Examination of Witnesses (Questions 80-97)|
TUESDAY 30 APRIL 2002
80. I did have a researcher who was obsessed
by the Tobin Tax. He worked in the City and, Steve, I think you
know him. He talked Tobin Tax morning, noon and night. I wonder
what sort of support you feel you have got for it in the various
European Governments? Is there anybody who is particularly enthusiastic
or anyone who has completely turned their face against it?
(Mr Tibbett) I will let Professor Spahn
talk about the German Government in a moment. In terms of the
wider picture, the French Parliament has passed a Bill which makes
the Tobin Tax law only if the rest of the European Union also
does the same so they have said politically that they are in favour.
So that is one country. The Belgians have also published legislation
and people expect that it will be passed in Belgium as well. There
have been a number of other supporters around the world. We have
had the Indian Prime Minister, the G77, the UNDP, and a range
of actors and players giving support. You may know that Gordon
Brown recently said that he is open-minded about this idea, which
is a change from before when he was close-minded so we quite like
that. There is a gradual movement and you can see it in the sense
as well that people two years ago were saying this idea was completely
unworkable and now you have people like Martin Wolf in the FT
saying it is feasible. We have got past that stage now of people
saying it will never happen. But perhaps Professor Spahn would
like to talk about the German Government's position.
(Professor Spahn) The German Government is split.
The Chancellor made a remark which has been interpreted as being
in favour of the Tobin Tax. Immediately the two ministers were
discussing it. The Minister of Development is now in favour. She
is the one who commissioned the study I did for the Government.
However, the Minister for Finance is very much against the tax.
The Chancellor has recently withdrawn from the debate. He has
an election campaign in front of him so I think we will have to
wait until September when there will be a new government.
81. Is the Development Minister Heidemarie Wieczorek-Zeul?
(Professor Spahn) Yes.
82. I am interested in this. I have to say I
find the concept of this taxation slightly difficult. It seems
to me more than anything else that the two reasons that were put
forwardthe first reason to reduce currency instability
to stop speculation, which was the original reason, and the second
reason which is to fund developmentwhilst not necessarily
incompatible, are somewhat contradictory. It seems to me if you
want to fund development you get countries to do it through taxation,
not necessarily through the Tobin Tax but through other taxation
you get countries to put more money into development. As regards
currency speculation, if you wish to see money moving into developing
countries to support good, growing economies, it is rather counter-productive
to put a taxation on that movement because people then think twice
about putting it in. Whilst it may come in at one per cent, taxation
has a habit of growing. It does seem to me that these two objectives
are very separate and therefore do not sit well together in this
(Mr Tibbett) We will both have a go.
I think you are right to say that the tax is trying to do two
things but the primary objective for both of uscertainly
for War on Wantis greater stability in exchange rates giving,
from War on Want's point of view, developing countries more room
for manoeuvre in terms of their domestic policy so they are not
at the mercy of currency markets so much, but also because there
are a whole variety of ways in which currency instability leads
to greater poverty. We have done a study on this.
83. Can I pick you up on this. The Asian crisis
is a very relevant example. Some of us (who are not experts in
currency markets, I hasten to add) would say that the fundamental
problem in the Asian crisis in 1998-99 was that too much money
had gone into fundamentally unsound economies. Let's take as an
example Indonesia. The problem with Indonesia was that a lot of
money had gone into a fundamentally deeply unsound economy in
a very corrupt country. The reason they got their money out of
it was they suddenly saw through it and they suddenly realised
they were not going to get any money. The money that was coming
out was not floating round in the ether, it was the money that
supports the pensioners on the old age pension in my constituency
who are not necessarily particularly well off.
(Mr Tibbett) I would not disagree with
you that there are huge problems with the Indonesian economy.
84. And the government?
(Mr Tibbett) And the government certainly
at the time, but the key here is that the currency markets poured
petrol on the flames of the crisis. The Indonesian rupiah lost
something like 80 per cent of its value in six weeks. I visited
the country in 1998 and met people who had been put out of work
simply because their businesses ceased to be able to exist.
85. 0.1 per cent is neither here nor there.
(Mr Tibbett) This is where we will get
to the two-tier variant. The two-tier variant is very useful in
acting as a circuit breaker in those circumstances. When there
are these huge swings, of course, a 0.1 per cent tax will not
make any difference, although I would argue it would take away
some of the players who are acting in the market who are acting
in this herding way. Perhaps it is a good time to go on to the
Chairman: Before we go on to the two-tier
version, we have still got one or two questions on currency and
tax which we would like to sort out in our own minds.
86. How would the Tobin Tax differentiate between
short-term speculation and longer-term investment? At what point
would you do it and how would you distinguish? They could make
an excuse and say, "It is long term, we just did it today."
(Professor Spahn) That is part of my
87. You could reduce the value of currency transactions
but that is not the same, is it, as reducing the volatility day-by-day.
