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Resolution M-239, due for vote in the Canadian House of Commons March 23, 1999

"That, in the opinion of the House, the government should show leadership
and enact a tax on financial transactions in concert with the international
community."

(Note: This motion was passed, and Canada did make some moves to encourage the Tobin Tax's adoption. Nevertheless, the international community did not adopt the measure.)

Sign on:

Citizens' Declaration on the Tobin Tax

Open Letter to MPs

The proposed tax on financial speculation is called the Tobin Tax after Nobel Laureate James Tobin who first suggested the mechanism in 1978.

For more detail, see "Good Taxes" by Alex Michalos.

THE TOBIN TAX - DEBUNKING SOME MYTHS

 

In a "globalized" world, a world resistant to taxation, convinced of market
"wisdom" and committed to government non-intervention in the economy, it's
hard to get a fair hearing on the Tobin tax. Critics including the most
powerful banks and investment houses (who would be subject to the tax) and
governments (which receive substantial party contribution from banks),
dismiss the Tobin tax. Some critics do not believe currency speculation is
a problem. (see our "Cooling Down the Hot Money" factsheet) . Some view the
tax as too difficult to adopt and too easy to avoid. While some criticisms
of the Tobin tax are legitimate, particularly around the difficulties of
adoption and implementation as well as the ultimate impact on the market,
many are designed to stifle debate. What follows is an evaluation of some of
those most frequently cited.

1. THE TOBIN TAX WILL HIT THE POOR
Opponents of the tax, including members of the Reform Party of Canada are
blatantly misleading Canadians when they state the Tobin tax will affect the
poor. These arguments are designed to play on the anti-tax sentiments of
Canadians and halt any discussion on the Tobin tax.

The Tobin tax is a tax on Wall St and Bay St not Main Street. Only
specialized financial transactions used primarily by large banks and
investment dealers (known as spots, swaps, and forwards) will be taxed.
Middle-class Canadians exchanging dollars to pay for their holidays abroad
will not be subject to the Tobin tax. The tax is a progressive one, designed
to target only those profiting from destabilising speculative currency
transactions. Only the "poor" bankers and investment houses will be affected.

The Tobin tax is also a "sin" tax designed to punish an activity that
results in unacceptable social and economic costs to the majority.
Cigarettes are taxed to discourage their use and to partially offset the
enormous health care costs associated with cigarette-related illness. The
Tobin tax is designed to help discourage speculative investments that
exacerbated the collapse of several SEAsian economies and resulted in
inestimable social, political and economic costs.

What needs to be emphasized is how the tax could lift the poor out of
poverty. Based on 1995 exchange volumes, a Tobin tax is expected to generate
between US$ 150 and 300 billion annually. The United Nations and the World
Bank estimate that the cost of wiping out the worst forms of poverty and
providing basic environmental protection globally would be on the order of
US$ 225 billion per year. Depending upon the formula chosen for revenue
redistribution, Canada could receive hundreds of millions from the Tobin tax
for uses including social service provision, environmental protection or tax
reduction.

2. SPECULATORS WILL FIND WAYS TO EVADE THE TAX
Yes, they will. All taxes are evaded to some extent and never capture the
entire revenue stream they target. However, these arguments alone never
dissuaded governments from collecting taxes, particularly sin taxes designed
to stem unacceptable behavior. Regulators strive to enact measures designed
to minimize evasion thereby ensuring an acceptable level of compliance. The
challenges of a Tobin tax are no different nor less achievable.

A Tobin tax could be quite difficult to evade. Because currency
transactions are tracked electronically, a Tobin tax would be theoretically
easy to collect through the computer systems that record each trade. While
the amount of money moving around the globe in speculative activities is
enormous, the number of centers in which trading occurs and the number of
traders is not large. Eighty per cent (80%) of global foreign exchange
trading takes place in only 7 financial centers (New York, Tokyo, London,
Singapore, Hong Kong, Frankfurt, Bern) among less than one hundred large
international banks and investment houses. Agreement by just these seven
centers could capture most of the speculative trading. The relatively few
locations, limited number of players and a clear "paper trail" would help
reduce the number and therefore the cost of regulatory authorities needed to
ensure compliance.

Critics argue that speculators would shift operations to offshore tax
havens to evade a Tobin tax. Agreement between the seven financial centers
on implementing a Tobin tax could keep the offshore relocation threat a
relatively distant one, particularly if the tax was charged at the site
where dealers or banks are physically located. The relocation of the Chase
Manhattan Bank to an offshore site entails considerable costs and risks and
is therefore highly unlikely, particularly to avoid a small tax.
Alternatively, financial transfers to offshore havens like the Cayman
Islands could themselves be subject to the tax and penalized at double or
higher than the agreed taxation rate. As noted above, electronic tracking
makes these transactions hard to hide. Another measure to reduce evasion
would have the tax apply to the citizens of participating countries
regardless of where the transaction was carried out. Thus the transactions
of a New York dealer would be subject to the tax regardless of which market
he/she speculates in.

Finally, financial incentives could be provided to countries to invite
participation in and ensure compliance with a Tobin tax regime. Given that
the tax will generate an estimated US$ 150 - 300 billion per year, there
will resources available to entice reluctant nations.

