Speculative tendencies in international currency transactions, which have a devastating effect on local economies, have to be curbed. International bodies and political outfits have to arrive at a consensus so as to ensure that genuine transactions remain unaffected and speculative transactions ate taxed so as to remove volatility in the currency market. The Tobin Tax mechanism described in this article, for curbing currency speculation, has the object of volume-shrinking goal and the proceeds from it can be fruitfully employed in tackling social problems of the world.
Introduction:
World is gradually turning into a casino, as speculative transactions have grown over the years. Currency exchange across borders, which was seventy billion four decades ago has surged to reach more than trillions of dollars today. It is going to be more voluminous as we go into the future. Although a portion of such exchange may relate to exchange of real goods, most transactions are driven by an unhealthy craze to earn windfall-profits. Not only is it going to have devastating effects on national currencies but is likely to have catastrophic effects in a globalized economy. Its impact on the stock market and creating crisis situations across economies cannot be empherically demonstrated within the space of this article.
Currency valuation under Bretton Woods:
It is worthwhile here to remember that under the Bretton Woods System (1944) each country was obligated to adopt a monetary policy, which would maintain the exchange rate within a narrow band in terms of gold value with IMF to monitor temporary imbalances of payments. However, in 1971 the United States unilaterally terminated convertibility of dollar to gold and the dollar became sole backer of currencies. The Bretton Woods System had to necessarily collapse as dollar became the reserve currency for member states.
Unregulated Currency Movements and its effects:
Unregulated currency movements have the effect of creating an economic turmoil between or across economies. We have seen the effects of currency movements in economies like Mexico, Brazil, Russia and Southeast Asia. The subsequent devastating effects had taken its toll on the economies by way of super-inflation, fall in share market values, devaluation of assets, etc., creating a panic and loss of confidence among the citizens. To bring back the economy to normalcy, countries had to dole out hefty concessions, at the cost of human welfare of its citizens, to attract capital. Having unleashed this tendency in the global economy, it is high time that efforts are made to temper this attitude to avoid spikes and busts by understanding the cause and effect of voluminous transactions across borders.
Concept of Tobin Tax and its Present Status:
Non-governmental organizations and Civil Societies across the globe are working continuously to ensure multi-lateral co-operation to arrest such tendencies in the world economy. It is believed that unregulated capital moving across economies destabilizes culture and democratic approaches and therefore requires a mechanism whereby evil effects of unregulated circulation are arrested. One such effort in this direction is to levy Tobin Tax, which has been named after James Tobin, who won a Nobel Prize in 1978. He proposed that all transactions in the currency market should be levied a lower rate of tax, as low as 0.05% of the currency transactions, called the Tobin Tax so as to discourage speculation. He went on to add that such availability of funds, which could be in the order of 100 billion dollars per year, may be utilized for currency stabilization, economic development, emergency relief and other national and international disasters or crisis. It can be inferred from the current currency transactions prevailing in the economy, more revenue collections can be made on this account.
Many countries, parliamentarians and legislators have pledged for implementation of such a tax through bilateral and multi-lateral negotiations at national and international levels. The appeals and efforts to move towards this reformation have been encouraging across different countries, although the effort in reaching consensus in implementing the same is really very slow.
Efforts of San Francisco Regional Advisory Committee:
The initiative list of principles named as ‘Multinational Co-operation to Tax Currency Speculators’ was adopted by the San Francisco Regional Advisory Committee in June 1998. The said initiative lists eleven issues sensitizing the need for taming currency speculations through the method of taxing such transactions. The following is the list of such issues emerging from the Tobin Tax initiative principles -
The speculative tendencies in currency transactions may at some point of time result in flight of currency, thereby resulting in the devaluation of the local economic currency. This results in the lowering of purchasing power of citizens having its effect on basic items like food, environment, jobs, etc. This crisis in the economy widens the gap between the rich and the poor and thereby creates a strain on the global economic environment.
The exchange transactions happen to the extent of more than trillions of dollars daily and it is so volatile that Governments and Central Banks can do nothing to adequately protect their own currency.
Even if efforts are made to combat destructive tendencies in the markets, they have the effect of increasing the level of suffering for the have-nots.
Although the reforms have to be brought in from several initiatives, but one of the mechanisms of reducing the volatility in capital flows is to introduce transaction tax on currency movements. This would thus deter short-term speculation tendencies in the international money market. Not only would this bring down the volume of transactions, but would generate revenue for international crises management.
The levy of transaction tax, like the Tobin Tax, should be such that speculation becomes unprofitable but would not scare away genuine transactions.
Major currency nations should adopt Tobin Tax mechanism so as to achieve volume-shrinking goal. This would pave the way for universal application of the same.
Concerns regarding tax avoidance could be dealt with through the adoption of regulatory mechanisms.
Since there is going to be a substantial amount collected through this mechanism, base line criteria for allocation should be established. For ex: practices can be laid down for utilization of such resources towards basic human needs and basic environmental needs.
