As the consequences of the financial crisis continue to be felt around the world, politicians and economists alike are attempting to find ways in which to curb the power of financial institutions. The Tobin tax, one possible means of achieving this, is a concept which aims to prevent institutional profiteering from affecting global currency markets.
The idea itself is not new – it was developed in 1972 by James Tobin, a Yale macroeconomist who won the Nobel Prize for economics. He developed the idea after the Bretton Woods System ended and floating currency systems took its place, resulting in unpredictable currency markets. The tax is designed, say its supporters, to restore national macroeconomic controls over currency fluctuations by removing the volatility of floating markets.
What does it hope to achieve?
During the years of the Bretton Woods system, the US dollar was directly linked to the price of gold. When Richard Nixon broke this link in 1971, there was chaos in global currency markets. As national currency values fluctuated significantly from month to month, Tobin tax was suggested as a method to calm exchange rates. However it was never taken up, as during the time of growing free market economics, it was seen as too constrictive.
In today’s unpredictable market place, however, the Tobin tax is once again being promoted as a possible solution to the destabilising effect of speculative currency transactions on national currency value. The tax is designed to discourage traders from making short-term currency investments and thus give nations more control over their currencies. Long-term currency investments (which account for between 10% – 15% of the market) would be exempt.
The tax would work by levying a tax on all short-term cross-border currency trades. The tax itself would be a very small percentage of any transaction (between 0.1% and 0.25%) but would raise tens of billions in revenue each year since trading volumes in the foreign exchange markets are estimated to be in the region of $1.8 trillion every day. It has been suggested that the tax revenues should be earmarked for public spending, aid and technological developments to counter global warming, although these ideas were never suggested by James Tobin.
Where has it been implemented?
Although a Tobin tax has never been introduced internationally, it has been suggested regionally. For example, the Bank of the South, proposed as an alternative to the World Bank and International Monetary Fund for South America, plans to raise some of its funding from a Tobin tax.
Elsewhere, a new FX broker, Ethical Currency, has adopted a small Tobin-style tax of 0.005% on total turnover, which it will donate to charity. However, such charges are simply a means of making a corporate charitable donation and not a measure to encourage economic stability.
Despite its simple format and honourable aims, a Tobin tax is unlikely to be taken up by individual governments as it could only work if all trading nations imposed the tax. Otherwise trading would simply be transacted or booked in other locations. Some countries have nevertheless prepared legislation: in 2004, Belgium passed an act based on Tobin tax, whereby foreign exchange transactions would be taxed at between 0.01% and 0.02%.
However the law stated that it would only come into force if other Eurozone nations produce similar legislation. France is also awaiting further Eurozone legislation before implementing similar laws. Despite some interest from other European nations, there has been little support for full implementation of the tax.
In August 2009, Lord Adair Turner, head of the UK’s Financial Services Authority (FSA), stated “If increased capital requirements are insufficient I am happy to consider taxes on financial transactions – Tobin taxes.”
He highlighted the difficulty of securing international agreement but went on to say, “at least proposals for special financial sector taxes, with increased capital requirements, address the issue of excessive profits and therefore have a chance of doing something about it.”