The Tobin Tax: Forcing corporations to allieviate global poverty
- Published: 16 March 2010
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While delegates were toasting each other in Copenhagen recently and trying to hammer out a framework to fight global warming, some world leaders were meeting to discuss the next phase in financial reform following the banking crash. One idea to emerge from some pretty powerful quarters was a surprise: the Tobin Tax, writes William Duane.
James Tobin was an influential 20th century American economist who proposed a small tax be levied on transactions in certain global markets, and that the money be used to help developing nations pay down debt and alleviate global poverty.
Tobin was trying to control what he saw as out of control speculation. He thought that currency markets in particular had become too big for society and worried that we were creating a global aristocratic class based on wealth that only circulated amongst the richest and most politically connected.
Since Tobin’s original idea was put forward, other uses for a Tobin Tax rainy-day fund have been proposed, such as bailing out banks in future crises (which, if we're being realistic about it, will indeed happen, regardless of the amount or severity of any new regulations imposed); paying down debt owed by developing nations; and funding part of the cost of the cuts to greenhouse gas emissions necessary to curb global warming.
But Tobin’s innovative idea found very few supporters in the halls of power. Throughout the age of deregulation, both government leaders and academics showed very little interest in putting any breaks on speculation, let alone taxing the very financial institutions over which they had come to see themselves as benign, do-nothing guardians.
James Tobin died in 2002 without having seen his idea tested.
New realities, new lease on life for regulators
The Tobin Tax was revived, however, at the beginning of the banking crash last year. In August, Prospect magazine published an interview with Lord Adair Turner, Chairman of the Financial Services Authority and the U.K.’s top financial regulator, in which Turner summed up the recent history of the relationship between finance and economy:
"The object of economic activity is to produce goods and services. Financial transactions are the means by which that production is funded. But in recent years transactions have grown much more rapidly than production and trade."
(Prospect, 21 Oct. 2009, quoted by John Eatwell)
This may seem like an odd claim to make, considering the recent exponential growth in Chinese productive capacity. But despite what Thomas Friedman and some others keep on doggedly repeating about the boundless creativity and elasticity of capitalism, it appears to have reached some limit. As a result, all the recent policies of governments and regulators have weighed in on the institutional side, in the form of increasingly desperate attempts to keep the engine running.
Deregulate banks? Sure. Allow them to morph into hedge funds? Why not? Inject more fuel into the system by encouraging mountains of junk loans? Go for it. The results are what we are all living through.
But that may be beginning to change. In December, while the Copenhagen talks were blowing up, Prime Minister Gordon Brown was joined by French president Nicolas Sarkozy, in proposing that part of a tax on a limited range of financial transactions be used to help fund efforts to fight global warming. In a joint statement the two leaders said:
"To ensure predictable and additional finance in the medium term and to 2020 and beyond, we should make use of innovative financing mechanisms, such as the use of revenues from a global financial transactions tax...."
(The Guardian, 11 Dec. 2009, quoted by Ian Traynor)
Brown had made the suggestion before, most notably at a meeting of finance ministers and regulators in early 2009, an audience that included the none-too-receptive U.S. Treasury Secretary Timothy Geithner.
The Tobin Tax is still not a popular idea in corporate America, where the reign of deregulation and other neo-conservative economic theories seems far from over.
(This in spite of the fact that the U.S. had a similar measure to the Tobin Tax in place for a long time. Starting in 1914, a tax of 0.2 percent was assessed on all sales or transfers of stocks.
In 1932, faced with the Great Depression, the U.S. Congress doubled that to 0.4 percent. Many economists trace the real beginning of the era of deregulation back to the 1966 repeal of this measure.)
The Tobin Tax, however, got a huge boost in the U.S in early January of this year, when President Obama proposed that a fee be levied on transactions by American banks that received bailout money and that aren't paying it back fast enough in the form of increased credit and other market-liquidity.
Obama's version of the Tobin Tax targets some of the riskiest gambles of the so called "too big to fail" institutions. It focuses on proprietary trading, or the non-retail activities of financial institutions, when traders gamble on derivatives and other instruments using an institution's own money—usually from the value of stock—rather than the deposits of customers.
