The Tobin Test.
Meet the new trial balloon for global tax advocates.

By Eileen Ciesla, Warren Brookes Fellow at the Competitive Enterprise Institute
December 14, 2001, 8:00 a.m.

he Tobin tax has been called utopian, easy to evade, impractical, and impossible to enact. And, that's from those who support the idea. Recently, this tax on foreign exchange transactions has enjoyed a revival thanks to anti-globalization activists, and France's National Assembly. On November 21, France became the first industrialized nation to vote for the tax.

An election-year gesture by Socialist Prime Minister, Lionel Jospin, the Tobin tax has little chance of being levied. It needs the approval of all EU countries. And Britain, one assumes, is unlikely to endorse it, given that London is home to the biggest foreign-exchange market in the world.

So, it's surprising that fiscally reasonable Chancellor of the Exchequer, Gordon Brown, has floated the notion. In remarks given to the New York Federal Reserve this November, Brown said, "We in Britain approach further evaluation of the Tobin tax with an open mind."

Yet, Brown is not so much interested in taming speculation, as he is in proposing a "New Deal for the global economy." Brown wants to raise $50 billion for development aid in order to close the fund-raising shortfall facing the U.N. Increasing aid to Third World countries is even more urgent since September 11th, said French Foreign Minister Hubert Vedrine in a TV interview, stating that "to fight against terrorism is also to settle or solve the problems which the terrorists use as pretext." But there is little to suggest in al Qaeda's rhetoric that insufficient U.N. aid and IMF loans are what drive the fundamentalist jihad against the infidel. Certainly, their terrorism is also directed at the impoverished
southern Philippines, Indonesia, Nigeria, and the Sudan.

Gordon Brown's development fund is most likely inspired by a preliminary report issued by the U.N. in June. Meeting in Monterrey, Mexico, this March, the U.N.'s Panel for Financing and
Development is to discuss ways to address the shortage of aid donations. Ideas in the first draft report included the Tobin tax, a tax on carbon emissions, global commons taxes (including the High Seas, outer space, and seabed mining), a tax on emigration to curb brain drain, and the creation of an International Tax Agency to administer these taxes globally.

The mere mention of a global tax authority was enough for the U.S. to strike down the report, which is now in its second draft. But the spirit of international taxation is kept alive with a few EU financial
ministers, and anti-capitalist activists, such as The War on Want, a UK-based anti-poverty organization, and the leftist Paris-based ATTAC, which has promoted the Tobin tax for years.

Ironically, the man for whom the tax is named is not happy that his brainchild is being promoted on the placards of radicals. Dr. James Tobin, 1981 Nobel Laureate in economics, told the German paper Der Speigel, "Most of the applause is coming from the wrong side. I'm an economist and like most economists, a backer of free trade . . . they're abusing my name."

And they are abusing the original intention of the tax, which was not proposed in an ideological spirit, nor as a revenue-raising tool. Tobin originally suggested that a small tax of 0.1% to 0.5% be levied on
foreign exchange transactions in order to curb short-term speculation in currency markets and to reduce exchange-rate volatility. In 1971, when he introduced the idea, the financial world was adjusting to the collapse of the fixed exchange rates of Bretton Woods.

But the tax never got too far with economists or politicians. To begin with, unless levied globally, it could trigger massive capital flight. Tobin himself suggested that no fewer than 15 to 20 countries had to agree to enact it, lest it cause a hemorrhaging of capital to tax havens.

And even if most of the world's nations could agree on implementation, how would such a tax be administered? If only levied on spot transactions, traders would move to derivatives or hedge funds. The tax would have to be placed on an ever-widening range of financial instruments. The tax, Tobin concluded, was unlikely to reduce speculation. As the U.N. notes in its first draft report, the Tobin tax
has an "ambiguous effect on financial markets."

However, its most vocal champions aren't too concerned with its potential to damage financial markets. They are eyeing the theoretical pile of revenue such a tax would raise. In 1971, foreign exchange transactions totaled $18 billion a day. Today they run about $2 trillion. A Tobin tax of 0.1% could raise $150 billion a year, more than enough to meet the U.N.'s fundraising goal.

The real hazard of the Tobin tax is not the tax itself. There is little chance of it ever being enacted. Even Belgian Finance Minister Didier Reynders, who endorses a pan-EU tax, scoffs at the notion. Rather, it is trial balloon for global tax advocates. Putting Tobin on the table is a prelude of things to be discussed at the Panel on Financing for Development in Mexico.

Will the $150 billion raised via global taxes alleviate poverty, or will it weaken Western financial markets, expand bureaucracy, and redistribute poverty while overriding tax law and national sovereignty? While French Foreign Minister Vedirine is concerned that terrorists are using poverty as a pretext to engage in jihads against freedom in the West, perhaps Gordon Brown should re-consider the U.N.'s own use of poverty (and global warming) for its assault on the stability and health of U.S. and British markets.