Tobin Tax

I was recently drawn back to some of my older writing on the Tobin Tax by a companera’s request to comment on it. So, I thought that since the Tobin Tax is and will be on the agenda of some sections of the movements, it has been raised in the Beijing declaration by Focus on Global South and TNI, and it has already attracted some critical comments in various lists, it would be important for us to give it a slightly more critical analytical consideration. In the following notes I will freely take from my old article “Capital Movements, Tobin Tax, and Permanent Fire Prevention: a Critical Note.” In Journal of Post Keynesian Economics, Vol. 22, No. 2, Winter 1999-2000.

First, for those who need an intro, the Tobin Tax is a tax levied on foreign exchange transactions and takes its name from James Tobin, who proposed it in 1974 in the midst of the then crisis back then. An element of that crisis was the rise of short term capital movements, which nevertheless were a fraction of what we have today.

There are three main rationales for the Tobin tax . . . . In the first place, this tax would be essentially a small transaction tax that would penalize short-term round-trip movements of speculative capital, thus helping to “put grains of sand in the wheels of international finance” (Eichengreen, Tobin, and Wyplosz 1995). In this way, the Tobin tax would reduce the profitability of short-term speculation and allow exchange rates to better reflect long-term factors in the real economy rather than short-term speculative flows. The second rationale is based on the greater autonomy this tax would give governments in pursuing economic policies, by being shielded from financial market discipline on domestic fiscal and monetary policy. Finally, the third rationale for such a tax is its revenue-raising potential. According to an older United Nations study, a Tobin tax of merely 0.05 % could raise $150 billion a year (United Nations 1994: 9) [this is of course a pittance in relation to current bailout regimes (a pittance which of course depends on the low tax rate, which — following the “grain of sand” logic — has to be low, otherwise capital movements would be brought completely to a halt, and this is something its proponents do not wish.]

There are three main interrelated criticism of the Tobin Tax. The first one comes from Paul Davidson, a post-keynesian economist, who argues that “the imposition of a Tobin tax per se will not significantly stifle even very short-run speculation if there is any whiff of a weak currency in the market. In fact, any Tobin tax significantly less than 100% of the expected capital gain (on a round trip) is unlikely to stop the sloshing around of hot money. (Davidson 1997: 678)” Thus, taking for example the case of the fall of the Mexican peso during the crisis of 1994-95, in which the peso fell by about 60%, a Tobin tax of about 23% would have been required to stop speculative run on the peso.

In our terms, therefore, the first argument against the Tobin Tax is that it is not a solution to capital movement and their disciplinary role of enforcing crises following profitability expectations.

The second argument is this: if we want the tobin tax because it transfers money from capital to labour, then it is legitimate to ask why the Tobin Tax and no other form of progressive taxation or wealth redistribution and reformulation of property right? This question is even more legitimate, assuming the validity of the first argument.

Third, and consequently, there is what Werner mentioned, that is the Tobin Tax “comprise well thought out ideas as to how to secure existing social relations”, i.e. capitalist relations. It is a mild form of capital control, that does nor prevent crises, it modest revenue raising powers gives the impression of addressing social justice, but it will be instrument for casting a new capitalist deal. With respect to this, for us the question will be to try to assess how — in today’s given context of crisis in its specificity — the tobin tax could in fact be used to secure existing social relations, as a part of a new deal.

But in general, let us hope that our marches and demos in the next months and years will see less of those awful banners with the “%” sign: I could never had thought that such a symbol of capitalist compound interest rationality could also become the symbol of part of a social movement.

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