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Column: International Studies Of Transaction Tax

Late this week treasurer, Bill English and Act's Rodney Hide came out swinging against the Alliance proposal for a financial transaction tax to replace GST, calling it "a loopy and failed idea." But the international community is presently studying just such a tax on a global scale . John Howard reports.

Many policymakers, scholars, government agencies and international organisations have favoured global taxes in recent years, as people have come to understand the growing need for global policy initiatives to solve global problems.

More and more, citizen groups are calling for this tax-based approach, even though the US government has blocked intergovernmental discussions and negotiations. The United Nations, however, is taking it seriously.

Most interest in global taxes has concentrated on two policy goals - taxation as a means to regulate carbon emissions (carbon tax) and taxation to reduce currency speculation (Tobin tax).

There is good evidence that currency speculators caused the Asian financial meltdown which sent the world into a financial tail-spin and it could happen again.

Indeed, Canadian MP's from all parties supported a tax on financial speculation and passed a Tobin Tax motion M-239 in their Parliament on 23 March.

The so-called Tobin tax is based on an idea of the Nobel prize winner for economics, James Tobin, dating back to 1978.

During the Asian crisis there were increased calls again for restrictions on the movement of capital, especially short term capital. Such demands have often been made in the past after a serious currency and financial crisis and have a long tradition in economics.

In recent years, they have played an increasingly important role since the volume of short-term international liquidity has risen significantly both in absolute terms and compared to the flow of international goods.

Global currency trade amounts to approximately $US 1.3 trillion each day. By comparison the combined US stock market trades a "tiny" $10 billion.

Of this daily $1.3 trillion, cross border purchases of goods and services which require foreign exchange accounts for only 2% of the total trading.

Another $50 trillion of foreign exchange trading takes place in futures, options, and derivatives to hedge against future exchange rate fluctuations. Exchange rate speculation - short or long term profit-seeking transactions - accounts for the remaining, at least 80%.

These speculative movements, which can take place rapidly and unpredictably, threaten to empty central banks' currency reserves.

James Tobin, David Felix and others have examined the possibility of levying a charge on international monetary transactions as a means to reduce exchange rate volatility and promote international economic stability.

In addition, considering that annual currency trading is 10 times the global GNP, the revenue generating potential of a financial transaction tax is tremendous. A modest 0.5% would generate over $1.5 trillion per year for peace, humanitarian work and sustainable development initiatives. The total UN budget is about $10 billion.

A positive effect of the Tobin tax would be that it would ease the pressure on the currencies of the emerging markets arising from speculative capital flows.

The financial transactions tax concept does have negatives as well. But unless we improve the credibility and predictability of economic policies, monetary transparency and the efficiency of the banking and financial sector such a financial transactions tax looks like becoming more publicly acceptable.

The currency speculators won't like it at all but surely, as a small and still developing nation, we must treat any idea seriously before dismissing it out of hand.

It may work, it may not, but we need to know more.


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