Global Policy Forum

A Global Public Goods Approach to a Currency Transaction Tax


By Morten Haugen Hans

Association for the Taxation of Financial Transactions to Aid Citizens
October 5, 2007

The basic premise for this paper is that there is a lack of sufficient provision of certain important goods on the international level. This lack of mechanism and institutions on the global level leads to reactionary and ad hoc solutions when facing a problem of i.a. financial nature. UNDP has taken a lead in both conceptual and methodological developments, as well as the policy dimensions of the understanding of global public goods. The 1999 book, with the sub-title "International Cooperation in the 21st Century", will soon be followed by a new book, which will have a stronger focus on the specific needs of developing countries, such as access to scientific progress and information. The fact that the notion of global public goods is also elaborated upon in the July 2001 communique from the G8 finance ministers indicates that there is an interest in developing the concept also in terms of concrete policy tools. The challenge ahead of us is not to drown in the definitory or conceptual circles, but to be able to use it as both indicators of change of policy and as a way to find a common standard to achieve aims.

UNDPs efforts

Defining the public goods concept is difficult. The two dimensions of non-exhaustiveness (that access will not diminish with consumption; no rivalry) and non-exclusiveness (that no-one can be excluded) is the traditional approach. UNDP, however, views the concept of public goods from the perspective of how one can explain the lack of sufficient provision, keeping in mind the two dimensions mentioned above. UNDP finds that there are three "gaps" that explain the lack of sufficient provision.

The jurisdictional gap: Lack of recognition of the externalities stemming from the potentially negative behaviour of its citizens is the premise for defining the content of this gap. The states have not built systems for preventing what might be defined as "public bads". Concretely UNDP asks for a reorientation of international organisations to be able to develop this capacity to minimize the negative behaviour and its damaging effects.

The participation gap: Lack of consciousness and proper channels for action is the premise for defining the content of this cap. The barriers for access can be both technical, financial and relating to capacity and time constraints. UNDP asks for better South and civil society participation, as well as a "future generations" assessment in the work of international organisations, as basic preconditions for more equity and thus legitimacy.

The incentive gap: Lack of proper mechanisms for providing the good is the basic premise for defining the content of this gap. Those that have the greatest benefit of the access to the good should pay the gratest share of its provision. UNDP asks for more properly adaptable responses that can be found by increasing the cooperation between countries at the same level of development, as uniform solutions are seldom appropriate for all countries.

Among the global public goods that are elaborated upon in the 1999 UNDP book on global public goods, are i.a. equity, justice and financial stability. This is confirmed in the Communique from the G8 finance ministers from July 2001.

Operationalising policy implications of an understanding of financial stability as a global public good

Financial turbulence in the aftermath of the Asian financial crises had severe economic and social consequences. The consequences have been found to most severe in countries with weak or no institutions for financial regulation on the one hand (Grabel 2001), and wealth distribution on the other hand. However, the negative consequences could also have been reduced or even avoided had the proper international and regional institutions been in place. The World Bank says in the World Development Report 1999/2000: "A wealth of studies exist on trade libaralisation: all suggesting that it has many benefits, but the evidence on capital account libearlisation is much more mixed" (World Development Report 1999/2000, p. 75).

I will elaborate on a CTT as a means to promote the provision of crucial public goods, first and foremost financial stability, but also justice and equity. This will be based on the three gaps in defined by the UNDP.

Jurisdictional gap: The negative behaviour of financial actors must be mitigated by robust mechanisms on both the national, regional and international level. This includes both single financial actors (heavy short-term financial transactions affecting both the financial, monetary and trading situation for vulnerable economies) and groups of financial actors (i.a. illustrated in the herd behaviour when withdrawing from countries when indicators where going down). Just increased suveillance can never be enough, there is a need for using price mechanisms to a higher extent.

