Tobin tax: a concept without a future / Resource rights: a concept with a future

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Tobin tax: a concept without a future / Resource rights: a concept with a future

 

  • 1.The Tobin tax is a very interesting subject in theory, but the preoccupation with the tax is not helpful for economic policy in practice and is distracting attention from thereal problems of the world. Securing the stability and efficiency of the international financial system; preventing monetary crises and development crises in individual countries; creating institutions and rules for overcoming crises; increasing development financing and ensuring it is used more efficiently – all these are important tasks in which a Tobin tax would not help or would even be a hindrance. In contrast to such a tax, the issuance of, and trade in, rights to use resources is a future-oriented, economically sound concept for (partially) overcoming our worldwide problems regarding resources.
  • 2.
    The practice of combining taxation and dirigism has a long tradition.The idea behind the Tobin tax – to counter unwanted speculative capital flows by throwing “sand in the works” of the international foreign exchange markets – is basically quite in line with this tradition, and taxes on capital movements have not been uncommon either (Germany’s stock exchange turnover tax, for example). However, James Tobin himself pointed out right at the beginning of the debate that a better solution than a Tobin tax would, in fact, be to introduce a single currency, for example in Europe. This would mean that with the euro we have already got the problem, as Tobin sees it, under control at least in Europe.
  • 3.
    To link the idea of the Tobin tax with development financingis extremely questionable (quite apart from the problems of applying the tax). Just as in Germany, which is financing social insurance through an eco-tax, two allegedly “good” causes are being linked here – quite obviously with the aim of making the imposition of a tax and the provision of funds politically more acceptable. Such deviation from the principle of non-assignment destroys the credibility of a government’s financial practice: it shows that the government lacks the courage to openly raise finance through a tax which is nothing other than a tax. Instead, the government deliberately obscures its operations in a jumble of different and entirely unrelated objectives.
  • 4.In the debate, the Tobin tax has been turned into anall-purpose weaponagainst everything that is in any way connected with the activities of the financial industry. It is claimed

    • to reduce volatility in the financial markets
    • to help avoid currency and financial crises
    • to strengthen the autonomy of national economic and fiscal policies
    • to reduce the profits of the international financial companies
    • to provide the state with funds for development financing.

    The width of this array weakens the credibility of the case. And the Nobel laureate Tobin certainly cannot be cited in support of it. Those who want a Tobin tax must answer three questions: Can the objectives really be achieved? Are the side-effects acceptable? Is such a tax even feasible in the 21 st century?

  • 5.
    Can the objectives be achieved?

    • Insofar as the intensity of short-term capital flows is reduced, volatility in the foreign exchange markets might, in theory, possibly decrease (Tobin’s original idea). There is still the question, though, whether the reduced market liquidity due to the tax may not, instead, increase volatility whenever there are developments of relevance for exchange rates.
    • The Tobin tax might perhaps have alleviated some of the crises in the old European Monetary System (debatable). But it would have been no help at all in any of the major crises of the last 10 years (Mexico; Asia; Russia; Brazil; Argentina).
    • The autonomy of national economic policies can indeed be threatened by short-term capital flows. But where and when in the last decade was a healthy economic policy thwarted in this way? And autonomy cannot – and should not – be strengthened by using “sand in the works” to artificially extend the life of an unsustainable policy; this only results in even greater distortions and imbalances. The “watchdog function” of the financial markets definitely has a positive side: it acts as an early-warning system.
    • Financial companies should be taxed in accordance with the same principles as industrial and distributive enterprises. Foreign exchange trading (which, incidentally, is decreasing) is not an appropriate area for “creaming off profits” through a Tobin tax.
    • Linking the level of development finance with the revenues from a Tobin tax does not do justice to the high priority that development finance ought to have.
  • 6.A Tobin tax would potentially have enormous unwantedside-effects. It would be tantamount to a tax on international trade in goods and services, for every trade transaction involves several transactions in the foreign exchange markets. It would make hedging deals more expensive, e.g. for mutual funds that invest internationally. It would accelerate the process of concentration in international banking, as in-house transactions would necessarily remain untaxed. Many of those who advocate a Tobin tax seem to be unaware of these effects.
  • 7.
    The Tobin tax is not practicable.There is no way it could be levied simultaneously all over the world. Investors would turn to countries that did not levy the tax (the USA and the UK, for example, are strictly opposed to it), and innovative financial instruments would be used and developed to circumvent it. In the age of computers and the internet, controlling the system would be a mammoth task. Unilateral introduction of the tax in individual countries would seriously damage their economic prospects.
  • 8.In short: the Tobin tax wouldnot achieve the desired ends; it would haveserious negative side-effects; and there arehuge obstaclesto putting it into effect. More important than the now fruitless discussion on Tobin tax are the questions how a global financial market order should be designed, how major crises can be effectively prevented, how the crises that do occur can be efficiently overcome through the cooperation of all parties involved, and what institutions and rules are needed for this. It is also important to promote the political willingness to engage in closer and more efficient international cooperation between rich and poor countries, and to provide the necessary funds in government budgets. The fact that this entails opportunity costs, in the sense that it will mean doing without other state services, should not be obscured by concentration on the inefficient, counterproductive and unrealistic all-purpose weapon, the Tobin tax.
  • 9.The concept of establishing trade inrights to use resourcesis theoretically convincing. The advantage of trade in emission rights for greenhouse gases, for example, is that the output of greenhouse gases is reduced where it is cheapest to do so. Since the cost of reducing CO2 emissions by a further tonne is much higher in industrial countries than in less developed countries, not only will rights be traded among industrial countries, but – depending on the arrangements – additional capital may also flow into the reduction of emissions in developing countries, where additional projects are likely to be started. Trade in emission rights under the Kyoto Protocol is thus a means of achieving the reduction targets set by the community of states flexibly, efficiently and at optimal cost. It is absolutely essential, though, that the developing countries be included in emission rights trading very quickly.
  • 10.Particularly in the context of internationally coordinated action on environmental issues, trade in resource rights should, wherever possible, be given preference over alternative instruments of environmental policy, su ch as conditionality, voluntary commitments or taxation (energy taxes), as themarket mechanismwill then ensure, firstly, that the setecomogical targetis met and, secondly, that it is met in aneconomically efficientway. The clarification of many of the remaining controversial and problematic points in Bonn and Marrakech is to be welcomed, for there is now a better chance (despite the resistance of the USA) that the Kyoto Protocol will be ratified. This will send a strong positive signal and have a high symbolic value: it indicates the recognition by the community of states that a global environmental problem demands global and coordinated action, and that market-based instruments are an effective means of achieving the desired end. In this connection, trade in emission rights is superior to other instruments of environmental policy, both economically and ecologically. However, there is still a lot to be done in Johannesburg this coming summer as a raft of problematic details have yet to be settled.
  • 11.It should be pretty well undisputed that in both cases – Tobin tax and trade in resource rights –comprehensive participation by the world wide community of statesis necessary. If major forex trading centres such as New York or London remain outside, that in itself will kill the idea of a Tobin tax. And the aims of the Kyoto Protocol are unfortunately seriously jeopardised by the withdrawal of the USA.

Axel Siedenberg

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