Debating The Tobin Tax New Rules for Global Finance Published by New Rules for Global Finance Coalition Washington, DC November 2003 Copyright of Papers Belong to the Authors Editors James Weaver Randall Dodd Jamie Baker Conference Planning Committee Jamie Baker Renee Blanchard Peter Bakvis Randall Dodd Seamus Finn Ilene Grabel Jo Marie Griesgraber Didier Jacobs Thomas Palley Liane Schalatek James Weaver Emira Woods Cover Design George Mocharko Printed by Automated Graphic Systems, INC CONTENTS 1. Introduction 1 James Weaver 2. The Economic Case for the Tobin Tax 5 Thomas I. Palley 3. Lessons for Tobin Tax Advocates: The Politics of 27 Policy and the Economics of Market Micro-structure Randall Dodd 4. How Can a Currency Transaction Tax Stabilize 51 Foreign Exchange Markets? Bruno Jetin 5. Securities Transaction Taxes and Financial Markets 77 Karl Habermeier and Andrei Kirilenko 6. Currency Transactions Taxes: A Brief Assessment 93 of Opportunities and Limitations Ilene Grabel 7. Tobin Taxes: Are They Enforceable? 101 Dean Baker 8. Overcoming the Tobin Tax’s Implementation Problems: 109 Tax Cross-Border Capital Flows, Not Currency Exchanges Howell H. Zee 9. Applying a Securities Transactions Tax to the US: 119 Design Issues, Market Impact, Revenue Estimates Robert Pollin 10. Understanding the Silence Amid Turmoil: 135 The Tobin Tax and East Asia Young-Chul Kim 11. Where Do We Go From Here? 151 Jo Marie Griesgraber Appendix A. Primer on Tobin Taxes 157 B. Primer: Transactions Taxes, or the Tobin Tax 173 C. New Rules for Global Finance Coalition 183 1 INTRODUCTION James Weaver New Rules for Global Finance American University The late James Tobin, Sterling Professor of Economics at Yale, a Nobel Laureate, a great economist and great human being, proposed in the 1970s, after the breakdown of the fixed exchange rate system that a currency transactions tax be imposed in order to slow down speculative movements of currency and give governments greater ability to manage their own domestic monetary and fiscal policy. Since the 70s this proposal has been changed in several ways –to have a two tier tax, to become part of financing for development, to include taxes on sales of international securities, and several other variations. New Rules sponsored a conference on Alternatives to Neoliberalism in May 2002. At that conference, we reached a high degree of consensus among the participants on several topics: including agreement with Dani Rodrik’s proposals for alternatives to neoliberal macroeconomic policies for developing countries; with Tom Palley’s proposal for domestic demand led development; with Didier Jacob’s proposals for reform of global governance; with Fran Horner’s proposals for reform of the international system for taxing multinational corporations; with Randall Dodd’s proposals to reform financial market regulation; with Kunibert Raffert’s proposal for an international bankruptcy system; with Aaron Goldzimmer’s proposals for reform of export credit agencies; with Ilene Grabel’s proposals for capital controls; with John Grieve Smith’s proposals on exchange rates; and with David Reed’s proposals for alternatives to neoliberalism in order to achieve sustainable development. When we published the Debating the Tobin Tax 1 papers and proceedings of the conference, we had a document which reflected a high degree of consensus among the participating NGOs on these important topics. However, we did not achieve a consensus on the desirability or practicality of Tobin taxes. And it is obvious that this is an important issue. So, we planned a conference to see if we could reach a consensus, or if not a consensus to obtain clarity on where we agree and where we disagree. This is a stimulating collection of papers. The first two papers, delivered as a debate at the conference, are a lively presentation of the case for and against the Tobin tax. Tom Palley of the Open Society Institute provides a strong case for the desirability and feasibility of the tax. Randall Dodd of the Financial Policy Forum finds significant problems with the proposal. We then move to the question of whether Tobin taxes can stabilize financial markets. Bruno Jetin of ATTAC-France is part of an alliance which is hoping to use NGOs to build support for the Tobin tax and argues that it can stabilize financial markets, particularly in its two tier version. Karl Habermeier and Andrei Kirilenko of the International Monetary Fund (IMF) marshal evidence that such a tax will not reduce instability, that it will, in fact increase instability. Ilene Grabel, of the University of Denver, argues that the Tobin tax may be a useful reform, along with others, to reduce destructive capital flight. The next papers deal with the issue of implementing currency transaction taxes. Dean Baker, of the Center for Economic and Policy Research, makes the case that such a tax can be implemented. Howell Zee, of the IMF, takes the position that implementation issues can be overcome by taxing capital, not currencies. Robert Pollin of