How would you address that?
(Professor Spahn) Absolutely. The reduction
of volume does not necessarily mean that you reduce volatility.
On the contrary, the less liquid the market is, the more prominent
88. is the spiking?
(Professor Spahn) Yes.
(Mr Tibbett) I would like to come back on that. My
contention is, in fact, that although that economic theories suggest
that is true, that the less liquidity there is in the market,
it is not necessarily true. In fact, if you look at the currency
market, it is characterised by a huge amount of liquidity, but
the problem is what is the quality of that liquidity and what
is the information in that market that drives the actors in that
market towards doing a particular thing at a particular time.
My contention is by having even the low rate tax you take out
some of those actors that, for instance in the Indonesian example,
just followed the market blindly and got out. That is the bad
characteristic about too much poor quality liquidity in the currency
market, as I see it.
89. What would be the knock-on effect on long-term
investment and trade of a currency transaction tax? Is it going
to suppress trade? Is it going to suppress investment?
(Professor Spahn) No, if I come back
to my one basis point argument I do not think this will frighten
any investor in the long run. This is just a small charge which
will, by the way, reduce the rate of return for international
financial investors such as life insurers, portfolio funds, and
so forth. The maximum I have calculated is seven and a half basis
points, which again is not very much.
90. A last question before we get on to the two-tier
variant. Just going back to the discussion we had about the German
Government, the French Government, the French Parliament and so
forth, if the argument is really about mobilising political will
for the Tobin taxyou were talking about a campaignwould
it be easier to get that political will to devote more money to
development aid through normal taxation?
(Mr Tibbett) We need to do both. We are
right behind the campaign for 0.7 per cent. One of the reasons
War on Want was set up in 1951 was to campaign for one per cent
of GDP. We may have reduced our aims slightly there but, of course,
we need to campaign on that issue. That is why I emphasise the
reason that we are interested in the tax is not for the revenue,
but of course you cannot ignore the revenue side. It is going
to produce revenue and what are you going to do with the revenue?
We are a development organisation, we want it to go towards development.
Can you think of a better use for the money?
Chairman: Let's move on to the two-tier
91. I must be missing the point somewhere. Why
are we stuck with having two purposes for the tax? Why do you
not just go for a source of development funding?
(Professor Spahn) That is a difficult
one. The original proposal of Tobin was designed to curb speculation
and I am convinced that he may drive a few actors out of the market,
day traders, what we call noise traders, people who do some charting
techniques and live on very small margins so that even a small
tax can drive them out of the market. This gives the market a
better performance as to how to define the equilibrium value of
the exchange rate, but it does not cope with large-scale speculation
as we had against the British pound in 1992 or Indonesia or Brazil
or Mexico, for that matter. As Steve just said, if a currency
is dwindling by 80 per cent in a matter of weeks this is an abnormal
situation. It has its fundamental causes and I fully agree that
you have to address these fundamental causes. I do not want to
lecture here but part of these causes is the bail out guarantee
given by these governments. In Indonesia, of course the President
gives you a bail out guarantee if you give a loan to his son-in-law
and he will address his central bank to bail you out in hard dollar
terms. If something happens and the central bank runs out of money,
there is the international community, in particular the IMF as
the lender of last resort. So we are all guilty, we are all part
of game to the extent that we bail out. Argentina, the same thing,
the Currency Board is a guarantee for a bail out. You can do it
as long as there is some commitment to do it and if the fundamentals
become too apparent the whole things breaks down. I am not saying
that the tax can address these fundamental issues but it can avoid
high speculations. The speculation starts with the in-flow of
capital. So I want to fend off very short maturities. If the tax
fends off those who think they can make money in a matter of weeks,
this is good news. So please distinguish capital in-flows with
a short-term maturity from those that are assigned to investment
priorities. The long-term investor will probably not be frightened
by my second tier tax. Perhaps I will sketch it very briefly because
there was one question on how do I distinguish between short-term
and long-term investment. My idea is the following and it is borrowed
from the European Monetary System which we had to keep exchange
rates within Europe within a band. The idea is give me the last
20 business days of the peso- US dollar rate. I then calculate
the target rate for tomorrow's peso rate in dollars on the basis
of a moving average, so I have a target rate for tomorrow. Then
I have an empirical daily fluctuation also based on studies which
gives me a plus/minus one per cent or two per cent, whatever it
is, which defines a corridor, and as long as trading is within
this corridor there is no tax at all, it is dormant. Once there
is some irregularity in the market, speculation in other words,
and some people try to push the price out of the corridor in a
matter of minutes or hours, that is immediately detected and through
software incorporated in the settlement system I take away the
difference between the traded price and the margin of the corridor
which I consider a speculative gain. Here the tax rate can be
very high, 50 per cent. The Belgian legislation, which Steve mentioned,
wants to introduce a tax rate of 80 per cent. It could even be
100 per cent. I would take away 100 per cent of the difference
between the traded price and the margin of the corridor, not the
value of the full transaction. The larger the deviation, the higher
the effective tax rate. Of course, the idea is to frighten them
off trading outside the corridor and to bring them into the corridor.
