How the Tobin Tax could help the poorest by Harry Barnes MP

How the Tobin Tax could help the poorest
By Harry Barnes MP

Imagine a tax which affects few people but could be popular with the many — an ideal New Labour tax perhaps? And one that enhances economic performance and raises billions for good causes. ‘Too good to be true’ would be a reasonable response. Yet proponents of the Tobin Tax on currency speculation make such a case.

The Tobin Tax was formulated in 1972 by James Tobin whose original purpose was to discourage disruptive speculation, stabilise currencies and lower interest rates. The tax would enable governments to place domestic needs above the priorities of international speculators by throwing some sand in their wheels.

Tobin has gained increasing support and could become a big political idea rather than an obscure academic one. The main reason for this increased support is the radical transformation of the world economy. Foreign exchange (forex) trading in the early 1970s was $18 billion a day. By the ’90s this was about $1.5 trillion a day of which only 5 per cent concerns trade in real goods and services. It was 80 per cent in 1975.

The result was two decades of substantial currency fluctuation when governments have often been powerless to prevent the value of their currency from plummeting. This economic turmoil has caused increased unemployment, poverty and even starvation. Currencies can be destroyed in days, hours and even minutes.

However, Tobin is hotly contested. A principal objection is that it is impractical since no single country could safely impose Tobin as traders would migrate. The UK is especially important as the City deals with 30 per cent of forex. The tax must be universally applied but even then traders could relocate to off-shore tax havens.

However, 80 per cent of the speculation is undertaken in just 7 countries and most transactions occur in only a few large institutions. Respectable banks and brokerage houses might not wish to buck a popular ‘sin tax’. Tobin suggested that IMF membership — and eligibility for loans — be conditional on levying the tax. Rogue states could be penalised. The technology that allows real-time international trading to be electronically tracked also enables a relatively simple system of tax collection. Apart from penalties, countries might keep a proportion of the tax as an incentive to participate in the system. There are also limits to the mobility of traders who settle in particular places for reasons connected with labour skills, industrial relations regime, geography and infrastructure. But tax avoidance and evasion are facts of life. A 100 per cent collection rate is probably impossible. But this does not prevent other taxes being levied. The remaining question is how the revenues are distributed. Some suggest that the IMF or some new organisation gets the job. Undoubtedly, the process of agreeing an international treaty will be extremely difficult as countries seek to guard their sovereignty and large nations insist that they cannot be out-voted by smaller ones. These problems of collection, distribution and organisation, are ultimately political not technical issues. The tax take could assist the argument. Estimates of the potential revenue from Tobin vary widely. But War on Want estimates that a 0.25 per cent Tobin Tax could raise $250 billion per year.

There are plenty of uses for such monies. Eradicating the worst forms of poverty in the world and providing basic healthcare, nutrition, education, water and sanitation would cost $80 billion a year. $125 billion a year could tackle environmental problems.

There is the potential for a broad alliance to promote Tobin. The Canadian parliament has backed Tobin as does the Finnish government and a wide range of socialists, social democrats, greens and others throughout the world. The French group campaigning for it has won 40,000 members in just over a year. Tony Blair’s government has not rejected the idea and International Development Secretary Clare Short says that ‘a campaign of ideas would have to be put in hand before we could get anywhere near to achieving what I agree is an interesting possibility.’ Let’s start this battle of ideas.

I have tabled a Commons motion outlining the case for Tobin and urging the ‘government to discuss the concept with its partners in international organisations such as the World Trade Organisation, the IMF, G8 and the European Union with a view to drawing up an internationally co-ordinated and feasible tax regime for currency speculation.’ The motion has already won cross-party support from a broad spectrum of Labour MPs, Plaid Cymru MPs, a Liberal Democrat and a Conservative. .