Tobin tax time

The panic that has gripped Democrats in Washington since their special-election ambush in Massachusetts last week has strengthened President Obama's apparent resolve to confront more boldly the country's economic challenges--lost jobs, ballooning deficits, and financial profiteering.  But Obama seems tethered to his Wall Street bodyguards of economic policy on the one initiative that could address all three with one blow -- an international financial transactions tax.

Nobel Prize economist James Tobin first proposed a tax on international currency transactions at Princeton in 1972, with the aim of stabilizing speculative frenzies in currency markets.  "The idea was anathema to central bankers," Tobin later recalled, but as he and other researchers refined and broadened the concept, support for it among national leaders has widened, as much to generate revenue as to ease market volatility. 

After the global financial meltdown of 2008, Europe's three leading governments embraced the proposal.  Predictably, Obama's treasury secretary, Timothy Geithner, was quick to dismiss the idea after British prime minister Gordon Brown called on the Group of 20 leading world economies to adopt it.  Firms are "going to move in a heartbeat to get around any tax like that," he said, repeating financiers' threats to transfer their business to countries that don't impose the tax.

But a lot of serious work has been done over the years to iron out the wrinkles in Tobin’s transactions tax, both by economists and by technology advances, as Dean Baker of the Center for Economic and Policy Research ably documents.  The collection administratively of such a tax has become immeasurably easier since Tobin's day, notes Columbia University's Stephany Griffith-Jones, thanks to "greater centralisation and automisation of the exchanges' and banks' clearing and settlement systems."

Moreover, there is already a critical mass of governments ready to join in applying the same levy.  Today's financial crisis has done what decades of gum-beating by well-meaning globalist advocates failed to do:  It has brought leaders of countries around the globe into agreement on the world economy’s need for prudent policing, integrated oversight—and incentivizing long term investment. 

A collectively coordinated tax on international financial trades, even at infinitesimally tiny rates, would generate substantial revenues for cash-starved governments. Estimates are that a virtually invisible charge as tiny as .0005% would yield $30 billion annually.  Britain already has a tax on security trades of fully half a percent, which yields the exchequer £4 billion ($6.5 billion) a year.

Far from hitting hard-pressed working families (much less the recession’s unemployed), the financial transactions tax would come entirely from the well-heeled top percentile that has been gaming Wall Street's global casino.  Even those in that top percentile making long-term investments would be virtually untouched, since most transactions are made by arbitrage-eyeing short-term investors flipping assets through rapid trades.   

Globalist enthusiasts for the transactions tax have long fancifully imagined such a revenue stream as a steady source of funding for United Nations agencies' development work.  This is not what today's champions of internationally coordinated taxes on financial trades have in mind.  Nations’ political leaders are ready to do battle with international financiers on this issue because they need the revenue to fill the gaping holes in national budgets ripped, and the bailout costs triggered, by financiers' recklessness. 

Still, there is a political reason to dedicate some share of such a revenue stream to agreed international purposes, such as the low-carbon energy investments in developing countries needed to seal a strong climate change deal:  It will help broaden the range of countries that voluntarily join and enforce the financial tax regime.   

The kneejerk negativism of Obama's financial team has not discouraged Democrats in the Congress, who are increasingly impatient with the administration's failure to deliver change on the global economy.  Led by Oregon's Peter DeFazio in the House and Iowa's Tom Harkin in the Senate, they have introduced legislation to tax specified securities transactions precisely “to fund job creation and deficit reduction." 

While the Congress can establish an American tax on financial transactions, only the president can hammer out with the Europeans and Asians an internationally coordinated system.  President Obama needs his treasury secretary to tell the International Monetary Fund that the United States, too, wants the Fund to present a plan for such a levy at the next G-20 meeting. 

Moreover, with his political opponents at home agitating about federal deficits after years of quiescence about them, Obama needs new revenue that does not violate his pledge not to raise taxes on average Americans.  If the 2011 federal budget he proposes next month anticipates the first stream of revenue from an international levy on financial transactions, he can close the deficit, plow money into job-creating initiatives -- and provide a down payment on America's promises to the developing world to deal with climate change.

Comments

[Russy D. Sumariwalla]

Brilliant!

[Sally McMillan]

What are we waiting for? In with the Tobin tax - out with Geithner.

[Robert Steinback]

I am amazed and embarrassed that I’d never heard of Tobin’s tax proposal until your blog article. This is an incredible idea, and, it would seem to me, quite do-able in the age of electronic funds transfer. Of course, the Right wing will howl because it simply hates the idea of taxes – but even more, it hates the idea that government can actually accomplish something positive WITH taxes without the private sector taking profit on it. (This, despite the fact that much of the revenue raised would probably go to private-sector contractors anyway.) Every government levy that turns into help for the poor, the middle class, developing nations, health care, a cleaner environment or even better-balanced government budgets stands as evidence that while the private sector and free markets have their role, they can’t solve ALL of society’s problems.

I hope this simple, elegant concept gets wider and wider distribution. With your help, it will.

[ola rennette]

Retirement tax time. It sounds like a pleasing theory, but real world applications have failed. In Britain as mentioned, only the poor and middle class investors pay the transaction tax. 71% of the UK trading volume is exempt from the tax, those are the banks, traders and market makers. There has been pressure to remove the tax in the UK as revenue would be substantially higher without the trans tax, but the exchequer is resisting out of its own self-interest. Middle class wealth destruction seems underway. Debtors and lenders that caused the crisis receive bail outs and tax credits and demand that the savers and investors pay for it. The exchange traded stocks, commodities, derivatives, traders, exchanges and my retirement fund had nothing to do with the banking crisis. The banks traded and created the disastrous credit derivatives that did not even trade on the exchanges and were not open to public investors nor small-time traders. Capital gains rates are nearly 50% if we make money. Now we would have to pay tax even if we lose money. Estimates from impartial studies such as from The Independent Budget Office of New York City estimate that this tax would result in net negative revenue after subtracting losses from lower capital gains and income tax loss from hundreds of thousands of jobs lost. A transaction tax would result in annual yield loss of more than 2% for long term investors according to the mutual fund industry, that’s if they don’t increase the tax. Important: At a 2% annual loss, investors starting out can expect to lose one half of their retirement because of reduced compounding. Any proposed long-term investment tax exemption means nothing. Fund managers will pass the tax cost onto us. As most trading activity will be stopped, it will severely reduce liquidity that makes it so cheap to purchase stock today. Important: This tax would increase the bid-ask spread and broker fee costs multiples more than the tax itself, yes, multiples more than the tax itself. Around 1990 both Sweden and Germany got rid of their transaction tax after only a few years. Other countries have recently abolished their transaction tax. India is in the process of removing the tax in a few months. The antiquated transaction tax is a relic of the past. It does not work. It harms the people, the economy, and destroys jobs. We don't need that to happen.

[Richard]

I really like the fresh & innovative perspective you did on the issue. Frankly speaking I was not expecting it when I started off studying. Your concepts were easy to understand. Glad to know that there’s an individual out there that definitely understand

[Jeffrey Laurenti]

Thank you for your message. I will be out of The Century Foundations
offices until 3 August. I expect, however, to be checking e-mails
intermittently during this period, and will likely, inshallah, be back to
you much sooner.

Jeffrey Laurenti
Senior Fellow and
Director, Foreign Policy Programs
The Century Foundation
41 East 70th Street
New York, New York 10021 USA
Tel.: +1 (212) 535-4441 ext. 339
or (direct) (212) 452-7739
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E-mail: laurenti@tcf.org
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