Speculative Currency Transactions and Tobin Tax

It is believed that unregulated capital moving across economies destabilizes culture and

democratic approaches and therefore requires a mechanism whereby evil effects of

unregulated circulation are arrested. One such effort in this direction is to levy Tobin

Introduction

World is gradually turning into a casino, as speculative

transactions have grown over the years. Currency exchange

across borders, which was seventy billion four decades ago

has surged to reach more than trillions of dollars today. It is

going to be more voluminous as we go into the future. Although

a portion of such exchange may relate to exchange of real

goods, most transactions are driven by an unhealthy craze to

earn windfall-profits. Not only it is going to have devastating

effects on national currencies but is likely to have catastrophic

effects in a globalized economy. Its impact on the stock market

and creating crisis situations across economies cannot be

empirically demonstrated within the space of this article.

Currency valuation under Bretton Woods

It is worthwhile here to remember that under the Bretton Woods

System (1944) each country was obligated to adopt a monetary

policy, which would maintain the exchange rate within a

narrow band in terms of gold value with IMF to monitor

temporary imbalances of payments. However, in 1971 the

United States unilaterally terminated convertibility of dollar

to gold and the dollar became sole backer of currencies. The

Bretton Woods System had to necessarily collapse as dollar

became the reserve currency for member states.

Unregulated Currency Movements and its effects

Unregulated currency movements have the effect of creating

an economic turmoil between or across economies. We have

seen the effects of currency movements in economies like

Mexico, Brazil, Russia and Southeast Asia. The subsequent

devastating effects had taken its toll on the economies by way

of super-inflation, fall in share market values, devaluation of

assets, etc., creating a panic and loss of confidence among the

citizens. To bring back the economy to normalcy, countries

had to dole out hefty concessions, at the cost of human welfare

of its citizens, to attract capital. Having unleashed this tendency

in the global economy, it is high time that efforts are made to

temper this attitude to avoid spikes and busts by understanding

the cause and effect of voluminous transactions across borders.

Concept of Tobin Tax and its Present Status

Non-governmental organizations and Civil Societies across the

globe are working continuously to ensure multi-lateral cooperation

to arrest such tendencies in the world economy. It is

believed that unregulated capital moving across economies

destabilizes culture and democratic approaches and therefore

requires a mechanism whereby evil effects of unregulated

circulation are arrested. One such effort in this direction is to

levy Tobin Tax, which has been named after James Tobin, who

won a Nobel Prize in 1978. He proposed that all transactions in

the currency market should be levied a lower rate of tax, as low

as 0.05% of the currency transactions, called the Tobin Tax so

as to discourage speculation. He went on to add that such

availability of funds, which could be in the order of 100 billion

dollars per year, may be utilized for currency stabilization,

economic development, emergency relief and other national

and international disasters or crisis. It can be inferred from the

current currency transactions prevailing in the economy, more

revenue collections can be made on this account.

Many countries, parliamentarians and legislators have pledged

for implementation of such a tax through bilateral and multilateral

negotiations at national and international levels. The

appeals and efforts to move towards this reformation have

been encouraging across different countries, although the effort

in reaching consensus in implementing the same is really very

slow.

Articles

Efforts of San Francisco Regional Advisory

Committee

The initiative list of principles named as ‘Multinational Cooperation

to Tax Currency Speculators’ was adopted by the

San Francisco Regional Advisory Committee in June 1998.

The said initiative lists eleven issues sensitizing the need for

taming currency speculations through the method of taxing

such transactions. The following is the list of such issues

emerging from the Tobin Tax initiative principles –

1. The speculative tendencies in currency transactions may

at some point of time result in flight of currency, thereby

resulting in the devaluation of the local economic

currency. This results in the lowering of purchasing

power of citizens having its effect on basic items like

food, environment, jobs, etc. This crisis in the economy

widens the gap between the rich and the poor and thereby

creates a strain on the global economic environment.

2. The exchange transactions happen to the extent of more

than trillions of dollars daily and it is so volatile that

Governments and Central Banks can do nothing to

adequately protect their own currency.

3. Even if efforts are made to combat destructive tendencies

in the markets, they have the effect of increasing the

level of suffering for the have-nots.

4. Although the reforms have to be brought in from several

initiatives, one of the mechanisms of reducing the

volatility in capital flows is to introduce transaction tax

on currency movements. This would thus deter shortterm

speculation tendencies in the international money

market. Not only would this bring down the volume of

transactions, but would generate revenue for international

crises management.

5. The levy of transaction tax, like the Tobin Tax, should

be such that speculation becomes unprofitable but would

not scare away genuine transactions.

6. Major currency nations should adopt Tobin Tax

mechanism so as to achieve volume-shrinking goal. This

would pave the way for universal application of the same.

7. Concerns regarding tax avoidance could be dealt with

through the adoption of regulatory mechanisms.

8. Since there is going to be a substantial amount collected

through this mechanism, base line criteria for allocation

should be established. For example practices can be laid

down for utilization of such resources towards basic

human needs and basic environmental needs.

9. The revenue collected should be set aside in Trust Funds

which are managed and administrated in a democratic

fashion.

10. The administration should work within a well-established

frame work for taking care of basic human needs and

livelihood, environmentally sustainable projects, etc.

