A Currency Transactions Tax (CTT) of the form usually discussed could very probably be reliably collected through the foreign-exchange-settlement system, and, if all major countries, or even the four to six authorities issuing the major vehicle-currencies, agreed to impose it at a uniform rate of the order of 0.05% to 0.1%, it could probably raise sums of the order of $75-200 billion a year or more. A strong case on grounds of justice could be made for devoting a large proportion of this sum (the great bulk of which would be collected by the authorities of a few rich countries) to the fight against world poverty or to other global purposes such as peacekeeping. But, to encourage general participation, which would be desirable in order to guard against the eventual development of vehicle-currencies outside the system, each participant should by agreement keep a certain part of the amount collected. That part would need to be defined in some equitable way---for example as some function of (a) the amount collected and (b) a certain fixed amount (say $5) per head of population.

At such low rates it would probably reduce short-term speculative foreign-exchange transactions somewhat, while having very little effect on international trade in goods and services or long-term investment.

This differential reduction in short-term speculative foreign-exchange transactions in itself would very probably decrease general exchange-rate instability to some extent. But, in the simple form in which the CTT has usually been discussed (a single, very low, uniform rate), the tax might well have little impact on the major speculative flights of currency that have been among the most disturbing economic phenomena of the 1990s.

However, a two-tier CTT---with a second, much higher, penal rate to be applied (a) temporarily, (b) under prior announcement, (c) on objective criteria, to transactions in any currency whenever the exchange-rate of that currency had changed at more than a certain velocity---could be used with every prospect of success to prevent sudden speculative flights of currency.

The mere fact that such a mechanism was known to be in place would very probably prevent any such speculative rush from beginning, so that the higher rate might never have actually to be applied.

• This would not block useful exchange-rate adjustment.
• It need also not reduce in any way a country’s autonomy in exchange-rate policy.

It is not the only plausible way in which such crises might be avoided; but

• it is superior in a number of ways to conventional exchange-controls;
• more confidence might be placed in it than in Chilean-type fiscal disincentives to short-term-capital imports, useful as these might be if imposed well in advance of a potential crisis and applied to all inflows; and
• it seems more likely politically to be offered, and more credible if promised, than an undertaking from the outside world to intervene massively in the currency markets (by buying any threatened currency) in order to prevent over-rapid exchange-rate changes.

It could in principle be applied unilaterally by a country with the appropriate institutions (which are readily accessible and which many now possess) to defend itself from speculative currency flight; but an international arrangement might inspire more confidence and would cover those lacking these institutions.

All the device requires is that the mechanism for collecting a CTT be set up. The regular lower-tier rate might be very low or zero without preventing the threat of a higher rate from blocking speculative currency flights.

Given the uncertainty about the effect of a CTT on the volume of foreign-exchange transactions, the lower tier should be introduced initially at a very low rate---and then raised gradually as and if raising it appeared to be justified by the effects (or lack of effect) on the volume and pattern of currency trading and on "real" transactions. With a rate of 0.01%, revenue raised would probably still be substantial. After observing the effect of a tax at that rate, the governments concerned could proceed from there to increase the lower tier as seemed appropriate, and so probably to provide, if they chose, very substantial sums for such global purposes as social development, peacekeeping and environmental protection.

Anthony Clunies Ross
Kinbuck, Perthshire, Scotland
Originally drafted 2 February 2000; Slightly revised Easter 2001

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