Many have argued that in terms of financial recession, a tax on currency trading would not have much effect, as the money would leave the country anyway. The proposal made by former IMF economist Paul Bernd Spahn on the idea of a two-tier tax can be a proper response to this. Spahn proposes that if the currency falls outside of certain pre-defined thresholds in short time, there is a need for a much higher tax that can stem these excessive outflows Paul Bernd Spahn (1996): The Tobin Tax and Exchange Rate Stability. In: Finance and Development, Vol. 33, No. 2, p. 24-27. Such a larger tax will therefore have the effect of the stability and also the recovery of economies. If the financial herd behaviour leads to a fall of the currency value, production output, economic growth and social distribution, there will be good reasons for introducing such a higher tax. The problems of regaining confidence in the currency after introducing such a tax must be weighed against the social consequences of not having a possibililty of stemming the worst consequences of herd behaviour - by taxing withdrawal in cases of massive outflows.

Participation gap: The pepople worst affected by the financial turmoil have absolutely no influence in the decisions of the big financial actors. On this background it is important to develop some kind of mechanisms for keeping the actors in central, public and private banks, as well as the various players in the derivatives market. Also many countries are more or less effectively left out of important decisionmaking bodies, thereby leading to increased tensions between developing and developed countries. Professor Gerry Helleiner (Helleiner 2000) has argued strongly for a change in the structure of international financial institutions, increasing the participation and influence of developing countries. The experiences from both the countries that have attempted to implement some form of capital control, as well the countries that did not have these instruments in place, will be important. Many developing countries have important evidence from capital control that can not be found among developed countries.

The proposed tax cooperation, possibly leading to an institutional body to deal with tax matters, is one of the most concrete proposals from the Zedillo High-level Expert panel on Financing for development. This should be given a concrete endorsement by both the Financing for Development High-level meeting early 2002, as well as the Rio + 10, to be held in Johannesburg later the same year. As the power seems to be more with foras outside the UN, such as the Financial Stability Forum, there is also a need to discuss the relation between various foras.

Incentives gap: The bail-in proposal of private actors is still formulated in very vague terms, and untill now has not received a concrete implementation. All agree that private actors should be part of the problem-solving of financial crises, but not how they should be held accountable. This is when a currency transaction tax on can be easily justified. While the low tax should be used for poverty alleviation and social development, the incomes from the high tax should rather be set aside for a crisis fund for protecting national currencies in times of crises. Then the private actors will pay for the generating of a robust mechanism for both eliminating the worst forms of crises, as well as contributing to the recovery after the economic crises.

Financial actors are important as advisors, but the concrete policies for handling the crises should of course rest with the government concerned. The bail-in should not lead to a situation where private actors have an increased influence over the financial policy. The economic contributions must be built up gradually, as it is less likely that financial actors will have incentives to contribute financially when an economic downturn sets in. In such situations they will be too concerned saving oneself, not all the others.

The partial rejection of a CTT by G8 finance ministers

For the first time the finance ministers adresses the issue of a CTT in their Communique. They do conclude by partially rejecting the proposal. They say that "[s]everal difficulties prevent such a proposal from being a workable tool" to promote financial stability. They present four objections that I will briefly present and then discuss:

A tax might increase volatility: The premise for this argument is that "by tightening market liquidity, the tax may actually increase, rather than reduce, volatility", as expressed by the G8 Finance Ministers. There seems to be an understanding that in a world with no regulations between states, the financial market will work perfectly well, as the market will correct itself by money floating to the markets with the best rate of return. An assumption that the market forces will always work logically and rationally proved wrong in the Asian crisis, as psycological factors played an important role as short-term investors decided to leave the unstable markets.

To this there is to say that the mer existence of a tax can be sufficient to guide behaviour. By knowing that there are also costs by trading with currencies, there might be a shift in which currency trading that will be chosen. Just trading on marginal changes in the currency value will not lead to positive economic changes. More of the trading will be related to productive sector and be a tool for neccessary adjustments of economic, financial and monetary policies. A tax can not be a deterrent to sudden outflows: Based on the argument above, it must be clear that the global movement for a currency transaction tax does not talk about one uniform tax, but rather highly adaptable taxes that are fit for handling various situations. This argument can therefore be effectively met.

A tax does not differ between speculative flows and trade-related flows: Every transaction that has a productivity-enhancing potential will still be perfectly possible. However, the trading that has untill now been generating short-term profit as a result of the low transaction costs on trading with currencies on marginal changes, will not be as profitable as before. This implies that it is difficult to justify an a posteriori differentiation between currency that is speculative and currency that is not speculative. Such a system will be too difficult to manage.

