Global Policy Forum

By, Robin Collins

1. Tobin's Tax back in the news

Most human interactions in financial investment, communications and trade, including those with negative global environmental, military and development impact have been increasingly internationalized. Yet taxation has remained in the domain of national jurisdictions, and primarily because national governments have been reluctant to give up their sovereign control over tax revenues. There are political implications to international taxation being levied by international institutions, but no more so than the existent international spheres already commanded by virtually every other human activity. As is pointed out in a recent book on the potential for generating international taxation revenue, it is important to note that "economic liberalization and the internationalization of markets, especially that of financial markets, have affected the taxation capacity of nation-states. Global taxes, such as the Tobin tax, applied across all countries, could help restore some of the taxation power governments have lost in these globalization processes."(Kaul and Langmore in "The Tobin Tax", 1996)

James Tobin, in 1972 at Princeton University, proposed a levy on international currency transactions as a way to "preserve some possibilities of autonomy in national or continental monetary policies" that were wracked by the anarchy of money markets. He proposed that a 1% tax on currency conversions should be considered as a means to deter rampant quick-turnaround currency speculation, and as a bonus, also a means to generate some significant revenue by way of a relatively small penalty.

The problem of currency speculation has worsened dramatically since the days when Nobel laureate James Tobin's idea was given an admittedly poor reception. In the early 1970s the global daily turnaround in foreign exchange markets added up to US$18 billion. Twenty years later, the average daily movement of currency exchanges is $1.3 trillion. To highlight the speculative aspect of this movement, one needs only to compare the annual global trade in goods and services, which was a mere $4.3 trillion over the same period.

Tobin's tax has returned to the discussion table for this reason, but also because interest in the idea "is shared by those concerned with public financing of development -- the fiscal crisis of the state as well as the growing need for international cooperation on problems such as the environment, poverty, peace and security..." (The Tobin Tax, Coping with Financial Volatility, eds. Mahbub ul Haq et al, Oxford 1996 pg. 2).

The feasibility of enforcing a Tobin-like tax as it would apply to international financial trading is the subject of much debate, some of which is presented in the ul Haq collection of essays just published (see the four essays by Garber, Kenen, Eichengreen and Griffith-Jones.) While the jury is clearly still out on this question (among others), it is important to note that the 25 year-old idea was tackled once again in 1996 at the annual meetings of the American Economic Association (IMF Survey, January 22, 1996). Stanley Fischer, chief economist at the IMF was also favorable to a Tobin tax as a useful measure if enforcement problems could be solved. While opposition has been strong from central bankers, it was of interest to France's Franí§ois Mitterand at the World Social Summit in Copenhagen (1994) and it was "on the fringes" of discussion at the 1995 Halifax G-7 meeting. It had reappeared during the October 1987 stock market crash, again in 1992 with the crisis of the European exchange rate and in 1994 with the collapse of the Mexican peso.

In the last couple of years, a financial crisis at the United Nations has led to the proposal that UN programs be funded from global, rather than national sources. "Such a shift," writes Stephany Griffith-Jones (pg. 144), "would allow the UN to more effectively promote "international public goods" and fight "international public bads" -- activities that are increasingly important in a world that is becoming more and more interdependent. The Tobin tax seems to be a prime candidate..." The 1994 Human Development Report proposed such a tax arrangement and the UNDP is looking at the feasibility of the Tobin project.

2. Revenue Generation originally not the main motivation of Tobin tax

Tobin, in his prologue (ul Haq, 1996, xvi) writes that he believed in 1978 that a universal transaction tax would raise huge revenues and that those funds should be devoted to "international purposes", although the raising of funds was never the main motivation of the tax. The prime purpose of the tax was to deter speculation and the devastation that money movements cause to national economies. These days, Tobin believes that the tax should be as low as .1% of transactions, in order not to "swamp the normal commission charged." Others argue for either lower or higher tax rates (Felix and Sau, Kenen). But Tobin also suggests that some of the political problems of imposing an international tax over sovereign nations might be alleviated by "sweetening the pill" and allowing countries to keep at least half of the revenues or "to choose -- among internationally agreed alternatives -- where the tax revenues would go."

