Global Policy Forum

By Jí¶rg Huffschmid

The following text is not dedicated to the question whether or not the Tobin tax (TT) is generally desirable or technically possible, since the former issue is widely acknowledged in political circles, and the latter not doubted anymore, in particular by bankers. The crucial argument against the TT - which possibly serves as an alibi to enable one to refuse the concept flatly even though such a refusal is not opportune anymore politically - is that it is supposed to work only if all major financial centres in the world participate. And it may reasonably be doubted that this will happen anytime in the near future. In particular the US, currently the largest financial centre in the world, will not implement a TT. Is this reason enough to drop the idea entirely or is there a sensible realistic possibility to implement the TT without participation of the US, say in the European Union alone? This question will be treated in the following. The crucial argument for the impossibility to implement the TT other than as a world-wide tax is that the speculative trade with currencies would leave an area in which the TT is levied in favour of an area such as the US (or offshore centres). The purpose of the tax would thus be undermined and its implementation would not have any effect. To test this claim, we have to answer the following three questions:

1. Is it at all possible to implement the TT in one country or in a group of countries alone and how could this be done?

2. How effective would a TT implemented in Europe alone be in damping the international currency speculation?

3. Does the implementation of the TT in the European Union discriminate European companies against other companies?

1. Is it at all possible to implement the Tobin tax in a group of countries such as the European Union and how could this be done?

This question will be treated in the case of trading the euro against the dollar, which in April 2000 amounted to be 65% of the total foreign exchange trading volume of Germany and 28% of Great Britain's (Bank for International Settlements, Annual Report 71, p.99).

It is obviously possible to register all foreign exchange transactions individually. There are two different possible approaches: The first is based on the pricing or broking procedure which today in the interbank market is usually settled electronically (i.e. about 85 to 90%, see BIS, AR 71, p. 99). It is quite simple to implement an additional procedure, which in every step of the transaction sends a message to the revenue authorities. The second approach is based on the actual payment process itself. For safety reasons such payments are increasingly registered individually (gross) in the interbank market, at the cost of the older procedure of settling the balance (netting out).

Four different cases are possible:

a. Purchase of dollars against euros in the US, by cash in hand or by means of a forward contract. This is the classical transnational foreign exchange trading, which to the lesser part serves to pay imports or investments in foreign countries and to the larger part is used for investments in securities for the purpose of arbitrage or speculation. Taxation does not pose any problems.

b. Purchase of dollars against euros in Frankfurt in a - domestic or foreign - bank, which already has a dollar account in Frankfurt, such that no transnational foreign exchange trading is necessary to procure the foreign currency. This transaction is registered in the purchaser's accounting books and could be taxed by a purchase tax, which would be levied as a VAT or an excise duty.

c. Remittance of euro to a euro account in the US, i.e. without an actual currency trading. Those euros will be used for the purpose of foreign exchange speculation, which is then not subject to the TT. This is the case which is commonly used as an argument against the TT. But the answer to this is quite simple: It seems that tax avoidance or financial speculation are the most common, if not the only reasons for this kind of transactions of transferring euros from here to euros abroad, since in a foreign country the euro neither serves as a counting unit nor as a currency nor as a means to safe keep values. So the tax should be put on any remittance of euro to the US, which as far as the necessary registration is concerned is not difficult. Therefore, a European TT could strike the trading of euros not only within Europe but world-wide - with one exception:

d. Euros which already are in the US are used for the purpose of currency speculation. It is not possible to prevent this case with a regional TT, but it seems that this case is of a more theoretical nature and moreover not very profitable for scalpers. (Moreover, consider that the euro has already been taxed before reaching the account in the US). It would be necessary for scalpers to keep large amounts of quickly liquidatable (thus low paying) euros in foreign countries in order to use them when convenient for the purpose of speculation. But this will remain highly improbable even after the implementation of a European TT.

