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Dave Taggart: An Economic Occam’s Razor

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An Economic Occam’s Razor


By Dave Taggart
9 February, 2006

Taxation is, to many, the bane of modern life. According to a handful of doomsayers, including Don Brash (cited in Berry, 2006) and Alan Bollard (cited in McDonald, 2006), New Zealand is beginning to feel the effects of a possible recession. Recessions are not viewed adversely by corporations and some Right-Wing politicians as they are used as excuses “to resist labour demands” amongst other things (Parenti, 1988: 17). But, I digress. Many people feel they are over-taxed and unheard by politicians or the Reserve Bank Governor.

I recently read an informal (non-exhaustive) list of forty seven individual taxes levied by the North American Inland Revenue Service; none of which existed 100 years ago. At that time, the U.S. had an unparalleled level of prosperity, no national debt and the largest middle class in the world. Now, with the advent of at least forty seven separate taxes, the U.S. has the largest current accounts deficit ever recorded (Anon, 2006). There are few who would deny that New Zealand’s standard of living has eroded over the past twenty years and most other ‘developed’ countries share similar fates. Something is very wrong here.

By far, small businesses and wage-earners carry the biggest load in this saga. As Michael Parenti (1988: 8) observed, “While glorified as the purveyors of the entrepreneurial spirit, small businesses are really just so many squirrels dancing amongst the elephants”. The elephants are, of course, supranational corporations. In nature, squirrels, elephants and other life-forms carry parasites, and economics has its own form of parasite; the currency speculator - a breed that serves no real purpose at all. George Soros, a well-known currency speculator, exemplifies my point.

Soros “earned billions from investments and currency speculation. In 1992, he bet $10 billion that the British central bank would devalue the pound. The gamble paid off and Soros earned $650 million that year” (Kaplan, 2004). Kaplan’s description is over-simplistic.

“Soros specialised in identifying pressured governments, destabilised their currencies, forcing them to spend large sums buying up the currency, then made money when they realised they couldn't afford to continue, and allowed sudden collapses in the value of their currency... the money he forced governments (including the Irish government in January 1993) to spend damaged their ability to spend money on health care, education, and other programmes they were democratically mandated to fund.” (Ó Baoill, 2004).

In 1997-98 alone, along with South Africa and Brazil, several Asian economies were plundered by speculators (do you remember the ‘Asian Flu’?); Brazil alone ‘lost’ the equivalent of U.S. $1.2 billion in less than 24 hours.

It wasn’t until the U.S. experienced the Long Term Capital Management hedge-fund’s failed raid on its economy in September 1998 that Western bankers acknowledged that there was a problem (Khor, 1999).

The Barings Bank catastrophe is another example of the pointlessness of currency speculation. “Today, the real economy in foreign exchange transactions is down to 2.5% and 97.5% is now speculative” (Lietaer, 1997). In other words, 97.5% of all economic ‘trading’ today is money – not tangible, put-it-in-your-wallet money, but ‘electronic’ money. This form of trading has absolutely nothing to do with human labour or productivity; it is not the ‘marketplace’ of Adam Smith’s day.

When Adam Smith wrote ‘The Wealth of Nations’ in 1776, markets dealt in material products, not currency speculation. Smith wrote (op. cit; Vol 1: 144), “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”. Doubtless, he would hold the Soroses of the world in similar contempt.

I am always amazed by the hypocrisy of civic ‘leaders’ who bay for the blood of rapists, paedophiles and, Deity-of-your-choice forbid, someone who smokes a joint, while ignoring the global socio-economic damage inflicted by currency speculators.

Global economics, to most lay people, is a baffling world governed by mystical Laws known only to a few people. Many of these ‘laws’ are simply ‘articles of faith’. When Don Brash was Reserve Bank Governor, he publicly stated that economics is not so much a science as guesswork:

We are not quite certain where the economy is going now. We don’t know precisely how it works. We don’t know what [fiscal] shocks are about to hit us (cited in Evans, 2000).