The revenue collected should be set aside in Trust Funds which are managed and administrated in a democratic fashion.
The administration should work within a well-established frame work for taking care of basic human needs and livelihood, environmentally sustainable projects, etc.
Political will and grass roots’ support is essential to the successful adoption of reform process.
The theory propounded by James Tobin has been refined to include that Tobin-like taxes can be enacted by national legislations, but will require bilateral or multi-lateral co-operation for the effective enforcement. If this becomes a reality across the world, the funds generated could be used for executing useful projects, as today’s globalised economy does not have an institutional mechanism for funding such projects.
Tobin Tax to Tackle Problems of the World:
Problems such as poverty and hunger, population growth and unemployment, global climate change, deforestation, decline in fisheries, global warming and pollution threaten local communities. The local communities themselves may not have contributed to such adverse situations but it could be the contribution of actions elsewhere. Hence, in order to provide for and combat such situations, global institutions by collecting common revenue like the Tobin Tax could effectively work towards worthy projects to reduce human sufferings. All said and done, it is this important aspect that is going to save this world from depletion and exploitation of constrained resources. In addition to what is contributed by private donors, which is insufficient to meet the current demand, Tobin Tax can significantly contribute in funding projects that will arrest negative approaches in the world economy. Probably this can be everlasting solution and an innovative measure in tackling the present and prospective problems of the world.
Innovative Tax Proposals:
Several innovative tax proposals have been made for Tobin Tax implementation. These include:
Carbon/Green Taxes
International Fees – includes airline flight tax and global common fees
Peace Dividend
Informal Economies and Local Barter
Security Insurance Premium
Debt Restructuring
Carbon/Green Taxes:
Carbon taxes or Green taxes are taxes levied on industry whose economic activity impacts environment on a large scale. The taxes so collected would be providing incentives for such companies who utilize renewable resources and control pollution.
International Fees:
This represents fees for services in areas which is common to all in the global arena. This is often referred to as ‘Global Commons’. It represents shared global areas of the world such as open seas, shared treaty areas and the like. It also includes fees for international postal services, global security, international airline flights and other services which commonly benefits citizens across national borders.
Peace Dividend:
Countries are incurring expenditures which have the effect of preventing wars or maintaining peace. The expenditure called as peaceful expenditure has largely remained expenditures of some nations. While the revenues and the benefit has shifted to other areas. In order to balance this, a proposal has been made to recoup peace dividend/peace conversion from nations which have derived such benefits so that it can be used for the benefit of the globe as a whole
Informal Economy and Local Barter:
There are a large number of informal mechanisms in the economy which do not get reflected in GDP/GDW of many national economies. These include such items as barter, informal trade, sharing and gifting, unpaid women at home, food banks, shelter etc. Such transactions or events need to expose themselves to tax so as to contribute to the international corpus for the several good of human mankind.
Security Insurance Premium:
The idea under this innovative revenue collection, is to collect premiums from nations that would go to pay into budgets for international security. This would pay for peace keeping, Interpol, etc.
Debt Restructuring:
It is expected under this concept that public and private lending institutions will restructure loans to underdeveloped nations. However, this may not be adequate and this may still affect the poorer sections in the economy in terms of health, education, disaster services, etc. It may therefore require outright debt forgiveness.
Policies for Establishing Tobin Tax System:
The introduction and establishment of Tobin tax system will include the following policy areas:
a Adoption of taxes
b Collection and Enforcement
c Expenditure Policy
d Implementing global priority projects
There is enough literature in the informal world, which has been debated and discussed as policy proposals for Tobin Tax implementation. The multilateral organizations can discuss and debate on such issues before coming to conclusions or formulating final policies. However, we have seen that efforts in coming to a consensus is either breaking down or is not reaching logical conclusions due to vested political interest. Any of the philosophies or innovative events that we conceive will conclude into results only if there are continuous discussions and there is an inherent desire and a need in the international forum towards such a design. It is in the interest of the humanity as a whole that negative forces in the environment have to be thwarted and therefore this requires responsible discussions and political will to look into issues with human concerns and sustainable livelihood situations for not only human beings but all living creatures on this earth.
Projects for Saving and Sustaining the Earth from a Crisis:
A large number of projects have been mooted in order to save this world from a major disaster. Some of the broad projects that have been conceived while discussing issues on saving this earth from any crisis include:
Poverty Eradication Projects
Environmental Restoration Projects
Conservation and Preservation Projects
Disaster Aid Projects
Disease Prevention and Humanitarian Aid Projects
Peacekeeping Missions and Projects
It is interesting to note that several responsible institutions have been identified to conceive and take up programs in order to meet the broad objectives of model projects cited above. It is important that such issues should be discussed more often that creates an environment of mutual trust and belonging. This will go a long way in establishing world-peace and sustainable environmental projects and approaches so as to prevent disaster to human habitation and other lives on this earth.