the realm of speculation, nationality does not exist. Undertakings have no scruples in speculating against the currency of their country of origin if they think there is an opportunity for profit.

For all these reasons, it is perfectly just to make banks subject to the Tobin tax. They will recover part of the cost of the Tax from their clients, which is not unreasonable since they too are sharing in the speculation. But it is the banks in particular which will pay the Tax, because it is they who carry out the greatest number of exchange transactions. As for individuals, they will seldom pay the Tax since the number of transactions they carry out is even lower. The impact of a 0.1% tax, for example, would, in any case, be low by comparison to bank commissions of 4 to 5% , hidden or not, which individuals pay when they change their currency.

Once the principle is agreed, how is the tax been collected and to what should it be allocated ?

To comply with the Law, every individual bank should open an account with the Central bank in all the countries into which it operates. As the Central bank also plays a primary role in operating electronic payments, as previously described, a simple and practical solution would be for each individual bank to pay the amount of the Tax into a special account with the Central bank of the country where the foreign currency is transferred. The objection that the Tobin tax would give rise to a new bureaucratic arm is quite simply false. After collection at national level under the aegis of the Central bank, the receipts would then be transferred to an international institution responsible for combining the receipts before distributing them.

As for knowing to what the yield should be applied to, there are unhappily a multitude of needs. The divide which yawns between the developed and developing countries is likely to become the central problem of our era. It can only grow and join the outburst of new forms of poverty, exclusion and uncertainty in the "rich" countries of the OECD and those of central Europe. These inequalities feed on the process of market globalisation. The promises of development aid made by the States at Copenhagen in 1995 and repeated at Geneva in 2000 unhappily remain a dead letter. In any case, the countries of the South are today experiencing absolutely enormous needs for financing with regard to the situation of children, of women, of public Health and primary Education, of Democracy, of the Environment and of security for individuals.

Each of these challenges constitutes a real time bomb for the whole Planet. To remedy them will in any case need colossal sums of money. The revenues from the Tobin tax would have to be allocated to these spheres of public interest. Thus, while reducing the margin of manoeuvre open to financial speculation and enabling the democratic sphere to recover control of sovereign power over the markets, the Tax would free billions of dollars for human development, public health, collective security.

It must be said by the way, the Third world has no monopoly of corruption. The matters which for several years have not ceased to shock the whole Western world, the role played by the big banks in the recycling of dirty money originating from arms or drugs, the place occupied by tax heavens, even among us, all this reveals that the whole system reeks of corruption. This only serves to reinforce the importance of Democracy as a universal value and the necessity for citizen recovery of control. In general, the more corrupt a system admits to be, the less democratic it is ; conversely, the more the people are entitled to windfalls, benefit from counter balances, from real rights and liberties, the less opportunity corruption has to flourish. Accordingly, the fight for development is inseparable from the fight for the right to Democracy, to freedom of expression, organisation, election �

No, certainly not. It is a means, one tool among others, and also a realistic and audacious objective in face of the reality of financial globalisation. Paradoxically, this globalisation creates the conditions for resistance in new forms, displaying more convergence, more solidarity one with another. For example, everyone understands quite well that it would not help much to collect revenues from a Tobin tax if these have to be used for servicing the Debt owed by the countries of the South. This explains why "Tobin militants" demand debt cancellation and likewise, why all those who have been campaigning for so long for this objective also have Development and its funding in mind, where the tax has a role to play. It is for this very same reason that the world March of Women against poverty and violence supports the proposal of a Tobin tax.

Similarly, the demand for the Tobin tax appears inseparable from others, specific, as for example, in the case of prohibiting tax heavens, or far more general, as in the case of regulating international Trade - what is the use of restraining financial speculation if the circulation of goods is totally liberalised - or reconstitution as necessary, the international financial institutions. It goes without saying, of course, that those who uphold the idea that "another world is possible" are not really counting on the IMF, the World Bank or the WTO to reconstruct it.

Hence the importance of combining the ideas and experiences of different bodies from different parts of the World in order to start reflecting on the formulation of global alternatives to liberalism.