The Obama administration has estimated that the measure would garner about $200 billion (US) over the next decade. Some of this would be used to recoup the government’s bank bailout costs, while the rest would be put into a fund to help in future crises.
The president’s plan followed on the heels of a proposal made in December by key House members, along with Sen. Tom Harkin (D-Iowa).
This measure would target all transactions exceeding $100,000 per year, and would bring in an estimated $150 billion (US) annually.
Pensions would be exempt, again keeping the focus on non-retail banking. The bill would split the money generated down the middle, using half to pay down the national debt, and half to fund jobs creation.
Ah, resistance. Resistance is futile
Proponents of the Tobin Tax, and other financial reform measures—including the reinstatement of at least part of the old Glass-Steagall banking regulations—will be faced with a predictable amount of blowback from those parts of the global financial sector that simply do not want to change the way they do business.
Resistance to the Tobin Tax, and other efforts at financial reform, is likely to come in predictable stages. Here are a few to watch for.
Stage 1: “They just won't go for it.”
We will be told that the Tobin Tax is unworkable because the banks will never agree to it. This is a simple abdication of any responsibility on the part of government officials and regulators to do anything about the crash.
Up to now, efforts have been limited to keeping businesses running and restoring value to exchange markets. As we all know, of course, a 10,000+ Dow does not equal recovery.
Rebuilding the capacity of businesses to create jobs takes time and money, lots of money. And if future crashes are on the horizon, then the cushion that would be provided by a Tobin Tax is crucial for long-term stability—genuine, job-supporting stability.
And the fact that big investment banks aren’t happy about it is hardly a new or persuasive argument. Regulation means regulating, and those being regulated are never pleased by it.
If the proposal survives this stage, we can expect to see...
Stage 2: “We don't know nothing.”
Call this the “playing dumb” stage. At this point we will be told that the Tobin Tax would be too difficult to implement in the “complex world of global markets.” This is rubbish.
The markets are not so complex that brokerage fees, and numerous other levies and surcharges, aren’t already collected with near perfect regularity. Still, expect an outpouring of think-tank theory against the idea to issue from Big Media during this stage.
If it survives the deluge of garbage theory, we will see the Tobin Tax go on to the next, much meaner stage...
Stage 3: “It's all a plot by (fill in the blank).”
We will be told that what is good for "them" is not good for "us." The fear-mongering of the opposition at this point will be backed up by a lot of assertions about how “we” do business differently “here,” regardless of the country, or the particular adaptation of the Tobin Tax, under debate.
In the case of America, there is a kernel of truth to this argument. U.S. financial markets are still too big to ignore, so that if a proposal can be killed there, it will remain relatively ineffective and insignificant in the global system as a whole. Watch for special pressure to be applied, as usual, on key members of the U.S. Congress and their most reactionary constituents back home.
If we survive the attack from Other space, we will enter the final stage of resistance...
Stage 4: “Punt.”
Never underestimate the power of institutions to absorb efforts to change them. We are witnessing something like this right now in the debate over healthcare reform in the U.S.
Healthcare giants have resigned themselves to some type of reform passing, and so they have decided to make sure that it is as helpful to them as possible. Whatever doesn't help their bottom line must be watered down or eliminated.
Likewise, beware a watered down Tobin Tax which could fall disproportionately on small investors and regional institutions. Any decent Tobin-like measure should focus on the activities of the biggest investment institutions.
Of course, we could persevere, and see through all the faux outrage. The world could get a Tobin Tax or something like it after all. If we don't, we can be sure of one thing: the next crash, which will be even bigger, will bring with it an even bigger bill. And who do you suppose will have to pay?
William Duane worked for 20 years in the field of organizational conflict analysis and resolution with some of the largest corporations in the world. Semi-retired, he now divides his time between projects in independent media and consulting work with not-for-profit organizations. He no longer believes in the corporation, since it refuses to believe in us.