Currency transaction tax

For the more specific types of "currency transaction taxes", see Tobin tax and Spahn tax.

Types of currency transaction taxes

There are several types of currency transaction taxes that have been proposed, the most prominent being the Tobin tax and the Spahn tax.

Tobin tax

Main article: Tobin tax

A Tobin tax is a tax on all spot conversions of one currency into another. Named after the economist James Tobin, the tax is intended to put a penalty on short-term financial round-trip excursions into another currency. Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system effectively ended.^[1]

Spahn tax

Main article: Spahn tax

In 1995, Paul Bernd Spahn suggested an alternative involving "a two-tier rate structure consisting of a low-rate financial transactions tax, plus an exchange surcharge at prohibitive rates as a piggyback. The latter would be dormant in times of normal financial activities, and be activated only in the case of speculative attacks. The mechanism allowing the identification of abnormal trading in world financial markets would make reference to a "crawling peg" with an appropriate exchange rate band. The exchange rate would move freely within this band without transactions being taxed. Only transactions effected at exchange rates outside the permissible range would become subject to tax. This would automatically induce stabilizing behavior on the part of market participants."^[2]

On June 15, 2004, the Commission of Finance and Budget in the Belgian Federal Parliament approved a bill implementing a Spahn tax. According to the legislation, Belgium will introduce the Spahn tax once all countries of the eurozone introduce a similar law.^[3] In July 2005 former Austrian chancellor Wolfgang Schüssel called for a European Union Tobin tax which he thought would base the communities' financial structure on more stable and independent grounds. However, the proposal was rejected by the European Commission.

Special Drawing Rights

On September 19, 2001, retired speculator George Soros put forward a proposal, Special Drawing Rights or SDRs that the rich countries would pledge for the purpose of providing international assistance, without necessarily dismissing the Tobin tax idea. He stated, "I think there is a case for a Tobin tax... (but) it is not at all clear to me that a Tobin tax would reduce volatility in the currency markets. It is true that it may discourage currency speculation but it would also reduce the liquidity of the marketplace." ^[4]

Evaluation

Impacts

In 1994, Canadian economist Rodney Schmidt noted that "in two-thirds of all the outright forward and currency swap transactions, the money moved into another currency for fewer than seven days. In only 1 per cent did the money stay for as long as one year. While the volatile exchange rates caused by all this rapid movement posed problems for national economies, it was the bread and butter of those playing the currency markets. Without constant fluctuations in the currency markets, Schmidt noted, there was little opportunity for profit."^[5]

"This certainly seemed to suggest the interests of currency traders and the interests of ordinary citizens were operating at cross-purposes."^[5]

"Schmidt also noted another interesting aspect of the foreign- exchange market: The dominant players were the private banks, which had huge pools of capital and access to information about currency values. Since much of the market involved moving large sums of money (typically in the tens of millions of dollars) for very short periods of time (often less than a day), banks were perfectly positioned to participate. Among swap transactions, which represented a major chunk of the foreign exchange market, 86 per cent of the transactions were actually between banks."^[5]

A representative of a “pro Tobin tax” NGO argued as follows: "[The Tobin tax] is designed to reduce the power financial markets have to determine the economic policies of national governments. Traditionally, a country’s central bank buys and sells its own currency on international markets to keep its value relatively stable. The bank buys back its currency when a ‘glut’ caused by an investor selloff threatens to reduce the currency’s value. In the past, most central banks had enough cash in reserve to offset any selloff or ‘attack’. However, this is no longer the case. Speculators now have more cash than all the world’s central banks put together. Official global reserves are less than half the value of one day of global foreign-exchange turnover. Many countries are simply unable to protect their currencies from speculative attack."^[6]

"By cutting down on the overall volume of foreign-exchange transactions, a Tobin Tax would mean that central banks would not need as much [reserve money to defend their currency. The tax would allow governments the freedom to act in the best interests of their own economic development, rather than being forced to shape fiscal and monetary policies according to demands of fickle financial markets."^[6]