Why the Tobin Tax - The Tobin Tax is Possible - Minutes of the Meeting
Patricia Lansdown
Why the Tobin Tax
Those most notably in attendance were: Martin Branen (Bread for All, Pain pour Landmark Estates prochain), Suzanne de Brunhoff (CNRS), Bernard Cassen (University of Paris VIII, President of ATTAC), Jean-Christophe Chaumeron (Federation of finances CGT), François Chesnais (University of Paris XIII), David Felix (Washington University, St. Louis, USA), Susan George (Globalization Observatory, Transnational Institute), Gerard Gourguechon (Union syndicale Groupe des Dix, Vice-President of the Scientific Council of ATTAC), John Grahl (University of North London, UK), Liêm Hoang-Ngoc (University of Paris I), Bruno Jetin (University of Paris XIII), Richard Langlois (Education International), Bertrand Legendre (banker, Observatoire de la finance), Jacques Mazier (University of Paris XIII), Alex Michalos (University of Northern British Columbia, Canada), René Passet (University of Paris I, President of the Scientific Council of ATTAC), Heikki Patomaki (Nottingham Trent University, UK), Dominique Plihon (University of Paris XIII), Howard M. Wachtel (American University, Washington Development Charge, USA), Ibrahim Warde (University of California at Berkeley, USA).
Since July 1997, the recession has had less and less of an impact on developed countries while developing economies, like Indonesia, are foundering in a deep depression that is having immeasurable consequences on its people. Every new national recession effects a deceleration in the growth of world economy and increases the threat of a global crisis. The structure of world finances, born from the liberalization and deregulation of capital flow, carries an enormous responsibility for the advent of this state of affairs.
The withdrawal of domestic capital from a country, stimulated by high returns on investment, resulted in the collapse of the financial and banking systems of Mexico in 1995 and of Thailand in 1997. To find a way to keep this capital at home would entail satisfying investors’ requirements. Brasil, for example, had to raise its interest rate to 40%, and even to 45%. The result was calming in the financial markets and share prices could continue to rise in the world’s major stock exchanges, but, in Sao Paolo, for example, the result was layoffs, each week by the tens of thousands.
A Warning Shot
The implementation of a tax on foreign exchange transactions, the Tobin tax, would constitute the first emergency measure to curtail the reoccurrence of such social disaster. The tax would act as a warning shot for the currency trader, prior to a complete revision of the international financial system. As such, its vision differs totally from that of the overwhelming majority of other reforms heretofore proposed. Their purpose is, in essence, to ensure the perpetuity of liberalized and deregulated financial markets which themselves are the principal causes of the turmoil created in the world economy and the destabilization of those layers of society that are most vulnerable to upheaval.
For the most part, the reform measures proposed by the International Monetary Fund (IMF) and the G7 are addressed solely at the so-called “emerging” economies. In the name of “transparency” and “necessary surveillance,” these measures are intended to increase the domination of the IMF on the governments of countries contributing to international finance. They are about controlling crises, not preventing them, and they absolve the money markets and international banking of all responsibility. They seek to ease the brutality of the markets’ sanctions - where heavy losses precede enormous profits - by providing a security net to investors and speculators, but nothing to the population as a whole, as was spectacularly shown in the recent interventions of the IMF in Southeast Asia.
Whether it is a question of speculative investments or large western banks, governments’ first priority is to ensure the survival of institutions which are too big to fail. The most recent case is the speculative fiasco of the American firm LCTM, but older examples such as the Crédit Lyonnais in France, should not be forgotten. The economic and social costs of such bail-outs, whether paid for by taxpayers or by large financial institutions, are wholly tolerated by the defenders of liberalized finance in the name of the need to offset the systemic risk of a credit meltdown and global financial crash. The Tobin tax which would apply only to currency traders is, in contrast, judged intolerable by these very neo-liberals because of the introduction of the element of control over the movement of capital. But, it is precisely this political warning to the financial markets which has become imperative.
Growth, Social Justice, Sustainable Development
We are presenting this measure as the first step towards the construction of a world economy in which economic growth combines with the redistribution of wealth and social justice; in which, year after year, international monitoring agencies are not reporting increased inequalities, malnutrition and hunger, the resurgence of diseases or the spread of AIDS which today ravages the most disenfranchised. An economy in which growth, liberated from the tithes of neo-feudal lords, would respect the ecological requirements of sustainable development.
A Too Modest Proposal?
James Tobin said of his proposal that it was simply designed to “throw sand in the wheels of speculation” on currencies. It would put into question the latitude allowed to actual destabilizing behaviour, just as algorithms allow the calculation of returns in relation to risk in an uncertain future: today, a single exchange of currency engenders up to eight subsequent operations, and they, in turn, open the door to immeasurable and unproductive speculation. The Tobin tax would reduce the size of the foreign exchange market, without paralyzing it altogether. It would act as a prophylactic by rendering certain speculative actions unprofitable and avoiding destructive attacks on a country’s currency. A modest ambition with regard to the problems of today? Let us say, rather, that it is the first step on a journey with great potential, the consequences of which have already shown their importance. Let us enumerate a few of them.
While the majority of reforms proposed by the IMF and the G7 are concerned only with emerging economies, the Tobin tax concerns all economies, taking, to begin with, the economies of the richest and most developed countries whose currencies are at the heart of the financial world and whose policies have the most weight. The adoption of such a tax would affirm the need to set international rules in light of the instability of currency markets. It would affirm the will of governments to have the upper hand on currency markets, turning back the present tendency. Such a restoration supposes that the currency instrumental in the operations of the currency markets, principally, the dollar, would be implicated.