11. Political will and grassroot support is essential to the

successful adoption of reform process.

The theory propounded by James Tobin has been refined to

include that Tobin-like taxes can be enacted by national

legislations, but will require bilateral or multi-lateral cooperation

for the effective enforcement. If this becomes a

reality across the world, the funds generated could be used

for executing useful projects, as today’s globalised economy

does not have an institutional mechanism for funding such

projects.

Tobin Tax to Tackle Problems of the World

Problems such as poverty and hunger, population growth

and unemployment, global climate change, deforestation,

decline in fisheries, global warming and pollution threaten

local communities. The local communities themselves may

not have contributed to such adverse situations but it could

be the contribution of actions elsewhere. Hence, in order to

provide for and combat such situations, global institutions

by collecting common revenue like the Tobin Tax could

effectively work towards worthy projects to reduce human

sufferings. All said and done, it is this important aspect that

is going to save this world from depletion and exploitation

of constrained resources. In addition to what is contributed

by private donors, which is insufficient to meet the current

demand, Tobin Tax can significantly contribute in funding

projects that will arrest negative approaches in the world

economy. Probably this can be everlasting solution and an

innovative measure in tackling the present and prospective

problems of the world.

Innovative Tax Proposals

Several innovative tax proposals have been made for Tobin

Tax implementation. These include:

􀂄 Carbon/Green Taxes

􀂄 International Fees – includes airline flight tax and global

common fees

􀂄 Peace Dividend

􀂄 Informal Economies and Local Barter

􀂄 Security Insurance Premium

􀂄 Debt Restructuring

Speculative Currency Transactions and Tobin Tax

Articles

Carbon/Green Taxes

Carbon taxes or Green taxes are taxes levied on industry whose

economic activity impacts environment on a large scale. The

taxes so collected would be providing incentives for such

companies who utilize renewable resources and control pollution.

International Fees

This represents fees for services in areas which is common to

all in the global arena. This is often referred to as ‘Global

Commons’. It represents shared global areas of the world such

as open seas, shared treaty areas and the like. It also includes

fees for international postal services, global security,

international airline flights and other services which commonly

benefits citizens across national borders.

Peace Dividend

Countries are incurring expenditures which have the effect of

preventing wars or maintaining peace. The expenditure called

as peaceful expenditure has largely remained expenditures of

some nations. While the revenues and the benefit have shifted

to other areas. In order to balance this, a proposal has been

made to recoup peace dividend/peace conversion from nations

which have derived such benefits so that it can be used for the

benefit of the globe as a whole.

Informal Economy and Local Barter

There are a large number of informal mechanisms in the

economy which do not get reflected in GDP/GDW of many

national economies. These include such items as barter,

informal trade, sharing and gifting, unpaid women at home,

food banks, shelter etc. Such transactions or events need to

expose themselves to tax so as to contribute to the international

corpus for the several good of human mankind.

Security Insurance Premium

The idea under this innovative revenue collection, is to collect

premiums from nations that would go to pay into budgets for

international security. This would pay for peace keeping,

Interpol, etc.

Debt Restructuring

It is expected under this concept that public and private lending

institutions will restructure loans to underdeveloped nations.

However, this may not be adequate and this may still affect

the poorer sections in the economy in terms of health,

education, disaster services, etc. It may therefore require

outright debt forgiveness.

Policies for Establishing Tobin Tax System

The introduction and establishment of Tobin tax system will

include the following policy areas:

􀂄 Adoption of taxes

􀂄 Collection and Enforcement

􀂄 Expenditure Policy

􀂄 Implementing global priority projects

There is enough literature in the informal world, which has

debated and discussed policy proposals for Tobin Tax

implementation. The multilateral organizations can discuss and

debate on such issues before coming to conclusions or

formulating final policies. However, we have seen that efforts

in coming to a consensus is either breaking down or is not

reaching logical conclusions due to vested political interest.

Any of the philosophies or innovative events that we conceive

will conclude into results only if there are continuous

discussions and there is an inherent desire and a need in the

international forum towards such a design. It is in the interest

of the humanity as a whole that negative forces in the

environment have to be thwarted and therefore this requires

responsible discussions and political will to look into issues

with human concerns and sustainable livelihood situations for

not only human beings but all living creatures on this earth.

Projects for Saving and Sustaining the Earth from a

Crisis

A large number of projects have been mooted in order to save

this world from a major disaster. Some of the broad projects

that have been conceived while discussing issues on saving

this earth from any crisis include:

􀂄 Poverty Eradication Projects

􀂄 Environmental Restoration Projects

􀂄 Conservation and Preservation Projects

􀂄 Disaster Aid Projects

􀂄 Disease Prevention and Humanitarian Aid Projects

􀂄 Peacekeeping Missions and Projects

It is interesting to note that several responsible institutions

have been identified to conceive and take up programs in order

to meet the broad objectives of model projects cited above. It

is important that such issues should be discussed more often

that creates an environment of mutual trust and belonging.

This will go a long way in establishing world-peace and

sustainable environmental projects and approaches so as to

prevent disaster to human habitation and other lives on this

earth. 􀂉

Speculative Currency Transactions and Tobin Tax

 

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