They never give up. Even if the ideas they're pushing have been thoroughly discredited for decades.
I'm speaking of an idea that even the economist who originally proposed the idea now rejects: a global tax on foreign exchange transactions.
Last week, The New York Times published an article by former French foreign minister Dr. Philippe Douste-Blazy. It proposes a "tiny levy" of 0.005% on transactions involving the world’s most traded currencies: the dollar, euro, pound sterling and yen. This tax, Douste-Blazy says, will raise US$33 billion annually to fight poverty and disease in the world's poorest countries.
Imposing tax on forex transactions isn't a new idea. Back in 1978, economics professor (and Nobel Laureate) Dr. James Tobin suggested that such a tax could potentially help curb volatility in emerging market economies. This type of tax has come to be called a "Tobin Tax"—over Dr. Tobin's objections.
Dr. Tobin proposed the tax to inhibit speculation in third-world countries, allowing them to pursue more independent economic policies. But the United Nations hijacked his idea, primarily because the tax offered the agency a funding source independent of individual donor governments.
So beginning in the mid-1990s, the UN made the Tobin Tax the centerpiece of its funding proposals to redistribute wealth and income. Only it would be imposed at 0.05%, a rate 10 times higher than Douste-Blazy now proposes. According to a 2001 report from the UN's "High-Level Panel on Financing for Development," such a tax would generate up US$400 billion annually.
And just to prove there's nothing new in current efforts by global tax authorities to end bank secrecy in tax matters…there's not. The same 2001 report proposed that all governments collect private financial data on individual taxpayers and share it with other governments. It also suggested that governments should have the permanent right to tax individuals who exercise their right to emigrate from their homeland. An "International Tax Organization" would oversee these efforts and "take a lead role in restraining tax competition."
It remains to be seen if the countries issuing the currencies Douste-Blazy wants to tax will go along with this idea. If they do, it will be one more blow against freedom of movement, tax competition, and financial privacy. But a Tobin Tax, if imposed, will not have the effect its proponents claim.
To understand why, consider how forex markets operate. Investors risk trillions of dollars in these markets daily, but someone has to take the other side of every trade. The broker-dealers that do so immediate try to off-load the risks they've assumed to other brokers. If speculators are short U.S. dollars, brokers may have an oversupply of yen. The brokers try to sell the excess yen to other dealers. This practice encourages hedging, increases liquidity, and helps reduce currency volatility.
Now it's time for a little Economics 101, directed to our former French foreign minister. Anytime the cost of something increases, people tend to buy less of it. So if governments impose a tax on foreign exchange, even a tiny one, transaction costs will increase. That will discourage trading, decrease liquidity, and increase volatility. It will also lead to a much smaller revenues than Douste-Blazy —much less the United Nations—suggests.
So what's the real purpose of his suggestion? The only reason I can come up with to resurrect this thoroughly discredited idea is because it presents an opportunity to impose a truly global tax. And to construct a foundation over which to enforce other global tax initiatives.
Are you ready for a global tax agency that can levy tax payments anywhere in the world? For global restrictions on emigration? Or for globally enforced capital controls?
If you are, then you should love the idea of the Tobin Tax. But if not, you at least have some intellectual ammunition to take on your friends, business associates, and family members when they suggest that it might be a good idea.
It's not.
Copyright © 2009 by Mark Nestmann
Update: The more things change, the more they stay the same! In the wake of the 2011 euro crisis, governments are reconsidering the Tobin Tax. The target, as before, are "high frequency traders." And no doubt, a Tobin Tax would discourage high frequency trading, albeit at the likely cost of decreased liquidity. Incidentally, securities that are traded frequently, such as U.S. Treasury securities, would be more affected than securities that are traded less frequently. With U.S. deficits at all time highs, can that possibly be a good thing?
(An earlier version of this post was published by The Sovereign Society, https://banyanhill.com/)
