An NDP motion on the Tobin tax makes it possible
By Lorne Nystrom, MP
May 1999
On March 23, the House of Commons passed with an overwhelming majority of 164 votes against 83 a New Democratic Party motion which targets currency speculators. Although the motion had strong support from the grassroots and a broad coalition of non-governmental organizations, only five Reform MPs (and one Tory MP) voted in favour of the motion which reads: "That in the opinion of the House, the government should enact a tax on (international) financial transactions in concert with the international community." The Canadian Parliament is the first parliament in the world to support such an initiative. Canadians should be excited about this first.
The motion which I moved on behalf of the New Democratic Party goes to the heart of the present world crisis which has destroyed virtually all the most prosperous younger economies. A couple of years ago South Korea was considered a "tiger economy." It is now a graveyard economy. The same can be said about Brazil and even Japan. The explanation for this lies with the disruptive powers of financial speculators who control unbelievable amounts of money.
There are two ways of making money: by building a society, or by tearing it down. Financial speculators take advantage of deregulation to enter a country's domestic financial system and gamble against its currency. This eventually brings about the collapse of a nation's currency and opens an avenue for the fire sale of all its domestic assets.
All of us are aware of the devastation financial speculation or "hot money" inflicts on countries and their people. Canada is no exception. The collapse of Southeast Asian economies has depressed the demand for our exports. Canadian primary producers of agricultural products, timber, minerals and other commodities are particularly badly hit. This means collapsing incomes, bankruptcies for our farmers and job losses for thousands of Canadians.
While speculators make large fortunes wrecking a country and its people, all is lost in the end. The destroyers end up destroying the very base of their existence. Still, they have a long way to go, as they switch from one country to another, carefully picking up the younger and weaker economies first, like pirates roving the Spanish Main in the "good old days".
Governments around the world have supported global speculators by allowing them to operate through tax havens. In a much similar way, pirates survived as long as powerful countries protected them. These modern day financial pirates have also hijacked computer technology to boost their power. At a click on a keyboard, hundreds of millions of dollars pour into and out of a currency. Speculators extract an amazing amount of wealth by selling and buying national currencies as if these currencies were just ordinary commodities.
Speculation not only destabilizes financial systems, it also is an economic virus that kills real investment. It is estimated today that only 5 to 10 percent of financial and currency transactions are related to trade and production, while 90 to 95 percent of these transactions are purely speculative. Instead of chasing productive investments, money chases money to yield paper profits. Paper entrepreneurs, "the guys in red suspenders", have taken over and diverted money to unproductive activities. The economy becomes a casino where money is made on money simply because someone guessed it right. What is accomplished, at best, is of no value to society.
There is much more to be gained in building rather than destroying. The challenge is to stop the rampage before the damage is too great! Building a prosperous society requires a strong and educated workforce, dynamic public and private investments, a healthy entrepreneurial force, good government and, most important, a stable financial system. The Tobin tax, named after Nobel Prize-winning economist James Tobin, is one of the many ways to help stabilize national financial systems by curbing the predatory behaviour of financial speculators.
How would a Tobin tax work? A simple analogy allows us to understand it. Let's compare the economy to a garden and money to the water that makes this garden grow. In our world, productive agents (the gardeners) do not control the water, which is often diverted by financial speculators to suit their interests. Speculators control the water and can significantly reduce the flow and dry up the garden. The Tobin tax imposes a penalty every time a speculator turns the water off. The cost incurred to turn the water off will make speculators think twice and slow down their destructive practice.
There is an added benefit to the tax: some of the water captured by speculators could be recycled into the garden. The tax has therefore the potential to generate revenues which could be dedicated to the public good.
As proposed by Professor Tobin in 1972, the tax would be a very low tax and would only hit speculators and the institutions which support them, such as the big commercial banks and investment companies. The tax would reduce the incentive to speculate against national currencies by eroding the profits of speculators and encouraging the inflow of long-term healthy investments. The effectiveness of the tax increases with the intensity of speculation. The tax would not affect ordinary people.
Taxing 'hot money' would help the international community achieve another major goal. Based on the financial market activity in the year 1995, more than $1.5 trillion U.S. is traded daily on international markets. A Tobin tax on these transactions at a rate of 0.1 per cent would raise an estimated $176 billion U.S. yearly. These revenues could be used to bail the world economy out of poverty, help control pollution and prevent the spread of infectious diseases.
For instance, the United Nation estimates it would cost $80 billion to eradicate extreme poverty in the world. A Tobin tax could also finance the end to land mines and related medical and rehabilitative care. It is estimated that the minimum cost of removing 100 million planted land mines is about $33 billion. In Canada, the proceeds could fund massive environmental cleanups and new social programs.
The Tobin tax would probably be the first case of a new tax that could generate real wealth and sustain profitable and socially useful activities by discouraging, in the long run, useless or harmful financial activities.
The challenge is to ensure that the Tobin tax agenda is not sabotaged by the right wing, which wants to discredit any notion of tax fairness and the harm done by capital flight. Jason Kenny, Reform's revenue critic, refers to the motion we New Democrats put forward as a "regressive tax proposal" and called this a "crazy socialist idea ... one of the most harebrained ideas ever to emerge from Ottawa."
The other danger is that governments would be tempted to use the revenues to bail out greedy creditors, or replace existing funding and water down the impact of these new monies.
The Tobin tax is not the panacea to the scourge of speculation but it is the first step towards restoring some form of balance between a society which values prosperity and those who want to build their prosperity at the expense of everybody else.
Lorne Nystrom is the Member of Parliament for Regina-Qu'Appelle and the New Democratic Party's critic on financial institutions.
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