the University of Massachusetts, Amherst analyzes the implementation and revenue impacts of a securities transactions tax on the US. Professor Young-Chul Kim, of Keimyung University in Korea organized one of the first conferences on the Tobin tax to be held outside Europe and North America and gives a view of the tax from the East Asian perspective. Jo Marie Griesgraber, who is the founder and chair of the New Rules for Global Finance Coalition presents a summary of our agreements and disagreements and suggestions of where we go from here. She found a high degree of consensus on many points. The final two papers are primers on the Tobin tax. Maureen Hinman, of the University of Denver, completed the first one while an intern at Oxfam America. Randall Dodd prepared the second one to highlight some of the unresolved issues with the tax. 2 New Rules for Global Finance We had a stellar list of speakers and authors at our conference. And we had a stellar audience, mostly representatives of non-governmental organizations (NGOs); people who operate on tiny budgets and have as their objective to bring about enormous changes in the world: to adopt new rules for global finance, or end poverty, or end the use of land mines, or cancel global debt. They have chutzpah, they have hope, and they are doing God’s work in the world. Theirs is truly a holy vocation. In conclusion, I would like to thank the C.S. Mott Foundation for financing the conference, the Open Society Institute for financing the publication, and the Heinrich Böll Foundation and Oxfam America for contributing funds to bring participants from the South. I would also like to thank George Mocharko for the design of the cover. And while I am expressing thanks, I want to thank Jamie Baker, of Oxfam America, who did great work in pulling this conference and this volume together. Debating the Tobin Tax 3 4 New Rules for Global Finance 2 THE ECONOMIC CASE FOR THE 1 TOBIN TAX Thomas I. Palley Open Society Institute The international financial instability of recent years has prompted calls for a new international financial architecture. Often included in proposals for this new architecture is a tax on international currency transactions, commonly known as the Tobin tax. Proponents argue that a Tobin tax is feasible, and would help reduce financial instability. Opponents counter that it is infeasible, and could even worsen instability. This article examines the economic case for a Tobin tax, and argues that it is both desirable and feasible. Three important points deserve emphasis. First, with regard to financial crisis prevention, the Tobin tax should be viewed as part of a package of reforms to the international financial architecture. No measure alone can prevent financial crises, and many measures generate synergies so that they work better as a package. A house has doors, windows, floors, and ceilings: a well-designed financial architecture will also have many elements, of which the Tobin tax should be one. Second, James Tobin (1978) initially proposed the Tobin tax in connection with spot market currency transactions. Since then, there has been significant financial innovation in currency markets, including development of more extensive futures markets and derivative 1 The author thanks M.E. Sharpe for permission to use material previously published in “Destabilizing Speculation and the Case for an International Currency Transactions Tax,” Challenge, (May/June, 2001), 70 - 89. The views expressed in this chapter are those of the author and not those of the Open Society Institute. Debating the Tobin Tax 5 instruments. This means the Tobin tax must now be applied to all forms of foreign currency related transactions to avoid evasion. More generally, the Tobin tax should be seen as part of a family of financial market transaction taxes, and many of the arguments for a Tobin tax carry over and support other forms of financial market transaction taxes. Indeed, from a purely technical standpoint, taxing domestic financial market transactions may be the easier place to start since these involve a single jurisdiction, and are therefore harder to evade. Third, not only does the Tobin tax promise to improve international financial stability, it also has significant tax revenue raising capacity. This is an important feature at a time when public finances in many countries are under pressure owing to mobility of capital income. Moreover, this tax raising capacity can be justified in terms of conventional optimal taxation theory (Palley, 1999a). In sum, not only is the Tobin tax good for financial stability, it also can raise large amounts of revenue in an economically efficient way. The same holds for modest financial market transaction taxes in general. The Intellectual History of the Tobin Tax The idea of an international currency transactions tax was first advanced by the late Nobel laureate economist James Tobin (1978) who proposed a small tax - these days the suggestion is 1/10 percent - on all foreign exchange (FX) dealings.