A Cuddly Tax: Why the World Needs a Currency Transactions Tax

Ross Buckley, professor of international financial law at the University of NSW, and Jubilee Australia policy advisor

Don’t you love a cuddly tax? You know, the sort that would raise enough money to halve global poverty and hunger, improve the workings of important financial markets, and cost you nothing. A tax that would be worth having if it raised no money at all, so that the revenue it does raise is a pure bonus. 

What, this isn’t your idea of a tax? 

It was the idea of a tall, spare, courtly American, James Tobin. In 1972 he had the idea of imposing a very small tax on all foreign currency transactions. He believed this tax would help exchange rates reflect long-term fundamentals over short-term expectations, and would preserve and promote national macroeconomic and monetary authority. He conceived of the tax as sand that when thrown into the wheels of international finance would actually improve their workings. A small tax of 0.1% to 0.25% is large enough to dissuade short-term speculative transactions, while having almost no effect on long-term investments. By taking the ‘white noise’ out of the market, the tax will allow the market to react to the long-term transactions and function more efficiently.

Tobin came up with his idea when neo-liberalism, the idea that unfettered markets allocate everything best, was on the rise. In that environment, as he said, his idea ‘sunk like a stone’. But much has changed in those 37 years. The Global Financial Crisis has highlighted the limits of unregulated markets and the objections to the practicality of the tax have been overcome.  

In the early 1970s James Tobin had an idea that was way before its time. But with some political will, its time could be now.

This coming Friday the G20 finance ministers meet in London, and next month the G20 leaders meet in Pittsburgh. Civil society groups are pushing strongly for the inclusion of a currency transactions tax of the kind Tobin proposed on the agenda for both of these meetings.

Last week, the Chairman of the UK Financial Services Authoriry, Lord Turner, said he would consider supporting the imposition of such a tax.

The response of bankers has been predictably hostile. My favorite response, for its utter disregard for the truth, is that of Scott Talbot, from the industry organisation that represents America’s leading banks. He said, “The financial services industry is a leading sector around the world in producing jobs and providing people with goods and services they demand.” It isn’t. Financial services employs only small proportions of any population outside New York and London. The industry makes no goods at all, and the services it provides are far more sophisticated and risky that most people demand. Undaunted, he continues, “A punitive tax would unnecessarily restrict the industy, harm shareholders, and ultimately weaken a key sector in the world economy.” Describing a tax of up to 0.01%, as punitive is chutzpah on a grand scale. And the tax won’t weaken the industry. Reams of research suggests it will strengthen it. What has brought the industry to its knees, and many banks to the edge of bankruptcy, is a lack of effective regulation. 

This tax is one of the best potential regulatory amendments for a presently disfunctional system. Yet extraordinarily Lord Turner has been accused of overstepping his remit as a regulator in supporting it. How dare a regulator propose to regulate us? The GFC has done nothing, it seems, to temper the hubris of bankers.

The most recent thinking supports a tiny tax, even smaller than that proposed by Tobin, of perhaps 0.005%, one-half of a basis point. The best estimates are that a tax at this rate would dissuade some 14 to 20% of total transactions (those at the most speculative, short-term end of the spectrum) and would raise between US$33 and US$60 billion each year. Estimates of the revenue from a higher tax of 0.01% range up to US$100 billion. 

The foreign exchange market is, in volume terms, the largest in the world and due to improvements in technology and turnover, the bid-ask spreads in the market have narrowed substantially in the past decade. A tax at this rate would amount merely to a slight widening in these spreads.

The opponents of a Tobin tax claim it is unworkable. That its implementation would require the cooperation of every country in the world. This objection had substance when Tobin proposed the idea. Yet in the intervening decades foreign exchange trading has moved onto large scale settlement systems such as SWIFT and others. All of these systems are perfectly adapted to levying the tax. Any move to avoid such a tax would require a return to the informal proprietary trading technologies of 30 years ago and would impose costs many times higher than the tax.

The tax is not a radical idea. France in 2001 and Belgium in 2004 enacted laws that will impose a currency transactions tax on all foreign currency transactions in their jurisdictions once such a tax is imposed across the EU (uniformity of application being, of course, necessary). Furthermore, earlier this year France established a study group on how the tax would work in practice.

Australia is playing a significant role today within the G20. Our voice matters; and it should be added to those arguing for a currency transactions tax. This tax will make foreign exchange markets more stable and efficient and provide a reliable, and today much-needed, source of revenue with which to reduce global poverty and hunger.