We thus conclude: If the TT is not implemented in all major financial centres but in the European Union alone, then the taxation should not be applied directly to the currency trading itself (i.e. the exchange of euro against, say, dollar), but already when national currency is remitted to a foreign country. The purchase tax thus becomes an exit tax. This does not pose any technical problems, has the same effects as a direct taxation of currency tradings, affects foreign payments and direct investments in the same way as the TT - and is an effective means to prevent the circumvention of the TT by transferring national currency to an account abroad.

It is thus possible for the European Union to implement the TT alone. To be precise, this tax would not be a regionally restricted tax, but a regionally unrestricted one which applies to any tradings with a particular currency, in this case euro. (Other countries could put a similar tax on the trade with their currency.)

2. How effective would a TT implemented in Europe alone be in damping the international currency speculation?

In previous discussions on the TT it has been clarified that this tax cannot be the only means in fighting financial speculation, and that it is a quite weak one in particular where massive fundamental speculation is concerned. But it is indeed a powerful tool against the gradual building up of waves of speculation which in the end can cause major crises. This of course remains true for the European TT.

The magnitude of euro transactions is certainly not negligible, as the euro is about to become the world's second currency despite its weakness. The fact that it is still way behind the dollar should not hide the fact that the major share of all foreign exchange turnovers consists in dollar-euro tradings. This means that one side of these tradings would be subject to a European TT. The BIS assumes in its annual report that "at the start of the EMU [European Monetary Union], the euro was being used in about 50% of all foreign exchange transactions. In the long run, the share of euro will probably rise'' (69th annual report, p. 116). If half of all foreign exchange tradings is subject to the TT, because the euro is involved, then this is no doubt not negligible. Moreover, the expected stabilization of the exchange rates is of particular interest if one takes into account that the volatility (i.e. the instability) of the exchange rate between dollar and euro in particular has greatly increased since the beginning of the European Monetary Union (from 8.2 in 1998 to 13.4 in 2000, see AR 71, p. 99).

The implementation of a TT on tradings involving the euro might moreover be relevant, because a success of this pilot project of monetary policy might encourage other countries or groups of countries (such as South East Asia or Latin America) to implement a tax on tradings involving their currency and thus damp currency speculation themselves. But one should not forget that for third world countries the danger of abrupt speculative attacks is much larger, and stronger means than the TT might be necessary, such as a cash depot demand ("Chile model'') or an administrative complete stop of tradings with the national currency (``Malaysia model'').

3. Does the implementation of the TT in the European Union discriminate European companies against other companies?

The TT does indeed make foreign exchange tradings more expensive. In fact, this is the intention and it should contribute to lessen short term currency speculation. On the other hand it lessens the risk of currency exchange rates. This should - if the neo-liberals are right - lessen the cost of those tradings, which stabilize exchange rates, an effect contrary to the rising costs caused by the TT. But: US companies as well, although not paying the TT, should profit from a growing stability of the exchange rates. This is a typical ``freeloader effect'', which would place European companies at a relative disadvantage.

As long as this discrimination concerns financial speculation only, there is no reason to object to it. If you cannot get all parasites, it still makes sense to proceed against those whom you can reach.

As far as exporters and direct investors are concerned, it has repeatedly been emphasized that the additional costs are negligible, because their time horizon is much larger and because contrary to speculative tradings, where two turnovers are taxed, only one turnover is taxed in this case (the payment of a consignment or the exchange of currencies to the purpose of buying investment goods).

In case that doubts still remain, it should be emphasized that there are ways to completely neutralize those costs: For importers in the Euro region the import tax is reduced by the amount of the TT, whereas investors abroad pay a reduced asset tax. This does not cause additional bureaucratic expenditure, and has the desired effect: anybody who needs foreign currencies to pay for imports or investment goods or wages abroad does not pay TT.

Final remark: To put a TT on the trade with Euro does not in any sense mean that the European Union isolates itself from international foreign exchange markets. After the implementation of such a European TT the euro will still be traded in New York, Tokyo, London, Frankfurt etc. against other currencies (mostly dollar) and the exchange rates will still be determined by these tradings. (This is not desirable, but the TT does not change it.) A European TT raises the costs of speculations involving the euro, which makes this sort of speculation less attractive and damps it. Not more, but not less either. And in the long run it may achieve more, if other countries follow the example.

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