In August 1971, as President Richard Nixon was struggling to bring the United States off the gold standard, the economist James Tobin proposed that any new system of currency exchange should include a small tax on transactions. The tax would, in theory, provide greater stability in exchange rates [glossary] by limiting speculative flows, which, according to Dani Rodrik, have “doubtful social value yet eat up real resources in terms of human talent, computing power, and debt.”
Although the tax was never adopted at a global level, it has reared its head from time to time, including in the aftermath of the 1997 Asian financial crisis, and as a potential funding mechanism for both development aid and for the United Nations system. Most recently, Brazil imposed a 2% tax on currency inflows into the country in an attempt to limit the appreciation of its currency, the real.
At a meeting of the G20 finance ministers this weekend, British Prime Minister Gordon Brown proposed a new tax on international financial transactions to offset the costs associated with the rescue of banks during the global financial meltdown. The proposal represents a shift in policy for the Brown cabinet, which had previously opposed similar proposals by France and Germany as too difficult to manage. But according to Brown, the new proposal would not be a tax but “an insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transaction levy.” Brown argued that,
It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us…There must be a better economic and social contract between financial institutions and the public based on trust and a just distribution of risks and rewards.
The proposal, which received a cold reception from both U.S. Treasury Secretary
Tim Geithner and Russian Finance Minister Alexei Kudrin, bears remarkable similarities to a criticism leveled by hedge fund manager George Soros in an interview with the Financial Times last week.
But the G20 has been struggling to develop a new system of financial regulation to prevent another global economic crisis. Despite a number of vague commitments to rethink their economic policies and establish stricter regulations governing the financial sector, little real progress has been made. Meanwhile, as the Economist’s blog points out, protectionism is on the rise and trade disputes between the United States and China are intensifying.
Perhaps it is time to think about more radical changes. A Tobin-style tax on global financial transactions could easily raise billions of dollars. A German proposal to impose a 0.005% tax on international financial transactions, for example, could generate between €20 billion and €30 billion per year. A more aggressive tax (say of 0.01%) could easily generate more than the cumulative official development assistance (ODA) budget of all developed countries (currently estimated to be around US $100 billion) while simultaneously limiting the negative impact of hot money on developing economies. Sounds like it might be time for the Tobin tax.