A uniform tax on foreign exchange transactions would deter speculation by imposing a small tax on such activity. This would reduce the volatility of exchange rate fluctuations and provide exporters, importers and long-term investors a more stable exchange rate in return for paying the tax.
2. Reduce the power that financial markets have over national governments to determine fiscal and monetary policies.
The tax would give more autonomy to governments to set national fiscal and monetary policies by making possible greater differences between short-term interest rates in different currencies. Such a tax would also reinvigorate the capacity of central banks to alter exchange rate trends by intervening in currency markets. By cutting down on the overall volume of foreign exchange transactions, central banks would not need as much financial clout to intervene.
3. Raise revenue.
This tax would yield enormous sums in receipts. Assumptions vary about the actual rate of the tax, the decline in volume of trade, the amount of trade circumventing the tax and transactions which would be exempt. However, just for illustration, assuming a conservative tax rate of 0.2% and an effective tax base of $75 trillion annually, the tax would yield $150 billion annually in receipts. Given the declining commitments to bilateral development assistance around the world, the tax could generate important resources to support sustainable human development.
This sounds good, but is it politically possible?
There are two key political issues involved with putting such a tax in place. First, it would be necessary to forge agreement amongst the major countries to implement a uniform tax, and second, there would have to be agreement on the collection and distribution of the tax revenue.
Developing countries have always been much more vulnerable to exchange rate volatility, but there is for the first time a convergence of interest between industrialized and developing countries as they all seek stronger government autonomy and more effective central bank intervention. At present, the governments of Australia and France have spoken out in favour of a currency exchange tax. The Canadian government appears divided on the question as cabinet ministers debate the issue publicly. The eighteen member countries of the Asia-Pacific Economic Cooperation are reviewing the proposal. Pressure is building on national governments and international institutions to support this measure from coalitions of non-governmental organizations representing labour, church, environment, women, youth, seniors and poverty groups as they seek to restore democratic control of their national economies.
Perhaps more significant is the fact that many governments face large deficits and strong anti-tax populism among the electorate and are looking for new sources of tax revenue that are not politically suicidal. Such a minimal tax will not hit "Main Street", but rather "Bay Street/Wall Street speculators". The promise of a new source of revenue will likely be the primary motivation for reaching agreement to implement the tax. Collection and distribution of the tax revenue is a much trickier question. The tax would have to be applied worldwide at the same rate in all markets. There would also have to be agreement on precisely which transactions would be subject to the tax. Compliance would depend on the banking and market institutions. Tracking the activity would certainly be possible as the financial industry has the sophisticated technology required to do this but enforcement would rest with the major economic powers and the international financial institutions. There would certainly be some strong resistance from members of the financial sector some of whom have already begun to speak out against the proposal.
It is possible that some members of the financial community might support this tax. The pace and the volumes traded in the markets has added a level of risk to doing business, for as much as great profits can result from speculation so can great losses as in the Barings Bank fiasco. Some experienced business people may see the value of the limited risk of more stable markets, suggesting if not the Tobin proposal, other strategies to limit the volatility of the current global money system.