Select Committee on International Development Minutes of Evidence


Supplementary memorandum submitted by War on Want

NOTE ON THE EVIDENCE GIVEN BY THE CHANCELLOR OF THE EXCHEQUER AND THE SECRETARY OF STATE FOR INTERNATIONAL DEVELOPMENT TO THE INTERNATIONAL DEVELOPMENT SELECT COMMITTEE ENQUIRY INTO FINANCING FOR DEVELOPMENT

TOBIN REJECTED HIS OWN PROPOSAL?

  One of the key issues often raised is the change in international financial markets since Tobin suggested his tax and his apparent acceptance that in the modern system it would not work. As the Chancellor pointed out, "It is very difficult to advocate a tax that has been, in a sense, rejected by the person who put the proposal forward."

  It is true that James Tobin became increasingly concerned at the attention his tax gained as the "focus of reform and protest movements." He clearly stated that he had "nothing to do with them and am not informed of their platforms." However to conclude that he was opposed to the Tobin Tax is a mistake;

    "this disavowal does not mean I disavow my own proposal. I certainly do not. I cannot control the use of the words "Tobin tax". While I assume that most advocates mean well, I deplore the tactics of some extremists.[4] "

  James Tobin did not reject his tax only some of the extremist platforms to which it had become bolted.

WORLDWIDE AGREEMENT IS NEEDED?

  Following the work of Professor Schmidt in this area we contend that any country can in fact introduce the tax unilaterally.

  Schmidt argues that the technology and institutions are now in place "to identify and tax gross foreign exchange payments, whichever financial instrument is used to define the trade, wherever the parties to the trade are located and wherever the ensuing payment is made."

  Every foreign exchange trade has two elements; firstly the payment instructions from traders are handled immediately in "Real Time Gross Settlement", (RTGS), and secondly, the two or more counterpart payment instructions are matched to each other and to the original traders before they are processed, simultaneously ("payment-versus-payment settlement"). Counterpart payments are matched before being settled and it is possible to identify each foreign exchange trade. The payments institutions can then collect the Tobin tax on behalf of the central bank that issues the taxed currency as appropriate.

  The market for trading foreign exchange is supported by a global infrastructure for making payments to settle such trades. The interbank or wholesale foreign-exchange payments infrastructure is highly organized, centralized, and regulated. Netting systems and clearinghouses located worldwide that deal in assets denominated in the domestic currency are closely integrated with the large-value payment system for that currency. That large-value payment system is located at home and operated or regulated by the central bank that issues the currency being paid

  By taxing the wholesale foreign exchange payments settlement system a country can unilaterally collect the tax on conversions of its own currency into foreign currency regardless of where in the world that trade takes place and no matter which financial instruments are used to mediate the trade.

  Coordination of the Tobin tax across domestic large-value payments systems, netting systems, securities clearinghouses, and the individual participants is straightforward, for two reasons.

  (1)  The Society for World-wide Interbank Financial Telecommunications (SWIFT) already functions as a centralized foreign-exchange payments system. SWIFT provides the technology and payments processing services for all three payments institutions and the integrated communications system between individual trading banks, and between them and the payments institutions.

  (2)  The Continuous Linked Settlement Bank (CLS) will begin operations in the near future using SWIFT technology and services to act as a physical global wholesale foreign-exchange payments system, encompassing both large-value and netting systems, and processing many currencies in a single system.

  A Tobin tax applied to foreign exchange payments would also be hard to avoid by creative use of foreign-exchange instruments. Nearly all such instruments, including exotic derivatives, require payments for settlement. In most cases, these are simple payments of the principal amounts traded, just as with ordinary foreign-exchange instruments. Even foreign exchange options are bought at a price that reflects their value, and the payment made to buy the option would be taxed.

  These systems can be used regardless of the form of the tax so that the two-tier Spahn suggestion could also operate with ease. Therefore each country or groups of countries only need to find the political will to stabilize its own financial system without waiting "to get agreement right across the financial markets"

SIGNIFICANT REVENUE WILL NOT BE GENERATED?

  The advantage of Spahn's two-tier tax is that the two distinct functions of the tax, revenue generation and "circuit breaking" can be separated out. The Tobin element of the tax can be imposed at a level that provides the optimal balance of revenue generation for development and maintaining a sound tax base.

  Moreover, taxes that have a trade-off between revenue and reducing externalities are not uncommon. Think of taxes on smoking or fuel. The balance here is ultimately a political decision and would be dependent on the rate set and objectives sought.

War on Want

May 2002


4   FT; (Sep 11, 2001), James Tobin. Back


 
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