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| UN Photo/Marco Dormino |
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The Currency Transaction Levy is increasingly recognised as one of the most feasible and just ways to help bridge the massive funding gap required to pay for the Millennium Development Goals. A tiny levy of 0.005% on the 4 most traded currencies has the potential to raise US$30 billion in revenue without damaging the market. The modern movement for a CTL for development has its roots in the work of Nobel Laureate James Tobin, and below is a brief history of the proposal's evolution.
The Tobin Tax, as it came to be known, was first proposed by James Tobin in 1973 as a 1% charge on all foreign exchange (FX) transactions to ensure currency trading was linked to cross-border trade in goods and services.
His aim was to ‘throw sand in the wheels’ of the global FX market by disproportionately taxing short-term, high turnover currency trading. He argued that this would reduce speculation and lower market volatility, raising hopes that a Tobin Tax could mitigate the increasingly frequent and hugely damaging currency crises.
Renewed interest in the idea followed the South East Asian crisis at the end of the 1990s. At that time Paul Bernd Spahn’s research refined the proposal into a ‘two-tier’ tax. Under normal market conditions, a minimal (perhaps zero) ‘transaction charge’ would apply to all currency transactions. However, this charge would increase as the exchange rate moved further outside a predetermined range. In these circumstances, an increasingly higher rate of tax would act as a severe disincentive to currency speculators. In effect, the Spahn proposal would short-circuit speculative attacks.
The third, and most modern form of the CTL, however, is quite explicit in its objective to raise revenue in a predictable and stable manner. This approach is embodied in the work of Rodney Schmidt (2001), where a tiny levy of 0.005% would be applied to every transaction of a given currency. The rate is too small to significantly alter market behaviour yet it has the potential to raise in excess of US$30 billion a year if applied to the world’s 4 most traded currencies. Schmidt has demonstrated that, contrary to critic’s assertions, it is entirely possible for countries to unilaterally impose a levy on their own currency’s transactions.
10 years ago technical limitations may have hindered its implementation. Three key advancements means this is no longer the case. Firstly, the introduction of Real Time Gross Settlement (RTGS) eliminates settlement risk by ensuring the act of buying and selling takes place simultaneously, in ‘real time’. Secondly, the Continuous Linked Settlement (CLS) Bank was launched in 2004 in order to centralise the location of wholesale foreign exchange transactions. Thirdly, transactions now universally use SWIFT as their messaging system. This has stabilised, centralised and standardised trading allowing a CTL to be applied automatically every time a trade takes place, making collection inexpensive and unavoidable.
These technical advancements combined with the fact that countries can implement the levy unilaterally and do not require global agreement have definitively answered any historic uncertainty over the proposal’s feasibility. It is now a question of political will.
For a more in-depth exposition of the proposal and its history, see ‘A Sterling Solution’ - a report written by leading City think-tank Intelligence Capital, and ‘The Currency Transaction Tax’ - a report written by Professor Rodney Schmidt of the North-South Institute.
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