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A fiscal Loch Ness Monster

Support for the Tobin Tax on currency speculation is moving in from the academic margins explains Harry Barnes.

Sceptics often dismiss the idea of taxing international currency speculation as a fiscal equivalent of the Loch Ness Monster - sometimes spotted but never retrieved. The idea was first raised by Yale Professor James Tobin in 1972 and is now popularly known as the Tobin Tax. He argued that throwing "some sand in the wheels" of what was then a relatively low level of speculation would help to stabilise national currencies and governments.

After 30 years of liberalisation of the international financial markets, such speculation has soared to about $1.5 trillion a day. The vast bulk of this is highly profitable and short-term gambling on the global casino economy.

Currency crises have had devastating effects in Asia, Russia and Latin America, plus our own Black Wednesday in 1992.

As a result, an international campaign for Tobin is starting to gain intellectual clarity and official as well as popular support. The French Government may propose an official European Union study into the feasibility of Tobin, during their current Presidency. The United Nations Social Summit on Development recently agreed to initiate a feasibility study.

The Treasury Select Committee may include Tobin in wider investigations of the international financial architecture in the Autumn. The Treasury itself has been flooded with round robin cards in support of Tobin organised by the third world pressure group, War on Want, but Ministers, including the Prime Minister, have ruled it out.

Nonetheless, support for Tobin is rapidly moving from the academic Margins into the political mainstream. In Britain, over 100 MPs from across the main parties including former Treasury Minister Geoffrey Robinson have backed Tobin. The Liberal Democrats have formally adopted the tax as policy. Tobin would be set at a relatively low level and aim to both deter speculation and raise revenue. Genuine investment would not be deterred by, say, a 0.25% tax whereas brokers making multiple "round trips" would at least think twice. Four-fifths of all transactions are for seven days or less.

If it were completely successful at deterrence, then it wouldn't generate revenues. But Tobin couldn't completely halt all speculation - not least where profits dwarf the size of the tax. The tax can be compared to those on alcohol and tobacco.

War on Want say that Tobin could raise perhaps $250 billion worldwide each year for third world development. A portion - say 20% - could be collected by the host country. Since the UK accounts for one-third of such trading, this could deliver a huge social dividend here of about 6 billion a year. The key objection to Tobin is that it would require universal support to prevent foreign currency traders migrating to uninvolved countries or offshore tax havens.

Total compliance with any tax or law is virtually impossible. However,the sophisticated electronic trading systems used by traders to protect their own interests could be used to track and tax their transactions. Feasibility studies can address this as well as other contentious Questions such as the rate(s) of Tobin, sufficient flexibility to minimise evasion by traders using new financial instruments, who collects it and how it is distributed. There are difficult technical questions but the key is political legitimacy.

After all, the vast bulk of currency trading is undertaken in 10 countries and by few big brokers who would incur popular wrath if they bucked such a "sin" tax.

The key is for campaigners to win popular support to persuade Governments to find the necessary political will for a tax that takes from the few to benefit the many.

There is no shortage of need that could be addressed by such huge revenues. For example, The United Nations estimates that $25 million a year would be enough to tackle the worst forms of poverty and environmental degradation. The Guardian argues that universal primary education could be secured at a cost of just $8 billion a year. Whether the UN itself is the best body to supervise the tax and its distribution is another matter, given its somewhat chequered record.

The Jubilee 2000 coalition helped to mobilise a new and large constituency of activists on the issue of third world debt. Despite radical promises, it now appears that little happened in reality. This constituency's anger at this and the increasing desperation of many third world countries and the continent of Africa in particular could begin to move many of these people into supporting other ways of financing development.

Tobin could also win support from beyond the Left: for example, industrial capital which suffers considerably from speculative short-termism and wants greater stability.

Speculation crises have strengthened those who say that society should regulate and humanise the process of globalisation. A global economy needs a global society and a global tax.

Even if Tobin is not itself implemented, the debate highlights the need for some sort of social control over global capital flows.

Harry Barnes is MP for Derbyshire North East

September/October 2000