Politics begin to turn extreme ...
economist.com
CHUGS
The Tobin tax
Roasting an old chestnut
Sep 6th 2001
From The Economist print edition
Unexpected support for a tax on cross-border capital flows
CRITICS of rootless global capital may have new friends in high places. In a comment on television that was opaque even by French standards, Lionel Jospin last month hinted at his approval of a tax on cross-border capital movements. The French prime minister was backing a Belgian plan to discuss the “Tobin tax” at this month's meeting of EU finance ministers. This week, Germany's chancellor, Gerhard Schröder, joined the fray by calling for greater debate on “speculative financial transactions”.
James Tobin, an American economist, first proposed a tax on cross-border capital flows in 1972, amid the collapse of the Bretton Woods system of fixed exchange rates. Details of how such a tax would work remain sketchy. Some proposals call for taxing only short-term transactions, while others would require differentiating between speculative trades and others. Estimates for the levy range from 0.1% to 1% of the value of each foreign-exchange transaction. Some Tobin tax supporters want to keep the rate flexible, so that it can be raised in times of crisis.
The tax got a brief boost in 1992-93 when hedge funds seemed to threaten the dream of European monetary union. George Soros, for example, famously bet against the pound and forced the British government to abandon its membership of Europe's exchange-rate mechanism in September 1992. A year later, the mechanism was blown apart after the French franc was driven down by hedge funds betting on its devaluation. Once the fuss died down and monetary union stayed on course, however, the Tobin tax faded from the European agenda—until now.
In other parts of the world, currency speculation has remained controversial. It has been blamed for devaluations (and subsequent economic crises) in South-East Asia in 1997, in Russia in 1998 and in Brazil in 1999. Speculators are now seen as a menace to Argentina's dollar-pegged exchange rate. In each case, demands for Tobin-type taxes have been heard.
Today's anti-globalisation activists view the tax more as a fat new source of cash than as a tool for exchange-rate stability. Groups such as Britain's War on Want and France's ATTAC want to use the tax to fund development projects in poor countries. They have lobbied European finance ministers vigorously. Voters sympathetic to these groups are just the sort that Mr Jospin needs to win his April 2002 bid for the French presidency.
A Tobin tax, however, would be both unwise and unworkable. It is true that only about 2% of the more than $1,500 billion in daily foreign-exchange transactions reflect direct trade in goods and services or investment in real assets; the rest is, in some sense, speculative. But it is hard to distinguish the two; and speculative trading provides essential liquidity to the markets.
In any case, speculators could easily avoid a Tobin tax, unless every country on the planet agreed to implement it. Traders could operate tax-free through offshore banks and use financial derivatives to skirt national laws. This would make it impossible to collect anything close to the $250 billion a year promised by the tax's proponents.
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