NCPA - National Center for Policy Analysis

Anti-Globalizers Support a Tax on Financial Transactions

September 5, 2001

Anti-globalization forces are pushing for a small tax on foreign exchange transactions. Called the "Tobin tax," after Nobel Prize-winning economist James Tobin of Yale University, it was originally proposed primarily to curb excessive volatility in foreign exchange markets, but has been seized upon by anti-globalization extremists.

The United Nations is interested in the Tobin tax as an independent revenue base, freeing it from the need to get appropriations from member governments. However, a June 26 UN report, in reviewing the views of "skeptics," makes the following points:

  • The tax would be "too complex to implement" and its economic effects would be "somewhat ambiguous."
  • Evasion of a Tobin tax would be simple unless imposed worldwide at a uniform rate; but even then, alternative financial instruments could still allow traders to avoid the tax.
  • Although the tax rate may appear low relative to the total volume of foreign exchange trading, which is on the order of $2 trillion per day, it would be very large relative to the profits on such trading.

In a 1996 paper, International Monetary Fund economist Janet Stotsky noted that a Tobin tax would play havoc with monetary policy.

And in a 1995 paper published in the Economic Journal, economists Peter Garber and Mark Taylor emphasize that because a Tobin tax can be evaded, it would have to be extended eventually to include ALL financial transactions.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 5, 2001.

For Stotsky paper

http://www.imf.org/external/pubs/ft/fandd/1996/06/pdf/stotsky.pdf

 

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