Why the Tobin Tax - The Tobin Tax is Possible - Minutes of the Meeting
Patricia Lansdown
Minutes of the meeting
On January 25, 1999, at the invitation of ATTAC, an international seminar was held at the Latin American House in Paris attended by economists, unionists, bankers and financiers. The purpose of the seminar was to examine the possibilities of implementing the Tobin tax. Organized by a working group of the Scientific Advisory Board of ATTAC, it afforded an opportunity for analytical debate between economists and specialists from Europe, Canada and the United States. A concluding statement was made which will be disseminated extensively .
Bernard Cassen, the President of ATTAC and René Passet opened the debate by welcoming all participants. The floor was then given to Suzanne de Brunhoff to present a paper co-written with François Chesnais, Bruno Jetin and Dominique Plihon. In writing this paper, which served as the working basis for discussions during the seminar, the writers’ intentions were, on the one hand, to respond to the principal objections made to the adoption of the Tobin tax and, on the other, to give their reasons for supporting the proposal of the American economist, James Tobin.
The Tobin tax represents, first and foremost, "a way of confronting the economic and financial interests hostile to the political control of capital flow." These interests, de Brunhoff submits, have been “deferred to for 20 years by neo-liberal politicians and favoured, at the expense of revenues earned through work."
Unlike the ordinary remedies prescribed in times of financial crisis, the Tobin tax would play a preventive role. The remedial measures taken by the central banks of the developed countries or by the American treasury, de Brunhoff explains, are as costly as they are useless and tardy. "This kind of intervention allows the markets and large institutions to return to the same fiscal policies, once the crisis has passed, that created the crisis in the first place."
In addition, the implementation of the Tobin tax would bring about a new relationship between countries. In the present economic war, the Tobin tax would usher in , “an effective co-operation of the major developed capitalist countries with developing countries. The Tobin tax is not a panacea but a way of lessening international global financial instability, an instability that many experts excuse as the inevitable ransom of the benefits brought by the free flow of capital. The time has come to oppose such fatalism and open debate on the means of controlling international finance.”
What are the undesirable effects?
The principle of re-regulating the financial markets is apparently being debated presently among the ranks of even the fiercest partisans of neo-liberalism. The idea of taxing transactions on the foreign exchange market is encountering similar controversy. Participants at the seminar reviewed the objections either to anguish about the eventual undesirable effects that the implementation of the Tobin tax would have or to refute the arguments aimed at discrediting it.
To quote Bertrand Legendre, "Even in the event the Tobin tax were to be applied universally, it could very easily figure into the calculations of the market’s brokers. It would, at the outset, be paid by the countries that make use of the markets." Special reference to emerging countries, which need foreign investments, being noted. Other than the fact that the tax will “obstruct the free-flow nature of capital exchange,” Legendre regrets that it was conceived to be applied indiscriminately without exempting Treasury bills issued by developing nations and transactions resulting in very positive benefits.” In the end, he suspects that the markets by the “extra-ordinary flexibility that they have shown,” still do not know how to find the way of applying a tax, whatever its form.
Howard Wachtel also invited people to reflect on the potential negative effects of the Tobin tax. By raising the cost of foreign exchange, the tax would put counter-productive pressure on interest rates - rates which would discourage investment. "The problem of interest rates is as important as instability." Following such a scenario, the weight of the Tobin tax would slow down the economy of those countries which had it in place.
The risk raised of a backlash does not sufficiently invalidate James Tobin’s idea, suggested Frederic Lordon: "a restriction, even an imperfect one, is better than no restriction at all." As far as fiscal evasion is concerned, Lordon brushed that argument aside. According to Lordon, given the hypothesis that the Tobin tax was implemented by each of the fifteen countries of the European Union, the attractiveness of the European markets would be sufficient to attract capital. “In other words, the negative effects of the tax can be compensated for by the preference of investors to diversify their assets in favour of the Eurodollar. This is particularly true of the Asian investor who only expects to come out at par with the dollar.”
Jacques Mazier shares the same opinion. “Europe will remain interesting to foreign investors for a long time.” As far as short-term capital is concerned, its flight “is obviously desirable as it causes instability.” This phenomenon could even have beneficial effects, Mazier foresees: “If capital does leave, the Euro would drop in relation to the dollar. On the other hand, if, in 10 years time, the Euro was allowed to appreciate, the European economy would suffer.”
