The Economic Times, November 26, 2022
By Pradeep S. Mehta
Daily currency trade is about $6 trillion. In this context, the Tobin tax – which concerns taxing spot currency transactions at a nominal 0.5% rate to raise critical capital for international development goals – appears very desirable. Even at 0.25% – half of the suggested 0.5% – the tax can, according to calculations, annually raise $4.5 trillion globally.
When attending a recent seminar on preparations for India taking over G20 presidency next week, Nirmala Sitharaman spoke about finance issues as a major handicap in achieving the Sustainable Development Goals (SDG) agenda. Financial commitments made by rich countries at the 1992 Earth Summit in Rio de Janeiro, Brazil, 2002 Monterrey Consensus in Mexico, 2015 Addis Ababa Action Agenda in Ethiopia and in various COPs have never been met. Looking at the current economic downturn and shrinking revenues, despite agreeing on setting up a loss and damage (L&D) fund, it is going to become more difficult. Taxing financial flows to raise unhinged funding could be the only way forward.
In 1972, Nobel-winning economist James Tobin had suggested that short-term capital flows should be taxed but not investment flows. The call is worth taking a close look, as it emphasises the need for this tax in the context of ‘elusive’ capital, while fiscal deficits are compounding treasury deficits. With high debts with major governments, leveraging liquidity should be desirable and the political will there.
G20 committed a stimulus package amounting to 1.1% of the world’s GDP to resolve the global economic crisis at the London summit in 2009. Of the G20 countries, only the US and China responded with decent packages. However, the execution, both in terms of size and speed, left much to be desired.
G20 later committed a higher stimulus package for the Covid pandemic, resulting in some poor countries facing potential debt default, while achieving less on SDGs. Successive G20 meetings found the group waning on the promise and purpose of stabilising the global economy. The world is desperately looking for fresh funding sources. Such collective effort has never been deployed to address financing key human development challenges of literacy, health, nutrition and employability in the developing world.
Contrary to popular perception, the world has neither been left dry without liquidity nor is global capital concentrated in an emerging Asia alone or in Chinese vaults. Much capital travels across the globe translating into liquidity many times over. Political will is needed to recognise drivers of global capital and liquidity, and therein leverage critical finance for human development and growth. A look at trade across currency and foreign exchange markets is warranted. Where untouched by the recession, money still moves full steam globally.
Unlike the stock and bond markets, recessionary impacts do not gravely affect forex markets. Daily currency trade is about $6 trillion. In this context, the Tobin tax – which concerns taxing spot currency transactions at a nominal 0.5% rate to raise critical capital for international development goals – appears very desirable. Even at 0.25% – half of the suggested 0.5% – the tax can, according to calculations, annually raise $4.5 trillion globally. This humongous amount can fund SDGs across developing countries easily.
Presenting compelling reasons for such taxation, apart from current financing needs, will go a long way in absorbing future shocks and preventing fiscal bankruptcies. A 2011 study (bit.ly/3F151TS) by Jeffrey Frankel and George Saravelos looking for the most prevalent and explanatory factors preceding a series of crises in the 1990s found exchange rate fluctuations as the key one. Generally, with an increase in capital moving in a country, there is currency appreciation making exports expensive and creating an inflationary spiral. When the money flows out, currency depreciates, creating a balance of payments (BoP) problem.
Economic theory postulates that exchange rate changes will lead to reallocation of productive resources and BoP will automatically stabilise. Exactly the opposite has happened with capital moving overnight, affecting currency values and creating volatility with speculative attacks. Most developing country governments clearly have not been able to maintain autonomy in this sphere. They can choose only two of the following three: fixed exchange rates, free capital movement and an independent monetary policy.
The current financial trade regime greatly limits governments’ authority in regulating capital or controlling their exchange rates. A Tobin tax can play a key role in dealing with volatility and speculative attacks.
Written off for different reasons, discussions on the tax have an interesting political precedent in the US. Introduced in the second session of the 104th congress, a bill titled Prohibition on United Nations Taxation Act of 1996 successfully prevented UN-led discussions on the Tobin tax. There is no other example in history where the ideas of a Nobel laureate economist have been prohibited from discussion by legislation, even as dissent has been a norm across key US academic centres.
Not a Toll Order
A cooperative G20 stance can help ease the problem emanating from a selective and/or unilateral imposition of the tax. It can also address the challenges of accounting and implementation. There is no reason why the G20 countries, including India, which has close to $33 billion of daily forex turnover, should not come together and create a movement for this possibility. G20 countries can consider adding crypto assets and gold to shore up taxable volumes and possibly bring down the tax rate further.
Introducing the Tobin tax will not only help in raising resources but also help financial regulators in tracking all the currency flows happening worldwide.
Inputs by Sushil Muhnot and Ujjwal Kumar
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