The Tobin tax has a universal avocation: to integrate, by negotiation, the collective world governments into a co-ordinated initiative toward the development of a stable global financial and monetary system, rejecting the questions begged in principle as stated in the limited framework and non-democratic G3, G7 and G10 summits. To impose the manner in which the currency markets operate would be to declare an unambiguous political warning to the principal financial players and affirm that the interests of the general public must override private interests and that the needs of development prevail over international speculation.
After 20 years of deregulation and capitalist restructuring, the economic and social power of capital markets has increased considerably. Neo-liberals themselves admit that the success of the stock market is due to the redistribution of “added-value,” favouring the spoils of speculation and disfavouring the wages of work. Moreover, tax breaks on capital have been accompanied by increased taxation of salaries. This pressure on the salaried is presented as an inevitable global phenomenon under which one must bend or face redundancy. In making revenues on currency speculation bend slightly, the Tobin tax would have an important political impact: it would remove a brick from the wall of fatalism which serves to maintain a power relationship that is detrimental to labour. Of course, it does not pretend to be able to avert major crises. But, by reducing economic instability, it could have a preventive effect and constitute one of the indispensable elements of a larger mechanism for the submission of finance to the exigencies of social justice and sustainable development.
Political not Technical
The difficulties of instituting the Tobin tax are not so much political as they are technical. The only argument against its adoption given by the French government, for example, has been its lack of political realism. What is lacking, in fact, is the will of defending a proposal which could upset certain countries and financial interests. Between 1979 and 1995, the present structure of global finances is the result of political decisions. Which argument made by different theories could correct or, rather, undo this regime of dubious accountability? Certain “emerging” economies (e.g., Chile, Columbia) have already successfully taken restrictive measures (e.g., mandatory reserves) which, though limited in scope, serve to tax capital entering the country which has a purely speculative motive. More recently, Malaysia has re-established control over money markets in order to contain the financial effects of the economic crisis which is ravaging the region.
For maximum effectiveness, the Tobin tax must be adopted by all members of the G7. They are, in fact, at the core of foreign exchange markets wherein the decision making is highly concentrated amongst eight or nine countries and a hundred large banks and financial institutions.
The creation of the Eurodollar has made speculation on currency exchange impossible among the participating nations. It is incumbent upon them to exercise the authority given to them to put appropriate political pressure on other capitalist countries to levy a tax on foreign currency exchanges. Tax shelters and strategies for evading tax must similarly be made impossible. (italics signify translator’s words where sentence was left incomplete)
The implementation of the Tobin tax would necessarily make tax shelters the object of attack. This salubrious public initiative could, among other possibilities, act as a punitive tax on fiscal fraud and the laundering of money insofar as the tax would be paid twice, once on its entry and again on its egress. Here, too, the European Union could, from the moment of its adoption, take action against countries and other political entities within its borders, and those that have close dealings with it, which provide shelter for money gained through speculation and all forms of trafficking.
It is thought by some that the Tobin tax would be ineffective because it could be evaded. But, evasion, legal or otherwise, is the inherent property of any tax, and has never before deterred the creation of a new tax. Evasion is combated through tax laws as well as through the vigilance of employees of banks and other financial institutions and their unions. A more technical debate, in which the parameters are known, will permit the development of adequate measures to spread and adapt the Tobin tax to all financial manoeuvres in the foreign currency exchange.
The Springboard for Reform of the Entire Financial System
The Tobin tax is not a panacea. It would be limited to foreign exchange transactions and would affect only short-term, even very short-term, capital flows. It would not replace taxation in the area of revenue generated from stocks, bonds or other options purchased by the public of a particular country, which taxation is very favourable to national treasuries, everywhere.
Its principal interest lies in its international character, in the pursuit of cooperation, rather than competition, between countries that enforce its implementation. It is control over speculation in embryonic form, if only just affecting the foreign exchange market, a market which is the fulcrum of all international financial transactions, on all kinds of stocks, including long-term foreign investments. Returning the boundaries of autonomy to national political economies, or communities, as in the case of the European Union, it would buttress taxation revenues for a country, internally, and bolster public surveillance of foreign investments, externally.
The proposals for reform of the current structure of currency exchange and the financial system must be made from the point of view of “those on the bottom” and not from the one of those who dominate. In order to benefit the countries and the layers of society that must submit to the pressures of the markets, the proposals must confront the power of capitalist finance and its freedom of action. The ball must be got rolling. In this respect, resolved action on the foreign exchange market would pierce the fatalism that is already too widespread about the supposed “immutable” nature of things as they are today.
Discussion about the Tobin tax must issue forth from the narrow circle of economists, experts, financiers, bankers and governors of central banks. One can only be encouraged by the expression of opinion which is in support of stricter controls over the movement of capital and which testify, amongst other things, to a recent survey conducted in 20 countries for the weekly newspaper, The Economist, and published in its January 2, 1999 edition: 49% of persons polled were in favour of control, 37% were against and 14% did not know. Of course, it is only a survey, but, as the newspaper points out (a newspaper that supports ultra-liberal theories), it stimulates thought about the limits that can be imposed on the freedom of the foreign exchange market and of the movement of capital. The time has come for governments to embrace and support this reflection of opinion by acting accordingly.
