Taxing Excessive Currency Speculation
To Prevent Social Crisis and Finance Global Challenges
A CIDSE-Caritas Internationalis-Justice and Peace Europe
Background Paper - January 1999

Introduction

Globalisation of the world economic system is proceeding at a very rapid pace, and is generally promoted as being welfare-improving. This phenomenon is also present in the arena of international finance. In this area, however, the presumed virtues of globalisation are far from being materialised. Until now, no orderly or stable financial system has been implemented, as recent currency crises, such as the Mexican peso crisis in 1994-95, and, more recently, the currency crises in a number of South-east Asian countries and Russia, painfully demonstrate. Furthermore, the current financial system does not succeed in channelling sufficient funds to finance crucial world problems such as adequate social development in poor countries.

The line of thought proposed here to cure these shortcomings is to use a tax instrument; a straightforward mechanism designed to tax the currently undertaxed (international) financial flows. More specifically, this proposal calls for the implementation of a tax that is levied on international currency transactions, i.e. a 'Currency Transaction Tax' (CTT). Over the past two decades, several proposals have been put forward on this subject. The most well-known of these, although not the most feasible, is the original proposal which was launched in 1972 by Nobel Prize laureate for Economics, James Tobin, which called for an internationally uniform tax to be payable every time a currency was converted. Since then, most proposals of this nature have generally been described as "Tobin(-type)" tax proposals.

In the 1990s, the idea of taxing international currency operations, and more particularly the Tobin tax proposal, became part of a surge of interest in new international governance, with proposals including: strengthening the role of the UN, the creation of an Economic Security Council, the supervision of international banking, and a range of international taxes such as a tax on energy consumption or air travel. In 1994, the annual Human Development Report, published by the United Nations Development Program (UNDP) focused on and propagated many of these international taxes as part of a new design for development cooperation, and concluded that a Tobin-tax proposal seemed to be the most easily implemented. It received a lot of attention at the World Summit for Social Development in Copenhagen and at the 50th anniversary celebrations of the UN, both held in 1995. The issue was also considered during the preparatory process for the G7 summit at Halifax, but was at that time thought to have too many technical complications, and, more significantly, was, in fact, politically unwelcome. This political resentment was felt most strongly in the US, where the 'Prohibition on United Nations Taxation Act of 1996', designed to prohibit UN officials from developing or promoting Tobin-tax or other global tax proposals, was introduced to the US Congress. This proposition successfully prevented at least UN agencies and officials, who were at that time central to discussions on global taxes (see e.g. ul Haq e.a. [1996]), from formally discussing Tobin-tax proposals any further.

From the viewpoint of Christian ethics, and Catholic Social Teaching, a very strong case in favour of introducing such a tax on financial transactions can be made, from at least two perspectives:

1. It offers a just mechanism to discourage excessive financial speculation in general, and, in particular, one specific type of highly-undesirable financial speculation, namely that of massive currency speculation that can trigger a currency crisis, with all its negative social effects.
2. Such a tax instrument would generate revenue that could be used as one possible source of finance to help meet some of the world's global economic and political challenges, such as the promotion of adequate social development in poor countries. Therefore, it would secure not only the financing of necessary investment in safety nets to cure current negative social effects, but would also, and more importantly, reduce the vulnerability of the poor to the detrimental effects of possible future crises. Moreover, the successful implementation of an international financial transaction tax could act as a precedent in favour of intervention (including international taxation) with respect to other global public goods.

As such, the proposal could 'kill' two birds with one stone.

A CTT can work, in practice, if it engineered carefully, taking into account some of the indeed valid technical counterarguments to the (initial) Tobin tax proposal. A workable variant would draw upon the work of Professor Bernd Spahn of Frankfurt/Main University, who launched his proposal in 1995. Essentially, only the issue of mobilising the necessary political will to implement it remains.

The momentum created by the Asian currency crisis could be used to push forward a modest but realistic proposal like Spahn's. Putting this on the agenda now would also revive international discussion, preventing further censorship from prevailing.

This document sets out to provide the necessary background essential for lobbying the proposal. The first part deals with the ethical dimensions of the problems, i.e. the birds to be killed; on the one hand, the devastating effects of financial speculation, and currency speculation in particular, and, on the other hand, the lack of financial resources to tackle problems of social development. In the second part (the stone), the initial Tobin proposal is sketched out along with a more detailed description of the technical counterarguments that have so far hampered its adoption. In response to the criticism, the document puts forward the Spahn variant, points out how and why it counters most of the technical counterarguments to the original proposal, and highlights some of the more political elements of implementation still to be discussed.

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