Let Us Begin in Europe
To be effective, must the Tobin tax be adopted by all the world’s nations? Powerful interests in opposition to its implementation are known to exist. According to Lordon, the United States is the main lobbyist against the idea of imposing a tax on the foreign exchange market inasmuch as “the free market is the vector of its hegemony and the expansion of its economic model.”
The universality of the Tobin tax, although desirable, is not the prerequisite necessary for its implementation. Liêm Hoang Ngdoc postulates an alternate scenario: “Doesn’t this single European currency provide a special opportunity to implement the Tobin tax? Doesn’t the constitution of the Euro, which prohibits any fluctuation between the different national currencies of the member states, also permit the taxation of capital flows at its borders?”
Also supporting the idea of a Tobin tax applied in the European context, Dominique Plihon suggests that, “those seeking to sell the Euro, would have to face the very argument they had in support of it, i.e., officially, the point of creating a single currency was to oppose speculation and financial instability. “Many skeptics dismissed it as being too ambitious. It has, nevertheless, been made a reality even though it is far more restrictive than a simple tax.”
Suzanne de Brunhoff is not as optimistic about the new single currency. She warns not to confuse the European political framework with the monetary one. If the former offers interesting possibilities of action, notably because “there are important unions that exist in France and elsewhere”; there is reason to mistrust the second as “the Euro was created by European financial interests.” While de Brunhoff has no doubts about the theory which served to legitimize the creation of the Euro, the introduction of the Euro as a single currency for the European Union did not put an end to speculation contrary to what many people claimed. In fact, “...even if equilibrium is realized in Europe, the problem of stability in the rates of exchange between the three main currencies, i.e., the Euro, yen and dollar, persist. We have perhaps made competition between currencies in Europe vanish,” Bruno Jetin added, “but the Euro threatens to strengthen competition in other countries. As far as taxation is concerned, in particular, the practice of ‘dumping’ could develop.”
In the absence of a multilateral agreement, could a country decide unilaterally to introduce a tax on capital flows? Initiatives such as those taken by Chile beg the question. “They proved their usefulness,” noted Plihon. Nevertheless, and in his opinion, “using the experience of emerging economies as an example, there is the danger of crediting ideas for measures that only certain countries are capable of undertaking. We are seeking, on the contrary, to promote a universal measure and one that must firstly impact the large industrial countries.”
Some Avenues of Redistribution
What is the principal function of a tax on short-term capital flows? As James Tobin conceived it, it is to discourage speculation in the foreign exchange market. Furthermore, it would generate considerable fiscal revenues. Several speakers called for a debate on the management and use of said revenues, agreeing that the subject required commitment by each one of them to study it on an individual basis.
What structure can be used to levy the tax and redistribute the revenues? “Neither the International Monetary Fund nor the World Bank. They would be unthinkable,” Susan George submitted. “What criteria would a candidate need to meet? It is not inconceivable that funds could be allocated to governments unconditionally, whether they are corrupt or not.” George proposes that an international agency require a prerequisite audit for eligibility equivalent to the Marshall plan.
Bernard Cassen repeated the figures released by the United Nations Program for Development: 40 billion dollars per year to meet the essential needs of the world’s poorest populations. Even if a very low rate were established, the Tobin tax could, by and large, provide enough money to erase world poverty.
Bruno Jetin warned against a possible misuse of the revenues from the Tobin tax. It must not become, “...the panacea for all the economic and social ills of the world. Common sense dictates that if a country controls its budgetary deficit by cutting social services, then its policies would have to be revised. The Tobin tax must complement such a plan and not be a substitute for it.”
The Cornerstone
Mindful of the fact that the Tobin tax is not in itself sufficient to redress all the ills, several speakers tried to circumscribe its limitations. “It will not be able to resolve all the problems of the Third Word,” noted, for example, David Felix. He conceived it as “an architectural element,” designed to “regulate certain long-term problems but not all.”
François Chesnais is of the same opinion that the Tobin tax represents only “a part of the whole structure yet to be erected.” Financial stability that would be permitted to be attained, “does not solve the problem of growth.” For Chesnais, the tax must be part of a process, and the message to be sent to political authorities is the following: “Begin here where a single currency exists, and which can provide support to the implementation of the Tobin tax.”
In order to convince political power of the benefits of this tax, Ibrahm Warde suggested the adoption of a new strategy. It is no longer the time to address the objections - that work has already been done. Rather than responding to its critics and remaining on the defensive, supporters of the Tobin tax must “move to the offensive.” The question that the latter must now pose to its detractors is the following: “Do you believe that the status quo is preferable to taxing transactions on the foreign exchange market?”
