Tobin Tax and International Development

It worries me that people who are interested in reducing world poverty leap so readily on the Tobin Tax bandwagon.

There are three questions to answer:

  • should we spend more on reducing global poverty?
    (my answer: yes, if we have to)
  • should we tax transactions in financial markets?
    (my answer: maybe, though I am not persuaded)
  • should we link aid budgets to revenues from such a tax?
    (my answer: definitely not)

My answers are explained below the fold.

I can see why some people are attracted by a combination of extra money for the world’s poor and a poke in the eye for the unacceptable face of capitalism.  But to support the Tobin Tax on these grounds is at best opportunism, and at worst reveals a hostility to the functioning of markets which will, in the end, not serve the poor.


a. Should we spend more on reducing global poverty?

Regular readers of this blog will know that I believe that aid works, though not as well as it should.  I believe we have obligations to our fellow human beings around the world, and that we have it within our power to alleviate suffering and promote shared prosperity.  Aid is not the measure of our common humanity, but it may be the cost of it.   I would much rather promote the well-being of the world’s poor through more open trade policies, open immigration policies, changes to intellectual property rules, reductions in environmental damage and changes to our policies on peace and security.  But (a) we aren’t in fact doing any of those things; and (b) we should be giving aid at the same time, especially as it is a natural complement – e.g. to more open markets.   We should spend what it takes to eliminate global poverty – it is easily affordable – and if we can do it with less aid, all well and good.  So yes, let’s spend more on aid, but let’s remember this is a means to an end, not an end in itself.

b. Should we tax financial transactions?

Adair Turner apparently believes that there are financial activities which are “a socially useless activity” and which should therefore be discouraged by taxation. However, the test for imposing a tax on an economic activity should not be whether it is socially useful, but whether it imposes costs on the rest of us.   Presumably somebody wants the financial transactions in question, which is why they are willing to pay for them.  If we want to impose a tax on them to discourage them, we have to explain what harm that does the rest of us.   (Readers may be able to think of other activities undertaken by consenting adults that have no wider social benefit, but also do no social harm: should we tax all these too?)

Tobin believed that a tax on transactions might increase financial stability.  That is the makings of a case for taxation, because financial stability is a public good.  (Tobin explicitly distanced himself from the anti-globalisation supporters of his tax.)  But it is not obvious that a Tobin Tax would increase stability.  Are markets with fewer, larger transactions likely to be more stable than markets with more market players, and more frequent, smaller transactions?

In the end, this is an empirical question. If it really is true that markets with higher transaction costs are more stable than markets with lower transaction costs, then a Tobin Tax looks attractive. If not, not.

c. should we link aid to revenues from a tax on financial markets?

This is where I part company most sharply from those who think that it would be a good idea to use a Tobin Tax to finance international development.

My reservations are part theoretical, part practical.

The theoretical objection is this.  Good public policy demands that governments spend the taxpayers’ money in the most effective ways to increase the sum of human happiness; and that they raise the money in ways which are either beneficial (e.g. by taxing bad things such as pollution) or at worst, in ways that do least harm.   These should be separate decisions: linking a particular form of revenue to a particular form of spending unnecessarily constrains those choices.   We should evaluate the case for aid spending on its merits; and we should evaluate the case for a tax on financial transactions on its merits.   If we link one to the other, we may find ourselves pushed into less effective forms of spending, or less effective forms of tax.

And here is the practical objection.  It has been clear from the current financial crisis that we need aid to be counter-cyclical – that is, we need more of it in a downturn; whereas in fact it is proving to be cyclical – that is, industrialised countries find it convenient to cut back on aid when things are tough.  Turnover in financial markets is pro-cyclical. That means that if a tax on turnover is a primary source of aid finance, aid will become more cyclical, which is the opposite of what we need.