And, of course, there is an adjustment of the target rate. The
next day of course the target rate will be a bit lower or a bit
higher according to the new information that goes into the game.
This is a formalised way of distinguishing speculation from normal
trading, because if we formalize a tax we have to think of the
tax lawyers wanting to have a legal basis which is clear, not
arbitrary, and this is the way I do this distinction.
92. Our theme is investigating funding for development.
We are saying that we believe there needs to be more funding for
development through 0.7 or whatever mechanism. Were there to be
an additional mechanism such as, in shorthand terms, a Tobin Tax
or one of the variations on it, that would be very helpful. To
do that we have to build up a consensus. What I am trying to get
a picture of is if we try to build up a consensus for development
and at the same time we are seeing this tax as a way of curbing
currency transaction, is there another consensus having to be
built up at the same time and are they in conflict, people who
see it for currency or people who see it for development? Would
it be more sensible to be looking for a currency transaction tax
that is simply geared to development?
(Mr Tibbett) I think that you are right
in a way, that it would be neater to have a method by which to
raise development funding. However, the method of controlling
currency speculation that we are talking about did come up in
early drafts of the financing for the development process because
it was recognised then that unstable exchange rates means that
it is very difficult, for instance, to invest in a country if
you do not know what the exchange rate is going to be in the future.
This is a disincentive to investment. Even in terms of private
sector investment unstable exchange rates are bad for financing
further development. You have asked us here to describe the Tobin
Tax to you. I realise it is in the context of FfD but it is first
and foremost a way of stabilising the market and it raises some
money as well. That is not unusual for a tax. We have taxes on
pollution, on smoking, on petrol, and all those are taxes that
attempt to do two things at once. They attempt to reduce consumption
in those cases and produce some revenue.
(Professor Spahn) We should make an a sharp distinction
between the revenue raising function on the one hand, which is
probably our task, because only the industrialised world can mobilise
new resources for development. I think of the classical Tobin
Tax with a very low rate as the appropriate instrument to finance
development. And stabilizing exchange rates on the other hand.
We do not have the problem of stabilising the euro against the
dollar so my second tier is probably not appropriate for the euro,
but it is appropriate for the Mexican peso and the Brazilian real.
This could be done on a unilateral basis. Maybe we have to separate
these two, leaving it to the developing world to implement each
on its own, each with its parliament a system of a second-tier
tax. But the discussion is confused by the argument that the Tobin
Tax also wants to curb speculation and I want to get rid of that
and concentrate on the financing of development, the function
which is our business. Let's face it, 99 per cent of currency
transactions involve currencies of industrialised countries. If
we talk about the smaller developing countries it is less than
one per cent of the market.
93. Very briefly, there are two points I want
to pick up on, particularly one to which Professor Spahn has alluded.
The first point I wanted to pick up on is that your long-term
investors rely on efficient markets and an efficient market means
there is somebody there making a market. You are calling those
people "speculators". They are there to provide markets.
I am more concerned about Professor Spahn's increasing tax, that
he is going to predict what he thinks the market will do and if
you trade outside that range you are going to be taxed up to 50
per cent of the differential. Let us look at it from the other
side. A country is going down the tubes, let's say, which is a
major problem, but I may be an investment banker looking after
pension fund money and I have to be prudent in the way I manage
that money and if that market is sinking I want to get out of
the market. If you are saying I can only get out of the market
by paying your 50 per cent tax because the market has already
fallen, but if I care to wait until tomorrow to see if it gets
better, it would be better, I would be sacked as the manager of
the pension fund.
(Professor Spahn) You have to present
the correct alternative. My solution says there is a guarantee
that the exchange rate will not fall by more than 1 per cent a
day. Because of this tax traders will move back into the corridor.
The alternative is that in Indonesia or Argentina you have a fall
in the exchange rate by one-third, or two-thirds in the case of
Argentina now. I think it is a better proposition for the long-term
investor to go into a country which guarantees a daily fluctuation
within bands than into a country where you do not have such guarantee.
I even think it should be attracting long-term investors into
those countries that have established such a scheme. It would
not fend off long-term investors. It would fend off short-term
investors, those who go in today with the intention of going out
tomorrow, yes, but this is intended.
94. What sort of countries should impose the
additional second-tier tax which Professor Spahn calls the Exchange
Rate Nominalisation Duty and why? Should this be done by all countries
or only those outside of the major currency blocs?
(Professor Spahn) The nice thing about
it is that it can be done unilaterally. Mexico has a Parliament
and can decide if it wants to peg its currency to the US currency.