3. Sin Taxes

A currency transactions tax is one of the list of sources of revenue from sins that might be converted to international uses. A carbon (environmental) tax, an international air flight tax, and telecommunications taxes are other sources of "global commons"-like tax funds. International taxes on the arms trade (in the absence of a ban!), tobacco and alcohol would undoubtedly be simple to sell. As unpopular as taxes are, those that are virtually imperceptible and applied to unpleasant human activities that have global reach or environmental implications, may be viable if the revenues generated serve popular purposes, the taxation mechanisms are fairly easy to apply and are seen as being applied fairly.

In their overview of the Tobin tax and its contemporary application, editors Kaul, Grunberg and ul Haq point out that despite the fact that it is popular to draw attention to the breakdown in international cooperation, governments in fact "are resorting more to joint action -- from the Montreal Protocol banning CFCs, to the Uruguay Round of multilateral trade negotiations that created the World Trade Organization. The Tobin tax would fit well as another part of this emerging framework of cooperation -- as a global incentive policy and as a funding source for global initiatives." They also caution, however, that raising revenue should not be the primary concern of the tax, nor should it outweigh its other uses.

4. Is a global consensus on new taxation possible?

The applicability of an international tax on anything, and the subsequent good faith use of the revenue generated by that tax presumes in part that a global consensus can be manufactured in the first place. A tax that is not supported, obviously will not be systematically applied, and (particularly in the absence of simple enforcement agencies) will be avoided. If some avoid, others will follow and the process may cease to function at all. Peter Garber (pg. 133) describes the effect of a single dissenting financial centre: "As market participants try to avoid the tax, its implementation will immediately push foreign exchange transactions out of the taxed centres [and into the tax-free area]." On the other hand, if all major financial centres participated in the implementation of the tax, "cooperation would make the tax more difficult to circumvent; thus, it would generate more revenue."

Opposition to Tobin's tax, as applied to financial exchanges, was strongest from the speculating community who saw it as "interference" in their speculation on the mobility of financial capital through different currencies. Writes Jeffrey Frankel, "for the policy to achieve any of its goals, it would have to be the outcome of an international agreement that was virtually universal..[...].Enforcement could even be a problem if all countries were to sign an agreement...[but] if the problem of international agreement could be solved, there is no reason to think that enforcement would be more difficult for financial transaction taxes, as compared to, say, income taxes."

The likelihood of evasion by states would be inversely proportional to the advantage gained by supporting the tax. States with severe economic hardships brought on by the effects of land mine contamination would be likely most supportive of a tax that generated revenue earmarked for de-mining or mine victim rehabilitation. They would also probably not be among the list of likely havens for speculators seeking to avoid the tax. Other potential havens might be deterred by penalties imposed by the larger financial markets (which would have to be supportive if the tax was to work in the first place.) And if the tax was small enough, would an attempt to circumvent it be worth the effort? A key premise of the Tobin tax concept is that small taxes applied to massive numbers of transactions will generate a goodly amount of virtually pain-free revenues. There is a balance to achieve between the tax as deterrent -- its primary goal -- and the tax as inspirer of evasion -- which means it is ineffective. (For some discussion on the likelihood of evasion, see Garber, pg. 138).

An international agreement to impose a tax regime could be generated by a ratifiable convention that is renewed regularly. The international agreement could be coordinated and supervised by the IMF , (or Bank for International Settlements -BIS, or the World Bank). That or another (or new) international organization would be authorized to draft a tax code, to amend and interpret the code and to collect the taxes for stipulated international programs. The IMF, with expertise in "maintaining interest rate stability and orderly exchange arrangements among its members" might be the most appropriate institution for implementing the tax (Griffith-Jones, p151-152).

