Grit or global taxation? - Tobin

Chris Burford cburford at
Fri Jun 12 12:28:09 PDT 1998

>From cburford at Tue Jun 2 1998

One is for the purpose of stabilising the volatility of foreign

exchanges by putting grit in the wheels.

I was asked off list, why is this good?

The article I have quoted from before, in the final UNCTAD Review, 1996, by Andrew Cornford, attempts a historical perspective of Tobin's original proposal. And although Cornford has to be careful not to promote global taxation too loudly because of censorship by the US Congress, it is not obvious to me that this description is distorted.


In view of the wide-ranging debate stimulated by the Tobin tax, it is instructive to return to an early version of the proposal as articulated by the author himself. The proposal was originally a response to experience in the 1970's of the newly established regime of floating exchange rates, and was prompted by concern over the ways in which 'the mobility of financial capital limits viable differences among national interest rates and thus severely restricts the ability of central banks and governments to pursue monetary and fiscal policies appropriate to their internal economies".

A basic problem confronting policy makers faced with the task of managing the interaction of the real and monetary sides of the economy was that "prices in goods and labour markets move much more sluggishly, in response to excess supply or demand, than the price of financial assets, including exchange rates". Tobin's proposal was based on the idea that a contribution to the solution of this problem could be made by throwing "some sand in the wheels of our exessively efficient international money markets".

The proposal was for "an internationally uniform tax on all spot conversions of one currency into another, proportional to the size of the transaction". The rate used for illustration was 1 per cent, and Tobin placed great emphasis on the fact that the impact on the profitability of transactions of internaional investors and speculators would vary inversely with their maturities, a reduction of 8 percent on an annual basis, for example, resulting for a three-month round-trip cross-border investment in money-market instruments.

The proceeds of the tax "could appropriately be paid into the IMF or World Bank". The view that the tax might also contribute to more orderly currency markets is more implicit than explicit in Tobin's argument, though it is stated at one point that "the purpose is to moderate swings in major exchange rates". Tobin acknowledges that the tax would entail costs owing to the fact that it would be born by transactions associated with trade and long-term investment as well as speculation and arbitrage.

However, in his view, these costs would be offest by the autonomy which the tax would restore to national macroeconomic policy by increasing the difference between nationla rates of return required to trigger international capital movements.

There is already recognition in this version of the possibility that the tax would be avoided by the substitution of untaxed for taxed transactions, a problem which has also been prominent in recent discussion. Thus the tax "would have to apply ... to all payments in one currency for goods, services and real assets sold by a resident of another currency area". But Tobin's phrasing suggests concern that exemption of trade transactions from the tax would lead to the disguise of financial transactions as trade, rather than that there would be increased recourse to ways of taking positions in foreign currencies through financial instruments that were left untaxed. "

(Tobin quotations from 1978 "A Proposal for international monetary reform" Presidential address at the Conference of the Eastern Economic Association, reproduced in The Eastern Economic Journal, July/October. But first proposed a currency transaction tax in his Janeway Lectures at Princeton in 1972 "The New Economics One Decade Older.")

So several different reasons, which have different weight at different times, from different points of view.

Chris Burford


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