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1) What is Stamp Out Poverty and what has it been working to achieve?
Stamp Out Poverty is a network made up of more than 40 UK charities, trade unions and faith groups that has been working on measures to fill the financing gap required to pay for the Millennium Development Goals and is increasingly concerned with how the substantial costs of climate change are going to be met.
Stamp Out Poverty has favoured the use of nationally-collected, internationally disbursed solidarity levies, for use towards a commonly agreed Global Public Good , such as treatments for major diseases, improving education or provision of clean water.
Stamp Out Poverty is credited with opening up political space around these new innovative sources of development finance.
Its flagship campaign is for a Currency Transaction Levy (CTL). It has led the way in demonstrating the technical feasibility of the proposal when applied at a very low rate for the purpose of raising additional revenue for the alleviation of poverty.
Some recent landmarks include:
February 2006:Establishment of The Leading Group of countries working on Innovative Sources of Development Finance
September 2006: Under the auspices of the Leading Group, UNITAID was launched which is principally financed through the use of a solidarity fund, pooling aviation levies from various countries. UNITAID, which has to date raised more than US$1 billion towards HIV/AIDS, TB and malaria treatments, is widely recognised as a ‘pilot’ initiative proving the viability of the ‘solidarity levies approach’, and therefore a stepping stone to the eventual implementation of a Currency Transaction Levy.
May 2009: France announces its intention to lead a group of countries in exploring implementation of a CTL.
August 2009: Financial Crisis leads to growing sentiment that banks must be made to give something back to society. Lord Turner, Chairman of the Financial Services Authority, supports 'Tobin Tax'.
November 2009: Major UK policy shift as government backs introduction of a Financial Transaction Tax.
2) What is the Currency Transaction Levy (CTL)? How much could it raise?
The CTL is a levy on foreign exchange transactions. The rate at which it is levied determines different outcomes. If set at the rate of a microtax (ie as low as 0.005%), it would skim the market, raising sizeable ongoing revenue without significantly impacting on the volume of transactions.
A staggering US$800,000 billion worth of currencies are traded each year in the global foreign exchange market. This is fifty times greater than the total value of all goods and services traded throughout the world each year.
A co-ordinated transaction levy applied to the four major world currencies – dollar, euro, yen and sterling – would yield revenue of more than US$30 billion annually.
Given the current financial crisis, more than ever it can be argued for the CTL to be introduced and levied at a higher rate in order to combat purely speculative activity. This would reduce the volume of the FX market, favouring transactions based on the real economy of goods and services and eliminating trades recently described by Lord Turner, Chairman of the Financial Services Authority, as 'socially useless'.
3) Does a CTL require international consensus? What would it look like in the UK?
A crucial distinction is that a country can unilaterally apply a transaction levy to their currency, meaning it does not require global or regional consensus. This levy would then apply to all transactions of that currency worldwide, and not the transactions of all currencies in that particular country.
In the UK context, a CTL on sterling currency transactions could be implemented through the introduction of a 'Sterling Stamp Duty' applied to all currency transactions involving Sterling, wherever in the world they took place. At a rate of 0.005% it would raise in the region of US$5 billion a year.
This is a major source of untapped revenue which could be used to boost development spending or contribute to the escalating costs of climate change.
4)Is a Currency Transaction Levy technically feasible? How would it be implemented? Could it be evaded?
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. It is therefore possible to identify and tax gross foreign exchange payments, whichever financial instrument is used to define the trade, wherever the parties to the trade are located and wherever the ensuing payments are made.
In other words: collection is inexpensive and there would be little scope for traders to avoid it. Indeed, the cost of avoiding a levy of 0.005% would be more expensive than the cost of compliance.
Implementing a Sterling Stamp Duty in the UK would be relatively simple. It would be announced by the Chancellor of the Exchequer in a budget, which would be followed by legislation in the next finance bill. Statutory rules and regulations for the reporting of sterling currency trades would be set out in the bill, so that the duty could be efficiently collected and would be illegal to avoid. It would be possible to enact the Sterling Stamp Duty at the next budget.