As Jeremy Seabrook (1990: 188) notes:

The market has no mechanisms taking the future into account, it cannot create social justice, it is powerless to make distinctions between good and bad and it has no moral code.

And that’s the point. Economists work with a small set of variables that ignore the vagaries of climate, finite resources, irresponsible newspaper editors, and myriad other real issues.

“Build Chernobyl and the effort contributes to G.N.P. Clean up Chernobyl and the effort contributes to G.N.P. All effort is included regardless of reason or result” (Robinson, 1994: 46). The mysterious ‘economy’ is really a chimera.

Nevertheless, to currency speculators, the global economy is a gigantic casino. Currency speculation does not manufacture or contribute anything of value. It does one thing only. It siphons huge chunks of taxpayers’ money into the bank accounts of a few people. More than a trillion dollars (in numerous equivalencies) are traded daily without any real protection.

However, there is a solution to this problem. It is called the Tobin Tax. “Tobin Taxes are excise taxes on cross-border currency transactions” (Anon, n.d.).

How Tobin-style Taxes would work:
• Currency speculators trade over $1.8 trillion dollars each day across borders. The market is huge, and volatile.
• Each trade would be taxed at 0.1 to 0.25 percent of volume (about 10 to 25 cents per hundred dollars)
• This would discourage short-term currency trades, about 90 percent speculative, but leave long-term productive investments intact.
• The currency market would thus shrink in volume, helping to restore national economic autonomy. Nations again could intervene effectively to protect their own currency from devaluation and financial crisis.
• Billions in revenue, estimated at $100 - $300 billion per year, would be generated.
• Revenue could go into earmarked trust funds to fund urgent international priorities (ibid).

It is important to note that when James Tobin proposed the tax in 1972, he only applied it to currency speculation. The tax does not eradicate currency speculation per se; it is simply designed to discourage ‘overnight’ speculation, thereby reducing the volatility of exchange rates. Normal business transactions would not attract the tax.

Further, part of the estimated $300 billion yearly revenue generated by the tax could be redistributed within participating countries via, for example, tax relief without the need to cut public services. Also, given the growth of ‘creative accounting’ that permits corporations to avoid paying taxes (Ackman, 2004; Johnston, 2006), a modified Tobin Tax would recoup some of these vast sums and direct them to where they are most needed.

As Adam Smith stated (1776; Vol 2: 158); "Such exclusive companies, therefore, are nuisances in every respect: always more or less inconvenient in the countries in which they are established and destructive to those which have the misfortune to fall under their government." Smith’s “exclusive companies” are, of course, corporations. His visionary contempt of the then fledgling corporate phenomenon is never acknowledged by the neo-cons who cherry-pick his writing, but I am sure he would have endorsed the Tobin Tax.

Despite opposition to the tax from the World Bank (Stotsky, 1996) whose own management practices are less than stellar (Bodley, 1990; Galbraith, 1994; Hancock, 1989) and who defines the main aim of its loans as helping to ensure governments “sustain reforms against the opposition of those who are adversely affected” (World Bank, 1984: 40), Canada endorsed it in 1999 (Salmon, 1999).

France followed suit in 2001, as did Belgium and India in 2004 (Anon, 2004). Globally, NGO’s and more than 800 Parliamentarians (Anon 2, n.d.) are campaigning to enshrine Tobin Taxes in their countries (an internet search of “Tobin Tax” yields a wealth of information). The Tobin Tax is an elegantly simple remedy for a major, yet often unacknowledged economic problem.

Who remembers the NZ Labour Party’s ‘Third Way’ campaign slogan of 1999? The ‘Third Way’ promised a society that promoted social justice (a hallmark of real democracy) over constant ‘growth’ at any cost. Anthony Giddens, who has been called Tony Blair’s favourite guru, wrote a book entitled ‘The Third Way’, in part advocating a global Tobin Tax (1998: 150-51).

He noted that the main barrier to implementing the tax is “a lack of political will” (ibid). I urge everyone to research it further, then, if you want fairer taxation and ‘market’ stability, lobby your government representative to institute it as soon as is practicable. Remember, currency speculators prey on public money, not private. Our so-called leaders may not have the will, but democracies are meant to empower the electorate; use your power to ease your own tax burden.

