By Ismail Serageldin
Al-Ahram WeeklyJanuary 27 - February 2, 2000
The Tobin tax, named after Nobel laureate economist James Tobin who first proposed it, would levy a very small amount (say 0.1 per cent) on each commercial transaction in the capital markets, to help reduce volatility. It was anathema to those pushing for unfettered markets at the global level. They claimed it would be unenforceable, that it would lead to cheating by some and therefore should not be enforced on anyone. It would, they said, be an enormous disincentives to the entrepreneurs who were the key to economic activity, and..., and...
All these arguments have a familiar ring. Anyone who knows anything about the arguments surrounding the imposition of income tax will recognise the same arguments almost word for word. Yet almost all societies in the world have adopted income tax and though it is true that some people cheat by and large it works reasonably well. And it does allow for a modicum of redistribution for the public good.
True, when income tax reached confiscatory levels it did act as a disincentive to investment and prompted all sorts of creative accounting practices, but overall, the rich were not impoverished, and the trust-busters did not pauperise the Rockefellers and the Fords.
As to its complications -- surely with the level of computerised systems that we have in place, the ability to guide a little robot in real time on Mars, and the increasing movement towards uniform reporting practices of financial data, and practically all financial transactions being done by computer, we are in a much better position to design and implement a variant of the Tobin tax today than we have ever been. I am fully aware of the problems of derivatives and the possibilities of the switching effects that a Tobin tax or similar measures could engender. But this is only an exploratory discussion, and the "new financial architecture", as it is now being called, should address issues of volatility and capital flows with some forms of new instruments.
Another criticism of the Tobin tax is more valid -- that it would provide a slippery slope for politicians, a temptation to start shifting the funding of programmes onto it rather than through more direct taxes and user fees, thereby undermining a necessary discipline in public financial affairs. The case of Value Added Tax (VAT) in Europe is instructive. Once in place, politicians have consistently jacked it up to levels that were never imagined at its inception. It is easier to add a tiny boost incrementally to an existing tax that operates on large base on many transactions than it is to cut back on government spending or to hit the population with a direct tax. So what of the Tobin tax? Will it be the international equivalent of the national VATs?
One way to guard against that would-be to agree up front that the proceeds of the Tobin tax go into a fund -- to be managed by the IMF and the World Bank -- whose sole purpose would be to fight the currency crises that plague the international system today. The beauty of this proposal is that it would remove the temptation to fund good international causes.
This proposal would link the size of the fund to the size of the markets. The larger the markets the larger the fund becomes. It would be accessible only by a decision of all the countries of the world, represented as they are on the boards of the IMF and the World Bank. It would also add credibility to the interventions of the international financial institutions. It would complement the necessary call for added IMF surveillance in this time of rapid movements and the blurring of the boundaries of conventional instruments of borrowing and equity finance all over the planet. But why, some may ask, the World Bank and not just the IMF alone? Because it is essential in these times of rapid change and occasional crises that the poor and the weak be protected. Changes in the structure of the economy, its pattern of public expenditure, and reforms in the parastatal and banking sectors must all be undertaken with a view of their impact on the poor. These are areas in which the World Bank, with its multi-sectoral expertise and developmental mandate, can play a very constructive role. Finally, making access to these funds subject to the agreement of the Executive Boards of both institutions makes such access exceptional event, one not approached lightly. It makes such a fund something to be approached only in exceptional circumstances.
This is not a call for a return to the era of the "gosplans", nor is it a call for abandonment of the markets as a key principle of economic organisation. It seeks constraint only to make international financial markets truly competitive. The question is whether those who are responsible for safeguarding the international system will show the necessary wisdom to tame the wild markets, and benefit from the next swing of the pendulum to help fine tune the transition to a truly global, smoothly functioning international market in capital, goods and services. It is time for these economic decision-makers to act wisely to protect the advantages of the "free markets".
In keeping with the words often addressed to jurists: "Go forth unto the world and fashion those wise constraints that make people free."
About the Author: The writer is a vice-president of The World Bank. The views expressed here are those of the author and should not be attributed to the World Bank or to any of its affiliated organisations. An earlier version of these arguments was presented in "The Swing of the Pendulum: Taming the Wild Markets", in Towards a Compassionate World, ed. Mahnaz Afkhami (forthcoming).
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