It can devise the mechanism, including the definition of the corridor,
and implement it unilaterally without asking anybody else. This
is different for the Tobin Tax. The Tobin Tax needs some international
co-ordinated effort, although I do not think we have to go as
far as Tobin wanted it. He wanted to have a global scheme including
all countries and yet the United States is not going to co-operate
for some time. My question is whether it would work as a European
scheme and the answer is yes.
95. It seems to me that there is always an easy
scapegoat to find, namely speculators, and there is something
distasteful, viewed in the raw, of somebody making profit out
of somebody else's disadvantage. I entirely understand that and
I sympathise with that. I have to say, however, that very often
it is not somebody speculating, it is somebody trying to save
money for not particularly well off pensioners in my constituency
and elsewhere, which is my point. If I can bring Professor Spahn
in here particularly. You used two examples as to why currency
transactions, in this case speculation, have been so evil and
that was both Argentina and Indonesia. It seems to me that you
are denying the responsibility of the governments of those two
countries for the management of their economies. It is not currency
movements that have harmed the economies of Argentina and Indonesia;
it is the behaviour of their governments and the mismanagement
of the economies. Is that not the case?
(Professor Spahn) I stress again what
I said before. I think there are fundamental causes of both the
Indonesian and the Argentinean crises, and we may be part of that.
These have to be addressed. The tax cannot remedy it and it cannot
substitute for bad governance and bad policy. I fully agree with
that. What it can do is protect governments that are under pressure
despite good governance, and that has happened. We have seen pressure
on the British Government, on the Bank of England, on the Bank
of France and we have seen it on Brazil, although Brazil is incomparable
to Argentina, it cannot be the same thing. There are contagion
effects which are totally irrational. These can be suppressed
by the tax, but I am fully in agreement with what you saywe
should not and we have no intention to protect governments who
are not able to perform macro-economic policies correctly.
96. The world has obviously moved on since the
1970s when the Tobin Tax was first discussed and we are now in
Europe with the introduction of the euro. What impact has the
introduction of the euro had on the desirability or the feasibility
of a Tobin Tax being introduced?
(Professor Spahn) First of all, it has
reduced the number of transactions. We can show that this is the
case. The consolidation of currencies is of course reducing this
market segment and it has abolished volatility among the euro
currencies, so this has brought more stability and has also created
a larger currency area against which to speculate is absolutely
suicidal. We had an incident on 11 September. I have spoken to
insiders in the currency markets and they all tell me that , remarkably,
both the Fed and the European Central Bank reacted in a very responsible
way, the Fed in a matter of 30 minutes, the European Central Bank
in a matter of hours, so both have reacted to avoid speculation
against the dollar in this particular situation and I think this
is good news for these two big currencies. This is why I do not
think we need a two-tier tax either for the euro or for the US
dollar. So I think the euro has stabilised the world currency
market and it has allowed now developing countries and Eastern
European countries to peg their currencies towards some European
anchor currency. I realise that both the British pound and the
Danish crone, as non-members of the European Monetary Union, try
to observe what is going on in this currency area, which has again
brought in more stability. Let me add one point which Steve made.
We should not necessarily look at budgetary ODA only because what
happened in Argentina is that through this large devaluation of
the peso we had a swing of wealth back into the developed world
and that was a multiple of budgetary ODA. So exchange rate fluctuation,
unfortunately, can counterbalance and even over-compensate everything
we pour into these countries through our budgetary initiatives.
This is why stabilising these currencies is so important. With
all our efforts we see them totally counteracted by these speculative
developments. That is something to be of concern.
97. We have been concentrating very much on financing
for development. Are there other new and innovative ways you could
be financing for development rather than concentrating what we
have been looking at throughout the session today?
(Mr Tibbett) You can think of other innovative
ways of getting money for development, of course, but this is
the one that has the most political will behind it. It has, as
we have heard, other beneficial effects. It could raise a lot
of money. Professor Spahn has estimated it would raise just on
the euro alone and the Swiss franc some 20 billion euros. That
is at the very low rate. There is huge potential in this market
to raise money. I think the other question you have to ask yourself
is if not this, then what? What other ideas are there on this?
There are some very sketchy ideas on the table about airline fuel
duty, arms trade tax, carbon taxes, none of which I dismiss, but
this is the one that is most of the way down the line. It has
got this other beneficial effect, and we are trying to stress
this other effect, and we would commend this in financing terms
Chairman: Unless colleagues have any
other questions, thank you very much. We are all hopefully wiser,
or at least better informed than we were when we started this
session. Thank you very much and very much for having come from
Germany because it has been extremely helpful. Thank you for helping
us with your variant because the disadvantage of this arrangement
is that it is all too easy to dismiss something and not see the
other permutations there. So thank you very much.