N.B: the impetus for the above article came from Muriel Newman, ex- Association of Consumers and Taxpayers(ACT) MP, who asked me to write an opinion-piece last week, expanding on a comment I made regarding an internet article she recently published (Newman, 2006). Ms. Newman wanted me to explain to her readership why I thought the Tobin Tax was worthwhile as she was sure that many of them would never have heard of it. An earlier, much-abridged version of the above article can be found on her web site at: http://www.nzcpd.com/soapbox.htm#DT

References.

Ackman, D. (2004). ‘U.S. corporations paying less in taxes’. http://msnbc.msn.com/id/6080561/

Anon 1. (n.d). ‘Tobin taxes; how to tame hot money and fund urgent global Priorities’. http://www.ceedweb.org/iirp/factsheet.htm

Anon, 2. (n.d). ‘World Parliamentarians call for Tobin Tax. http://tobintaxcall.free.fr/list.htm

Anon. (2004). ‘Currency Transaction Tax’. http://ozattac.conforums.com/index.cgi?board=Tobin

Anon. (2006). ‘Tax Talk Goes Orwellian’. http://www.nytimes.com/2006/02/04/opinion/04sat2.html?_r=1&th&emc=th&oref=slogin

Berry, R. (2006). ‘Brash talks doom and gloom’.http://www.nzherald.co.nz/section/story.cfm?c_id=1&ObjectID=10366263

Bodley, J. (1990). Victims of Progress. Calif: Mayfield.

Evans, K. (2000.). ‘Rich Land, Poor Land’; Assignment. (18/5/00). Wellington: TV One.

Galbraith, J.K. (1994). The World Economy Since the Wars. London: Sinclair- Stevenson.

Giddens, A. (1998). The Third Way: The renewal of social democracy. Cambridge: Polity Press.

Hancock, G. (1989). The Lords of Poverty. London: MacMillan.

Johnston, D.C. (2006). ‘Corporate Wealth Share Rises for Top Income Americans’. http://www.nytimes.com/2006/01/29/national/29rich.html?_r=1&oref=slogin

Kaplan, J. (2004). ‘Soros Blasts Hastert Over 'Drug Money' Allegation’. http://www.alternet.org/drugreporter/19796/

Khor, M. (1999). ‘Currency Speculators: Bad Men in a Big, Bad World?’ http://www.globalpolicy.org/socecon/glotax/currtax/0323badworld.htm

Lietaer, B. (1997). ‘Global currency speculation and its implications’. http://www.twnside.org.sg/title/nar-cn.htm

McDonald, F. (2006). ‘Is it just me, or is Bollard running up a sanity deficit’. http://www.stuff.co.nz/stuff/sundaystartimes/0,2106,3554880a6619,00.html

Newman, M. (2006). ‘Letter to the Prime Minister’. http://www.murielnewman.co.nz/weekly16.htm

Ó Baoill, A. (2004). ‘Soros and currency speculation’. http://funferal.org/mt-archive/000652.html

Parenti, M. (1988). Democracy for the Few. New York: St Martin’s Press (5th ed).

Robinson, J. (1994). Rebuilding New Zealand. Martinborough: Technology Monitoring Associates.

Salmon, B. (1999). ‘Tobin tax motion passes in Canada’s Parliament’. http://www.ceedweb.org/iirp/canadames.htm

Seabrook, J. (1990). The Myth of the Market. Devon: Green Books.

Smith, A. (1776). The Wealth of Nations (2 Vols). Oxford: Oxford University Press.

Stotsky, J (1996). ‘Why a Two-Tier Tobin Tax Won't Work’. http://www.worldbank.org/fandd/english/0696/articles/050696.htm

World Bank. (1984). Toward Sustained Development in Sub-Saharan Africa. Washington: World Bank.

*************

Dave Taggart is a Social Anthropologist currently living in Napier, New Zealand.

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