A tax could lead capital to less regulated institutions and jurisdictions: This problem must be met by involving all relevant international actor, based on an understanding that certain transactions can simply not be acepted. The OECD list on non-cooperative tax havens is very important, and will be even more so if also tax havens in the OECD area are adressed properly. Banks must agree on specific criterias for determining whic countries that are illegible for trading. Alongside isolation, there must be a strenghtened international police cooperation to curb the illegal black market economy.

The G8 finance ministers are therefore invited to exchange views with researchers, civil society organisations and all relevant shareholders in the international financial system. Based on their notion of financial stability as a global public good there should be a better understanding of how such stability can be realised. Better surveillance is important, but also more robust preventive effects must be in place. As the issue is brought up on the G8 agenda there will be several occasions to bring the issue further. But it is important to act swiftly; when the new financial crises is again haunting us, there will only be time for reactionary and ad-hoc measures.

Flexible taxes will not hurt the countries' sovereignty

One of the main arguments against the idea of introducing a CTT, is the principled rejection of collect taxes for international purposes. The first issue is the sovereignty to collect taxes, the second is the sovereignty to decide on the use of the income from the taxes. Most illustrative is the wording is US Constitution: "No taxation without representation"

The challenge ahead is therefore to keep up the principles that a.o. guide the Zedillo Expert Panel on Financing for development to propose a glocal carbon tax. This proposal builds on the basic thinking of the global public goods concept, and is therefore of interest. Readers of the report will know that it was more reluctant on the idea of a CTT, but asked for further studies to be made.

The advocates for a CTT are coming toghether in arguing for a national collection of the tax. The collection should therefore not be done by any international institutions, but institutions such as the Bank of International Settlements will be very important in working out the technical modalities and providing information to the states that are responsible for the concrete implementation. Further, there are strong reasons for arguing for a national decision process also on the use of the money collected by the tax. However, the United Nations should make guidelines and strong recommendations on how the money should be spent. The achievement of the 2015 Development Goals (related to poverty, education, health and urban sanitation) are important.

It could be argued that developing countries could spend all their income nationally, as all know about their restrained budgets. Developed countries on the other hand should set aside up to 100 per cent, and not less than 90 per cent, to poverty alleviation and social development in developing countries. For economies in transition there must be a flexibility, depending upon their level of development. Such a system will not undermine the sovereignty of countries, and will therefore be possible to work out, first by discussions at the High-level Event on Financing for Development.


There must be policy implications of the new understanding of global public goods. The 1999 UNDP book concludes by pointing to certain changes in the ODA transfers. However, it seems obvious that also other aspact of international political economy must be adressed. The issues adressed in this short paper adresses mainly the policy changes on the national and international level. However, there might be as good reasons for developing the regional capacity to promote sound financial flows and prevent unsound ones. This work must be built on the understanding that countries in the same regions share certain characteristics, and also will have a stronger interest in assisting during crises, also to avoid the contagion effects.

Based on the information that we now have, it is disappointing that the World Bank and especially the IMF are pushing for greater capital account liberalisation in countries with a weak institutional structure to handle financial crises. Rather than arguing for a reduction in regulations, these institutions should encourage sound monetary regulations, including on currency transactions. A nationally implemented, coordinated tax could certainly be a way forward.


Grabel, Ilene (2001): Averting crisis: Assessing Measures to Manage Financial Integration in Emerging Economies, paper presented at the Seatini Expert Meeting on Financing for Development, Geneva 10th-12th of May 2001

Gerry Helleiner (2000): Global Financial Management, in Global Financial Challenges: Towards a Financial Arcitecture for the Developing Countries, The Norwegian Campaign for Cancellation of Third World Debt, 2000, Norwegian Forum for Environment and Development, Oslo

Kaul, Inge, Isabelle Grunberg and Marc A. Stern (1999): Global Public Goods - International Cooperation in the 21st Century, Oxford University Press, New York and Oxford

Spahn, Paul Bernd (1996): The Tobin Tax and Exchange Rate Stability, in Finance and Development, Vol. 33, No. 2, p. 24-27

World Development Report 1999-2000, Entering the 21st Century, Oxford University Press, Oxford & New York 1999.




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