The Tobin Tax (by Mark Cavdar)

The pace of the 21st century economy is breakneck, as economic systems constantly adjust to new technological advancements. Technological breakthroughs have created affordable business solutions, permitting developing countries to take equal part in international business transactions. These strides of innovation have ushered the formal deconstruction of the all-encompassing Western capitalist ethic, and have opened up markets and knocked down borders on the international stage. As markets are always in motion, some friction is caused in the trade of foreign currencies.

Investors looking to shelter funds or make short term investments often buy and sell large quantities of foreign currency, causing domestic markets to fluctuate and resulting in unhealthy ripple effects for residents. For the currency to remain attractive to foreign investors, governments are forced into marking up interest rates. Higher interest parlays into an increased rate of inflation, and these unnatural market shifts can be attributed to the volume of foreign investment. Long term economic instability often results for these respective nations, as previous crises have proven in countries such as Mexico, Russia and the nations of South-East Asia. A nation can suffer disastrous circumstances as a result of higher interest rates.

It is from these international problems that economist James Tobin’s proposed tax on international currency transactions stems. Every day, nearly 1.8 trillion dollars of international currency is traded across borders in an extremely volatile market. To stabilize international currencies, Tobin suggested that a small tax rate be instituted on international currency transactions, somewhere in the neighbourhood of 0.5% to 1%. Tobin’s intent was to stifle short-term conjecture on a currency’s performance by spectators who forecast the immediate economic performance of a country’s dollar. Tobin proposed that national governments enact these taxes on a domestic level, however for the idea to have any real impact the concept would have to receive widespread acceptance on an international scope. This is the primary obstacle faced by the Tobin Tax.

Some may argue that national Tobin Tax implementation on an individual level seems a bit redundant, and further argue that authority of the tax’s realization should be granted to an international organization such as the United Nations (UN). While this would provide an independent source of income to bankroll the organization, the idea is too early in its infancy to register any sort of imminent revolution to the processes of international transactions.

This is not to say that Tobin Tax initiatives aren’t springing up across the globe. Belgium, Canada and Brazil have all introduced versions of the Tobin Tax for debate into their parliamentary caucuses. However, in a show of how essential international cooperation is to the success of the tax, Belgium’s acceptance of the tax was wholly dependant on whether or not neighbouring nations in the Eurozone similarly adopted Tobin Tax legislature.

The idea, originally proposed in 1972, garnered Tobin a Bank of Sweden Prize in Economics in 1981. After Tobin’s acceptance of the award, the idea of a tax on international currency lay mostly dormant for nearly two decades. Recently, however, the idea of Tobin’s Tax has become a hotly debated issue, as a new school of thinking has adopted and fundamentally altered the concept’s core ideals. Tobin initially proposed the minute tax of monumental transactions as a handbrake on the fluctuation of foreign currencies due to the sheer volume of speculator trading. Recently, however, the Tobin Tax has taken on a new form altogether with progressive economists; a form that Tobin disagrees with.

Anti-globalization enthusiasts have adopted the Tobin Tax as a mantle philosophy for the purpose of deterring the stronghold grip organizations such as the World Trade Organization (WTO) and International Money Fund (IMF) have on international trade. A large sum of revenue will be generated by instituting the tax, estimated to be in the vicinity of $100 to $300 billion dollars a year. This money could further be put to use in amending pressing international developmental goals and on-hand in dealing with immediate international problems.

Tobin, an economist who ardently supports free market trade, initially devised the tax as a means of controlling international interest rate fluctuations. Tobin believes in trade-promotion organizations such as the IMF and the WTO, while new supporters of the Tobin Tax wish to see their iron-fisted authority diminished. The central goal of the concept of the Tobin Tax has morphed against the creators will, and the questions begs to be asked: is the change for the better or the worse?

Picture this for a moment. Suppose an international organization assumes control of the implementation of the Tobin Tax. For the sake of argument, let’s assume that the UN serves as the international organization. The UN adopts the administration of the Tobin tax and becomes the beneficiary of the $100-300 billion dollars of revenue it would generate per annum. One of the problems that plagues the UN is the fact that it has no independent funding and rather relies on financial donations from member nations (which often go unpaid). With a stable source of income, the UN could actually start exerting some sort of international authority. Case in point, the money generated by Tobin Tax revenue could play a key role in the realization of the UN’s Millennium Developmental Goals. With good intentions about and no money to fund them, the Tobin Tax could be just the saving grace international diplomatic aid organizations need to become a relevant force on the international stage.

Detractors of the Tobin tax are plenty, and a change in thinking this monumental seems too revolutionary to ever become a concrete, accepted principle. The reverberations of Tobin’s tax will drastically alter the way international currency is traded, and many obstacles will present themselves along the path to the idealistic tax’s implementation. Also, the international cooperation that the tax will precipitate is unprecedented on a scope this vast and encompassing. The Tobin Tax seems almost to be a dreamer’s game; a brilliant idea birthed in a world that will never let it see daylight.

Sources

"Fact Sheet on Tobin Taxes." Center for Environmental Economic Development. 1 May 2005. <http://www.ceedweb.org/iirp/factsheet.htm>.

"Tobin Tax." Wikipedia. 16 Apr. 2005. 1 May 2005. <http://en.wikipedia.org/wiki/Tobin_tax>.

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