Critics also argue that speculators could evade the tax by shifting into
other untaxed financial instruments. While this again is true, it comes with
costs that might outweigh the benefits of Tobin tax avoidance. Using other
types of deals to swap currencies forces dealers to trade with increasingly
less liquid assets to achieve the same goals. Basically, the less liquid an
asset, the more trouble it is to convert it to cash when you really need it.
With the currency markets trading at US$ 1.5 trillion dollars a day,
liquidity is the key to profiting from minute fluctuations in currency
values. 80% of all transactions occur within 7 days or less - 40% occur in
two days or less. The additional transactions needed to evade Tobin may
entail additional brokerage fees or transactions taxes. Dealers will have to
determine at what point the cost in terms of liquidity and extra fees makes
tax evasion too costly.

3. POLITICAL CONSENSUS COULD NEVER BE FOUND TO ADOPT A TOBIN TAX
Political consensus can always be found when the need for policy
coordination outweighs the risk of continued inaction. The world can
ill-afford the economic devastation and social collapse another global
financial crisis. Recently, even the most strident free-marketers are
advocating the imposition of financial transfer taxes to "cool down the hot
money" in order to protect the real economy. In addition to the economic
need there are social benefits. The enormous revenue stream that would be
generated by the Tobin tax has a powerful appeal to cash-strapped
governments including Canada.

History has shown the while political consensus is the most serious and
legitimate barrier to the adoption of any multilateral action such as the
Tobin tax, it is not insurmountable. Many larger, more complex issues,
requiring greater degrees of international cooperation, have been addressed
in recent years and should serve as positive incentives to the adoption of a
Tobin tax. Nations around the world have created a new multilateral
organization, the World Trade Organization, negotiated hundreds of trade
agreements including the massive and difficult Uruguay Round, and have
implemented international environmental treaties. European nations launched
a common currency on January 1, 1999. Critics said many of these agreements
could never be reached.

For those who state, "but global taxation is different", it should be noted
it is not without precedent. Multilateral taxation is not new. The European
Union has been jointly collecting, administering and redistributing the
Value Added Tax among its 15 members for years. The European Union funds
its infrastructure from the collection of the supranational tax, with each
member state retaining ten percent of the revenue it collects.

4. THE TOBIN TAX WOULD BE IMPOSSIBLE TO ADMINISTER
While this presents legitimate challenges, multilateral institutions with
well-developed administrative structures already exist and could administer
the tax. Because the tax must be imposed consistently in at least seven
jurisdictions so as not to give certain countries and/or those who invest
there advantages, an international body such as the United Nations could
implement the tax in cooperation with other multilateral institutions
including the Bank for International Settlements, the World Bank and/or the
International Monetary Fund. National governments or banks could then act as
collection agencies. The tax could easily be extracted from transactions
electronically through existing systems and deposited directly into a
dedicated account. Implementation of the tax in the broader global community
could be assured by making collection a condition of membership in the
administering institution and encouraged by the added prospect of revenue
sharing.

SUMMARY
The Tobin tax is a tax on the most powerful bankers and investment companies
in the world. It is viewed as a threat to financial community privilege and
has been met with resistance by a sector with massive political clout. We
must not let the Tobin tax "myth-makers" stifle, manipulate and ultimately
undermine an essential public debate on controlling global financial
markets. The Tobin tax deserves a fair hearing. Only widespread global
popular support and public pressure can ensure it.

___________________________________________

Citizens' Declaration on the Tobin Tax


WHEREAS over US$1.5 trillion is exchanged every day in currency markets
around the world;

WHEREAS approximately 95% of those exchanges are "speculative" as traders
bet on whether currency values and interest rates will move up or down;

WHEREAS most international currency speculation is conducted with a view to
earning short-term profits at the expense of long-term investment in
economic and social development;

WHEREAS international currency speculation disrupts the ability of
governments to establish just and equitable national economic policies;

WHEREAS the sudden outflow of large quantities of speculative capital from
Mexico, Thailand, Indonesia and South Korea resulted in severe economic
downturns, political instability, widespread social turmoil and human suffering;

WHEREAS excessive speculation could be curbed by a modest tax of between
0.1% and 0.25% on each currency transaction as proposed by Nobel
prize-winning economist James Tobin;

WHEREAS the revenues from a Tobin tax, estimated to be worth between US$150
and US$300 billion a year, are urgently needed for genuine economic and
social development and environmental protection in less developed countries;

WHEREAS the resources needed to wipe out extreme poverty, provide basic
social services and mitigate environmental destruction globally are
estimated at US$ 225 billion a year;

I / WE DECLARE THAT governments around the world should immediately
establish a Tobin tax on speculative currency transactions and dedicate the
revenues to social and economic development for less developed countries.
The tax should be collected and redistributed in an a fully transparent and
accountable manner by the United Nations.

NAME : ______________________________________________________

SIGNATURE : ______________________________________________________

ORGANIZATION (if signing on its behalf) :
______________________________________________________

ADDRESS: (include phone and email) :
______________________________________________________
_____________________________________________________
______________________________________________________
PLEASE RETURN TO :
Halifax Initiative
#412 - 1 Nicholas St
Ottawa, ON, CANADA, K1N 7B7
ph (613)789-4447 fax (613)241-2292
email: halifax@web.net

(OR FILL IT IN AND EMAIL RETURN TO rjr@web.net)

Debunking Myths about the Tobin Tax