The "Tobin tax" - a business viewpoint
Corporate Economists Advisory Group, 14 December 2001

French version

Introduction
Since originally raised in 1974 by Professor James Tobin, Nobel Memorial Prize winner in economics, the question of taxing international transactions in different currencies has over the years been proposed in various versions and for a number of different reasons. While ICC considers that greater stability of financial markets is desirable, it also believes that a "Tobin tax" would be harmful to international trade, economic growth and welfare, and businesses throughout the world. The smallest nations would be most hurt. The tax would not prove feasible in practice since it would require uniform implementation throughout the world, and would need to encompass not only spot transactions but also substitutes and supplements such as currency swaps, forwards and futures in order to limit evasion.

Tobin's original idea
Tobin's original idea was to introduce an internationally uniform tax on all spot conversions of one currency into another, proportional to the size of the transaction. The impact of such a tax would obviously punish short-term trading more seriously than longer-term trading. A major concern was to make currency exchange rates reflect to a larger degree long-run fundamentals relative to short-range expectations and risks, and thus reduce volatility. A second objective was to preserve and promote the autonomy of national macroeconomic and monetary policies. To raise revenues for international purposes was never a main motivation of Professor Tobin, but is a major purpose of many of the present supporters of such a tax.

Transactions are necessary to cover currency risks
An estimated 1,500 billion US dollars are traded each day on the world's foreign exchange markets. Most transactions are for less than one week - most within a day - and the interbank share is approximately 70-80 per cent of the total. To a large extent, the high volume of the transactions reflects genuine needs to cover currency risks and spread the risks among different participants in the exchange market, in much the same ways that insurance risks are distributed on the international reinsurance market. Certainly, a single trade transaction may easily result in ten currency transactions because the currency risk is passed around among currency dealers like a hot potato. In most countries there are strict regulations regarding how much uncovered currency exposure banks may accept.

Harmful effects
A consequence of a Tobin tax would be to reduce short-term trading. But there would be no guarantee that exchange rate volatility would diminish because liquidity would also diminish. Indeed, minor currencies might become more volatile and vulnerable to manipulative speculative attacks. Reduced liquidity would also make stabilizing long-term arbitrage more risky. Thus, customers' transaction costs would increase more than the tax levied. As with stock and security markets, some degree of short term trading - or speculation - is desirable on most currency markets to increase liquidity.

Transactions between minor currencies would be particularly hurt because there are no cross rates between many of them. Hence, it is necessary to use a major currency - for instance the US dollar (which is part of 80 to 90 per cent of all currency transactions) - as an intermediary currency. This implies two transactions or more (if an additional intermediary currency is required). Consequently, the tax might be doubled or tripled for conversions between many minor currencies. Because of the costs involved, pension funds and other portfolio managers would increase their home bias. Less capital would be available for international capital markets in general, and for investments in minor currencies in particular.

At a reasonable rate, say 0.05 per cent, the increased domestic autonomy the tax would provide in setting interest rates would be negligible. And to the extent it did work, there might be a loss of discipline on economic policy stemming from abroad.

A Tobin tax would not prevent speculative attacks on a currency where the expected gain might be high -- not unusually 10 per cent or more over a week. Furthermore, a tax could neither rectify nor repair unsustainable economic policy, which more often than not is the main reason why a currency comes under attack.

An impracticable tax
A Tobin tax would prove impracticable since it would require worldwide coverage, or at least coverage encompassing the G 10 countries, supplemented by a penalty on transactions to tax havens. Unilateral implementation would move currency trading offshore. Not only spot transactions, but also derivatives like currency swaps, forwards and futures would need to be taxed, since they are substitutes for and supplements to spot transactions.

ICC notes that Professor Tobin today is no longer a proponent of the tax that bears his name -- inter alia, because the currency regime is now very different from the time when he originally proposed the tax and because he supports free trade as an instrument for raising welfare throughout the world.

Conclusion
In conclusion, ICC is firmly of the view that it would not be feasible to implement a Tobin tax. And even if it were feasible, such a tax would neither significantly prevent speculative attacks on currencies nor increase national economic autonomy. The tax would throw sand in the wheels of international trade and investment and would harm the prospects for raising global economic growth and the welfare of all peoples.

About ICC
ICC is the world business organization, the only representative body that speaks with authority on behalf of enterprises from all sectors in every part of the world. ICC promotes an open international trade and investment system and the market economy. Business leaders and experts drawn from the ICC membership establish the business stance on broad issues of trade and investment policy as well as on vital technical and sectoral subjects. ICC was founded in 1919 and today it groups thousands of member companies and associations from over 130 countries.

Document 105 / 41 final
14 December 2001