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The Tobin tax

The Tobin myth

The Tobin Tax could be enacted without broad cooperation among nations. Computerized settlement systems now make it possible for governments collect the tax on trades in their currency, wherever the trades happen to take place.

Erik Rauch

The Tobin tax is a tax on currency trades. It was originally proposed by economist James Tobin as a way to avoid currency crises and increase national governments' economic autonomy, but because the volume of currency trades is so large, even a tiny tax would raise a development bonanza of $100 to $300 billion per year which could be used to fund urgent international needs such as fighting disease and providing schools and clean water in developing countries - much more than the amount currently spent.

But whenever the Tobin Tax is discussed, one seemingly showstopping objection is automatically raised:

"Currency trading would just move to jurisdictions that don't collect the tax."
The tax would have to be agreed to by all trading nations to be effective, it is argued, since any one that did not collect the tax would immediately become a haven for avoiding it. Of course the tax would be small - most proposals are between 0.1% and 0.25%, probably smaller than the cost of relocating currency transactions. Nevertheless, this generally has been the end of the matter wherever the tax has been considered.

This objection is now obsolete. In 1999, Rodney Schmidt published a paper showing how the Tobin Tax could be enacted without the broad cooperation of most trading nations. Discussion of the Tobin Tax has focused on taxing the trading of currencies, which is very decentralized and happens in many different exchanges. But once trades are completed, they must also be settled. Settlement has recently become centralized in a single electronic system called the Continuous Linked Settlement System. This essentially means that a country or currency bloc could unilaterally decide to tax most transactions in its currency. Transactions involving Euros, for example, could be taxed by the European Union if they take place in Aruba, whether or not the government of Aruba cooperates. The technology and institutions to support this are already in place. However, in public debate, the Tobin Tax is still dismissed by saying it would have to be adopted by all countries to be feasible. Not a single one of the over 1,000 newspaper articles mentioning the tobin tax in 143 major newspapers worldwide mentions CLS, according to the NEXIS database. Schmidt's name is mentioned in the media only in connection with the earlier paper he wrote which doubted the feasibility of the tax. Even many activists do not seem to be aware of the possibility of taxing settlement.

If you support the tax, contact your local media and elected representatives and educate them about the feasibility of the tax. 

  • The Tobin Tax Hall of Shame is the dubious honor of those who continue to claim that the Tobin Tax would have to be adopted by all countries to be feasible.

Related:

"Tobin Bird" illustration from New Internationalist magazine poster