Conclusion

We concede too much ground when we advocate a Tobin Tax to pay for international development.   We have profound obligations to help our fellow human beings, and we can do so at little cost to ourselves.  Our obligation is to see to it that people have the  food, water and shelter they need, access to security, health care and education and to a decent quality of life.    If this costs more money than we are spending, so be it.  The sums are small.  If we can achieve these things with less aid, or no aid at all, all well and good.   This is solid ground which we should defend.  When we argue that the money should come from a Tobin Tax, or an airline duty, we implicitly move the debate to measuring our solidarity by the amount of aid we give, rather than what we seek to achieve, and implicitly concede that aid at the levels required to achieve these simple things cannot be afforded without additional taxation.

7 thoughts on “Tobin Tax and International Development”

  1. Good point about the pro-cyclical / counter-cyclical dimension.

    I guess the same would also apply to the idea of an international carbon tax that Joe Stiglitz proposed in his commission of experts on international monetary and financial reform (http://www.un.org/ga/president/63/interactive/financialcrisis/PreliminaryReport210509.pdf), given the extent to which energy consumption is also cyclical.

    Using cap and trade, on the other hand – either through a full global emissions budget with equal per capita allocations, or through the more modest idea of withholding a proportion of developed countries’ Assigned Amounts and using it to fund development or adaptation (as the Norwegians propose) – wouldn’t be susceptible to this problem to the same degree, though I guess developed countries’ need to purchase emission permits to meet their targets would diminish in recessions.

  2. I suspect that one’s attitude to the Tobin tax proposal depends to some extent on one’s politics and political prejudices. I understand all your arguments and reservations, all of which have much force. But it seems to me that reducing the velocity and volume of foreign exchange transactions, especially short-term speculative ones, *would* be beneficial, and that the microscopic rate of tax proposed would help to achieve it. When speculation against a country’s currency can come close to wrecking its economy, some kind of disincentive is surely desirable. I’m also impressed by the Turner argument that the UK’s financial sector has grown too large and fat for its own good or ours, that its gigantic profits (reflected in gigantic dividends and bonuses) are to some extent at the expense of the more productive areas of the economy, that the huge inequality that it has helped to create has all sorts of damaging consequences for society, and that taxing it more heavily is an obvious way to tackle some of these ills: a Tobin tax being just one way of doing that. It might be possible to exempt from the tax long-term investment transactions: wasn’t that a part of the original proposal?
    As to the proposed hypothecation of the proceeds of the Tobin tax for development aid to poor countries, or poor people in whatever countries, of course hypothecation is generally undesirable and may distort otherwise rational spending allocation decisions. But this is not just one more ordinary tax to which that objection necessarily applies. To be effective, it would have to be an international tax, internationally managed and enforced. The proceeds from it would accrue in the first place to whichever body was responsible for administering it (the IMF?). It would be virtually or totally impossible to divide up the Tobin revenue among governments in proportion to the place of origin of the tax collected: the financial world is surely too comprehensively globalised for that to be feasible. Far better, surely, to devote it by international agreement to purposes on which everyone can agree: either for combating climate change (which would prompt interminable argument about which specific environmental measures should be chosen for funding), or for international poverty reduction (on which much money is already being spent on an international, i.e. multilateral, basis and where there already exists fairly broad agreement on priorities and techniques). It could be administered, for example, by a reformed World Bank managed by a Board on which developing country governments would be equitably represented.
    But the clincher, surely, is that if Tobin revenues are not to be collected for any defined purpose other than to be added to the Consolidated Funds of national governments, with the lion’s share by definition going to the richest countries, it will be impossible to create the national and international will to introduce the tax, especially against the strenuous opposition of the world’s powerful financiers. Devoting the proceeds of the tax to international development and poverty reduction is probably a necessary condition of eventual success in the mammoth task of securing international agreement to the tax in the first place. (Even then I doubt very much whether it has a serious chance of acceptance, e.g. by the US Congress. But it’s surely worth a try?)
    Brian

  3. Worth noting that the tax was designed to be set low, the purpose being to discourage speculative currency trading, which typically is based on small margins on a lot of money, while not discouraging trade related currency exchange, which presumably has higher margins.

    One thing that strikes me as mistaken regarding potential revenue streams is that if the tax worked there wouldn’t necessarily be huge revenue streams, as speculative currency trading would be much diminished.

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