5) Will the Sterling Stamp Duty adversely affect trade, leading to a reduction in currency trading in the City of London? Would it damage the foreign exchange market? Would it reduce liquidity in the market and cause an increase in volatility?
At 0.005%, the Sterling Stamp Duty will result in a tiny increase in the cost of currency trading. This additional cost will not negatively impact trade as it is dwarfed by the typical gross margin on export transactions, which is in the region of 10%.
Since the Stamp Duty applies wherever Sterling is traded, there is no incentive to move the trade outside the UK, so the City of London will not be negatively impacted. Because the rate of the Stamp Duty is so low, it will have a negligible and non-distorting effect on such a vast market.
Some banking institutions have argued that a Sterling Stamp Duty would result in decreased liquidity, which in turn would lead to problems of volatility in the foreign exchange market. While such a criticism would have had some validity for a Stamp Duty of 1%, currency experts now concede that this will not be the case with a levy of 0.005%.
Technological developments have recently brought down transaction costs in the market. Even after adding in the cost of the 0.005% Stamp Duty, the transaction costs will still be lower than they were in 1998.
6) Would it cost holidaymakers or those sending remittances abroad more money?
Although many people identify foreign exchange with holidays this actually constitutes only 0.1% of the market. Along with remittances (for example: money sent abroad by migrant workers in the UK), this constitutes the retail market.
It is completely distinct from the wholesale market, where the principle players are large multinational banks. The incidence of a CTL, at a rate of 0.005%, would only be felt in the wholesale market.
7) Do other financial transaction taxes exist?
Financial Transaction Taxes are commonplace. They exist on stocks, corporate bonds, government bonds, futures. In Argentina for instance they have been applied on all of the above since 2000 at 0.6%. In the US they are used to pay the operating costs of the Securities and Exchange Commission.
The taxing of share transactions is particularly widespread. They exist in countries such as Austria, Belgium, India and the UK. In the latter case the rate is 0.5%, generating a revenue of at least US$8 billion a year.
8) Is the government open to innovative sources of finance? Do any development levies of this kind already exist?
In November 2009, Gordon Brown announced his support for a Financial Transaction Tax. The Government is calling for a small levy (0.05%) to be applied to various categories of financial transactions including, stocks, bonds and currency.
Unlike a Currency Transaction Levy, it would require global agreement, but has the potential to raise US$600-700 billion a year. The government are actively pursuing the proposal through the G20.
It represents a mechanism to help bridge the UK's budget deficit, fulfill aid pledges and, in Gordon Brown's own words improve the "economic and social contract between financial institutions and the public… it cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us."
Although this marks a major shift in policy, the UK has in the past supported other innovative financing mechanisms such as UNITAID. In November 2006, the UK Launched the International Finance Facility for Immunisation (IFFIm) - a 10 year vaccination initiative saving children’s lives using an innovative borrowing mechanism to provide predictable, long-term finance.
9) Why is the Currency Transaction Levy sometimes referred to as a 'Tobin Tax'?
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.
The 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. (For more information, click here).
10) What is the difference between a Financial Transaction Tax (FTT) and a Currency Transaction Levy (CTL)?
The proposal for a Financial Transaction Tax that recently hit the headlines is a broad levy applied to various categories of financial transactions including: stocks, bonds and currency. Its motivation is to both regulate the market and produce revenue.
The proposed rate is 0.05%. Crucially, it would require universal participation in order to work. And its projected revenue has been estimated to be US$600-700 billion a year if implemented on a global basis.
A Currency Transaction Levy is a type of FTT that applies only to the currency market - the largest market in the world. The proposed rate of 0.005% would raise more than US$30 billion a year if applied to all four major currencies (dollar, euro, sterling & yen). Crucially, it could be implemented unilaterally and so would not need global consensus. (For more information
click here).
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