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Tobin Taxes are simple sales taxes on currency trades across borders. James Tobin, Ph.D., Nobel laureate economist at Yale, came with the original proposal in 1978. It's a very important proposal since the estimated $100-$300 billion per year makes it possible to fund urgent global problems such as global warming, hunger, various diseases, etc.

From the Tobin Tax Declaration:

WHEREAS over US$1.5 trillion is exchanged every day in currency markets around the world;

WHEREAS aproximately 95% of those exchanges are "speculative" as traders bet on whether currency values and interest rates will move up or down;

WHEREAS most international currency speculation is conducted with a view to earning short-term profits at the expense of long-term investment in economic and social development;

WHEREAS international currency speculation disrupts the ability of governments to establish just and equitable national economic policies;

WHEREAS the sudden outflow of large quantities of speculative capital from Mexico, Thailand, Indonesia and South Korea resulted in severe economic downturns, political instability, widespread social turmoil and human suffering;

WHEREAS excessive speculation could be curbed by a modest tax of between 0.1% and 0.25% on each currency transaction as proposed by Nobel prize-winning economist James Tobin;

WHEREAS the revenues from a Tobin tax, estimated to be worth between US$150 and US$300 billion a year, are urgently needed for genuine economic and social development and environmental protection in less developed countries;

WHEREAS the resources needed to wipe out extreme poverty, provide basic social services and mitigate environmental destruction globally are estimated at US$ 225 billion a year;

Read more at http://www.tobintax.org.

Like many apparently simple solutions to massive worldwide problems, the Tobin Tax idea is flawed in a simple but fundamental way.

The theory behind the Tobin Tax is to tax speculation -- that is, financial trickery in which the profit comes not from investment in useful activity (which most people agree is good and, in general, makes people's lives better) but from taking advantage of minute changes in the price of a given commodity whose price changes often. If you're a speculator, you're just in it for the quick buck.

Currency speculation is an especially unhelpful form of the practice because it has nothing whatsoever to do with production -- on actually making stuff that improves people's lives. In fact, it just piggybacks on other people's productive activities and weighs them down a little bit.

Currency speculation is attractive because, if you're good at it, you can make an enormous profit very quickly with minimal effort and negligible loss of liquidity.

The very nastiest form of currency speculation is "arbitrage," in which a speculator buys a currency on one market and then electronically whips over to another market where its going rate is slightly higher and sells it immediately. Generally, this means taking it across a national border.

OK. Here's where the Tobin Tax kicks in. As James Tobin, a Yale professor who won a Nobel Prize in economics for his work in describing the behaviour of financial markets, proposed in 1978, the Tobin Tax would slap a levy of a fraction of one per cent on currency transactions that crossed borders.

Given the truly massive amount of money that crosses borders every day, the Tobin Tax would supposedly raise something like $300 billion US a year, depending on the rate at which it was set.

Its appeal, in many people's minds, is twofold:

  1. It taxes something only fancy-pants money managers do -- it wouldn't affect you and me, who maybe own a bit of a mutual fund or something, but don't have arbitrageurs working to increase our billions.
  2. It would raise a very large amount of money practically out of thin air.

The problem, however, is that you can't yank $300 billion US a year out of the world economy and divert it for political purposes, however noble they might be, without people noticing that their money's not there anymore. The profit margin on most arbitrage transactions is profoundly minute. If you buy one unit of some currency for $0.0067 US and sell it across the world for $0.0068 the next minute and somebody taxes you 0.1 per cent to do it, suddenly it's not worth doing anymore.

Stopping that kind of trading might well be a valid public-policy goal. But best not to pretend you're going to raise money for the world's poor with a tax that kiboshes the activity it taxes.

What the tax would affect is international financial exchanges with slightly larger profit margins -- like, for example, the activities of the people who manage your (or your parents') retirement fund, if it includes a handful of Asian stocks that have to be bought in yen or baht or something.

The fabulously wealthy would find some other, microscopically less profitable, way to speculate, the middle-class's retirement funds would be hit, and the tax would raise some tiny fraction of the money it promised to.

I particularly like this one:
WHEREAS international currency speculation disrupts the ability of governments to establish just and equitable national economic policies;
Typically, governments manipulate their currencies to hide their mistakes or shortcomings -- Cronyism, fiscal mismanagement, jump-starting exports at the cost of devaluing the accumulated wealth of its citizens, and the like. Only an apologist or a rube would consider these "just and equitable national economic policies".

At least with speculators, you don't have to guess what their true agenda is.

Most of the time when a government complains about currency speculation, it's because that government was itself attempting to manipulate its currency, but failed or got caught. Somehow governments don't seem to complain as much when the currency speculation swings in their favor, especially if it is at the expense of their trading partners or competitors!

To be fair, some countries get and stay in trouble thanks to those puppeteers at the World Bank, IMF, and the like. These are bureaucracies that claim to be promoting globalization, not the true essence of globalization. Really, they are more like crack dealers, the first loan is always "free".

The bottom line is -- the Tobin Tax is IMO just another supposedly painless (yeah right) way to increase taxes to fund whatever lovely utopian scheme strikes the fancy of whoever is claiming the mantle of "world government" this week. In spite of the protestations of the proponents, it wouldn't be long before politicians succumb to the incredible temptation to favor one currency over another, by making the Tobin Tax variable based on which currency one is trading, or something equally absurd. Personally, I'm nervous enough as it is about floating currencies and central bank interventions, I don't think we need yet another way (Tobin Taxes) that would start out with wonderful intentions but end up as yet another lever for governments to manipulate currencies, making it even harder for the average world citizen to be sure what their accumulated wealth (or future hopes for same) is really worth (if anything).

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