5. How much tax?

As would be expected, estimates vary as to the level of revenue generated from currency exchange transactions (alone), even taking into consideration the revenues effectively deterred by the application of the tax. Using a .1% Tobin tax on exchange rate transactions, Jeffrey Frankel estimated that $176 billion in tax revenue could have been raised in 1995, which was similar to the estimate of Felix and Sau based on a phased-in .25% tax. ( pg. 241) British journalist Martin Walker proposed that a .003% tax would fund UN peacekeeping (see p. 251 for discussion on this estimate.)

While the tax level could be determined at an international level, it is suggested by Inge Kaul and John Langmore (p 256) that it be collected by national governments who would control the proceeds. Those "global public goods" that could be serviced at the international level cannot now be financed without robbing inadequate "existing funds designated for official development assistance (ODA) [...] It would be more logical and effective to finance global public goods through levies and fees on international activities, such as international currency transactions."

To avoid distresses from the global reach into sovereign jurisdictions, it is argued that "governments could allocate the international portion of the proceeds in much the same way as they today allocate ODA resources: for the amount they are committed to transfer to the international level, they could state their own expenditure priorities, bearing in mind established global objectives." Alternatively there could be established a new international Treasury-like cooperation fund (possibly modeled on lessons drawn from the experience of supranational bodies like the European Union.) In any case a cooperative spirit would be necessary. In the absence of that spirit, success would be limited ...although one shouldn't underestimate the enticement that can be brought to bear on national governments intent on replenishing departmental coffers with their allotted share of the tax revenue pot.

Among the potential international uses for the funds (Kaul and Langmore state that a fair "global public goods" share of the pot would be about $25 billion per year) might be expenditures in the areas of controlling air pollution, maintaining peace and security, and preventing the spread of infectious diseases.

6. Applying Tobin to land mines

The ease of application of the Tobin tax project to de-mining, funding of de-mining technology development and mine victim rehabilitation needs little further explanation, but briefly:

a) With a land mine ban in place to halt new mine production and slow or halt mine-laying, efforts could concentrate on the financing of de-mining. It is estimated that the minimum cost of removing 100 million planted mines is about US$33 billion, a huge number by itself, but quite approachable, given annual Tobin tax revenues of $25 billion, the estimated international allotment alone. (Kaul and Langmore p267)

b) Few objections on moral grounds will arise from critics of international taxation schemes if the cause is the elimination of a weapon that inflicts huge social, health and economic costs every year, and for an indefinite period, on innocent civilians. Such a tax is cost effective and saves money in a relatively short period of time; it can be virtually imperceptible and its "burden" is shared by the international community. Few objections will arise for devoting a percentage of taxation revenue to direct medical and rehabilitative care (an estimated minimum $750 million is required.)

c) Dissent is likely to issue from those who are concerned that the imposition of a new international tax would establish a feared irreversible precedent of interference in national finances. However, the system could be instituted so that it is annually renewabale and so that budgets are tightly coordinated with the actual costs of mine removal and rehabilitation. Once an international land mine ban was instituted and proliferation can be minimized, costs of mine removal -- though significant -- would be finite, although rehabilitation requirements would continue through the lives of existing victims.

d) The present mine arrangement is morally and financially unacceptable. Approximately 100,000 mines are removed a year by the UN, with millions remaining in the ground. The majority of victim states are among the poorest countries on the globe and least capable of managing both the costs of removal and the costs of non-removal. With few exceptions, the manufacturers of land mines are not victim states, but they are the worst speculators in currency exchange transactions, and in most cases they are also the most active states in the international arms trade.

** The United Nations Association in Canada's First Conference on UN Reform, which took place in Montreal in 1995, found significant interest in the Tobin Tax as a financial tool for funding the United Nations in light of its serious financial situation. Key reference: The Tobin Tax, Coping with Financial Volatility, Edited by Mahbub ul Haq, Inge Kaul, and Isabelle Grunberg. Oxford University Press, Oxford 1996 [Comments? Send us some e-mail...] United Nations Association in Canada, National Capital Region Branch Association canadienne pour les Nations

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