In coming months, Americans are likely to start hearing a great deal about something called the "Tobin tax." Named for Nobel Prize-winning economist James Tobin of Yale, it would levy a small tax on all foreign exchange transactions. Although designed primarily to curb excessive volatility in foreign exchange markets, the Tobin tax has been seized upon by anti-globalization extremists, who have made it a key part of their agenda.
The latest convert is French Prime Minister Lionel Jospin. In late August, he announced that he would press for the European Union to adopt such a tax. The revenue would be used to aid developing countries. Advocates believe that even at a 0.25 percent rate (25 basis points), the Tobin tax could raise $250 billion per year.
Mr. Jospin's initiative is not seen as a serious effort to impose a new tax on already overtaxed Europeans. Rather, observers see it as a cynical political ploy to shore up his left flank. Leftists in France have been very critical of Jospin lately for backing down on his promise to impose a 35-hour workweek in that country. As London's Financial Times newspaper put it, Jospin's endorsement of the Tobin tax "smacks of gesture politics of the touchy-feely variety pursued by President Bill Clinton."
Of course, there is no chance that a Tobin tax will ever be enacted. Jospin's own Finance Minister opposes the idea, and the German government has made it clear it will veto any effort to enact a Tobin tax in Europe. Commenting on the Jospin initiative, Germany's economics minister, Alfred Tacke, said, "Nobody in the industrialized countries wants the Tobin tax, and the German government doesn't either."
Still, the lack of practical political reality has never stopped the far left from pursuing its agenda. With anti-globalization forces gaining strength worldwide, it is inevitable that the Tobin tax is going to be an issue that will be around for years to come. In Europe, there is a well-organized effort on behalf of the tax, with growing efforts here as well. A group called the Center for Environmental Economic Development maintains a Web site on the subject, and the AFL-CIO's chief economist, Thomas Palley, has been pushing the idea within the labor movement.
The United Nations, as one might expect, has a strong interest in the Tobin tax. The UN has long coveted some sort of international tax that would give it an independent revenue base, freeing it from the need to get appropriations from member governments. In a June 26 report, the UN once again addressed the issue. "There is a genuine need to establish, by international consensus, stable and contractual new sources of multilateral finance."
Interestingly, the UN report's discussion of the Tobin tax actually does a pretty good job of throwing cold water on it. In reviewing the views of "skeptics," the report makes the following points. It would be "too complex to implement," and its economic effects would be "somewhat ambiguous."
Unless imposed worldwide at a uniform rate, evasion of a Tobin tax would be simple. But even if this were done, the use of alternative financial instruments, such as Treasury Bills, could still allow traders to avoid the tax.
Finally, the report notes that although the tax rate may appear low in relation to the total volume of foreign exchange trading, which is on the order of $2 trillion per day, it would be very large relative to the profits on such trading.
These points are exactly correct and echo the criticisms that have been levied against the Tobin tax by academic economists and other financial experts. In a 1996 paper, International Monetary Fund economist Janet Stotsky laid out all the points in the UN report and also noted that a Tobin tax would play havoc with monetary policy. Every time a central bank intervened in foreign exchange markets to support its currency, it would trigger a tax liability.
In a 1995 paper published in The Economic Journal, economists Peter Garber and Mark Taylor emphasize that because a Tobin tax can be evaded by using T-bills and other financial instruments, tax authorities eventually will have to tax ALL financial transactions. "To control this operation," they write, "the tax would have to be extended out of straight foreign exchange to transactions in an ever-widening ring of securities and derivatives markets."
Indeed, this may be the ultimate goal of Tobin tax supporters. Proposals have periodically been made to tax all stock and bond trades in the United States as a revenue raiser and to dampen speculation. In 1990, the first Bush Administration even toyed with the idea, dropping it only after the stock market fell sharply on the news.