Financial markets tax could aid world’s poor

The Tobin Tax has long been advocated as one possible solution to aid the problems of capitalism. But there would be other and more effective ways, if only the institutions wanted to solve problems effectively. Do they?

Financial markets tax could aid world’s poor

By Harvey Morris at the United Nations

Published: April 16 2008 22:23 | Last updated: April 16 2008 22:23

A tax of one-hundredth of a percentage point on global financial transactions could provide hundreds of billions of dollars for developing countries facing the challenges of soaring commodity prices and climate change, the United Nations heard this week.

The food price crisis that has sparked unrest in some of the world’s poorest countries also spurred mainstream interest in the concept of micro-contributions from the financial markets when UN officials and experts from the World Bank and IMF gathered for a special session in New York.

Philippe Douste-Blazy, the former French foreign minister appointed by the UN to find new ways in which private business can help support development, said he would work with proponents of a tax on all securities and derivatives trades to find a solution that would not upset the balance in world markets.

The latest proposal was put to the session on Monday by Stephan Schulmeister of Austria’s Institute of Economic Research and a former Austrian government adviser who said a global micro-tax would raise around $230bn a year that could be made available to meet development goals threatened by soaring commodity prices.

Ban Ki-moon, UN secretary-general, this week echoed a warning from the World Bank that an escalating global food crisis had reached emergency proportions and threatened to wipe out seven years of progress in the fight against poverty.

Outlining his institute’s micro-tax plan, Mr Schulmeister said: “Given the enormous trading volumes in financial markets, the revenues of an FTT [financial transaction tax] would be substantial even at very low tax rates. These revenues could be used to finance development aid and other supranational projects or institutions.”

The concept of a tax on financial transactions was advanced more than 70 years ago by John Maynard Keynes to curb speculation in stock markets. In the 1970s, similar ideas were put forward by James Tobin, American Nobel-prizewinning economist, to cool speculation in currencies.

More recently support for “Tobin taxes” has come from international aid charities and has also been associated with an anti-globalisation movement determined to make the markets pay for the perceived damage the opening of world financial markets has done to the world’s poor.

However, with the world’s richest countries falling behind on pledges to eradicate poverty in the developing world, the idea of transactional taxes has re-entered the mainstream and gained support from parliamentarians in Europe, Latin America and Canada.

“The instability of financial markets together with their global interdependence . . . have reignited the debate over the pros and cons of a currency transaction tax,” Mr Schulmeister said. He said such proposals had received support in the Belgian, French and Austrian parliaments.

His proposal went further, to embrace securities and derivatives markets. He said this had the added advantage of increasing the tax base and making the proposed tax rate correspondingly low.

The proposal would principally affect very short-term trades that contributed to the volatility of the markets. “A general FTT would render transactions the more costly the shorter is their time horizon. Hence, it would dampen technical trading, which is increasingly based on intraday price data,” Mr Schulmeister said.

Mr Douste-Blazy, appointed this year as UN special adviser on innovative financing for development, said he had shared the scepticism of economists, bankers and traders who believed such a tax was unworkable and would destabilise markets. “If some do it and some don’t, there could be an effect on the market economy.”

However, he said technical innovation made the idea more feasible and made it worth considering moving towards a global accord on micro-contributions. He said the Austrian proposal had shown that a general tax would not have a negative impact on international markets.

“Others are also working on these micro-contributions and I will work with them very soon on behalf of the UN secretary-general . . . on the most painless solutions so that there is no market warping,” he said.



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