Taking the Next Step: Implementing a Currency Transaction Development Levy
Updated: Sep 4
The Momentum for Innovative Development Finance
In December 2006, as the international community approached the halfway mark for achieving the Millennium Development Goals, the urgent need for new, predictable sources of development finance was undeniable. The recent, groundbreaking launch of UNITAID, an international drug purchase facility funded primarily by a solidarity levy on airline tickets, had just proven that innovative, globally coordinated taxes could transition from academic theory into life-saving reality. Against this backdrop, the Norwegian Ministry of Foreign Affairs commissioned a pivotal report authored by David Hillman, Sony Kapoor, and Dr Stephen Spratt. Grounded in the Norwegian Government’s Soria Moria Declaration, which explicitly committed to spearheading international agreements on global financing sources like a duty on currency transactions, the report argued forcefully that the global community needed to immediately implement a second solidarity levy. By targeting the foreign exchange market, this new mechanism could tackle the gaping funding shortfalls threatening the Millennium Development Goals.
The Core Proposal and Technical Feasibility
The core proposition of the report was the implementation of a Currency Transaction Development Levy set at a microscopic rate of 0.005 per cent. Unlike historical proposals that critics claimed required universal global agreement to function, this report provided a definitive, technical blueprint for unilateral implementation. The authors demonstrated that a country could effectively apply the levy to all transactions involving its own currency, regardless of where in the world the trade actually took place. Even accounting for a highly conservative assumption of a 2.5 per cent reduction in trading volume, the authors calculated that this 0.005 per cent levy would generate 2.03 billion dollars annually for the United Kingdom, 167 million dollars for Norway, and 4.43 billion dollars for the Eurozone.
This unilateral capability was made possible by the profound technological evolution of the global financial system. By 2006, the foreign exchange market had transitioned from fragmented, bilateral telephone trades to highly centralised, electronic Real Time Gross Settlement systems designed to eliminate settlement risk. Major currencies were settled either through the Continuous Linked Settlement Bank, which handled over sixty per cent of global trades for currencies like sterling, the euro, and the Norwegian krone, or through domestic high-value systems like the United Kingdom's Clearing House Automated Payment System. Because these central systems universally utilised the Society for Worldwide Interbank Financial Telecommunications for secure messaging, tax authorities could seamlessly use the existing messaging format to identify trades. Specifically, the automated MT300 messaging series confirmed the details of individual trades before any netting processes could obscure them, allowing the gross value of the transaction to be perfectly captured and the tax automatically deducted from settlement accounts held at central banks.
Strategic Allocation of Generated Revenue
A critical element of the 2006 report was its strategic vision for how the generated revenues should be utilised to maximise developmental impact. Rather than simply adding to general, short-term aid budgets, the authors proposed targeting three chronically underfunded weak spots in the international development architecture.
First, the report called for massive, sustained investment in the provision of clean drinking water and basic sanitation. The authors noted that the absence of these fundamental facilities was responsible for killing over 1.8 million people annually, primarily children suffering from preventable diarrhoeal diseases, yet bilateral donor funding for water and sanitation had actually decreased as a percentage of total official development assistance.
Second, the authors highlighted the severe human resources crisis in global health. They pointed out that over 600 million people in Sub-Saharan Africa were served by fewer than one skilled health worker per thousand population. While international donors were often willing to build clinics or supply medicines through initiatives like UNITAID, they consistently failed to fund the salaries required to staff them. Halting pandemics like HIV/AIDS, tuberculosis, and malaria requires a twenty to thirty-year long-term funding horizon to educate, train, and retain millions of doctors and nurses—a timeline that only a predictable mechanism like the Currency Transaction Development Levy could adequately support.
Finally, the report advocated for providing a predictable, long-term source of funding to the United Nations Central Emergency Response Fund. The authors observed that flash appeals for humanitarian crises consistently fell short, leaving an estimated 16 million people at risk in neglected emergencies in Africa alone. A permanently funded rapid-response mechanism would ensure the global community could respond rapidly to sudden natural disasters and neglected humanitarian emergencies without waiting for ad hoc, often insufficient, donor appeals.
The Economic Case and the Incidence of the Tax
To justify the levy, the report contrasted the immense wealth generated by globalisation with the deepening poverty experienced by those left behind. In 2004, the global foreign exchange market turned over four hundred and fifty trillion dollars, representing a more than hundredfold increase since 1973. Simultaneously, the financial services sector was posting record revenues, with just two institutions, Citibank and HSBC, generating over forty billion dollars in profit in 2005 alone.
The report carefully analysed the economic footprint of the proposed levy, proving it would be absorbed easily by the highly profitable financial sector and its wholesale clients without damaging the broader economy. Because transactions by everyday individuals constituted less than 0.1 per cent of the total market, and trade-related transactions amounted to less than 10 per cent, the tax was deemed highly socially progressive. For the corporate export sector, the impact was calculated to be practically imperceptible. For instance, a 0.005 per cent levy on sterling would equate to just 0.3 per cent of the average annual profits of United Kingdom exporting companies, a fraction easily lost in the normal daily fluctuations of business conditions or minor shifts in exchange rates.
Rebutting Objections and the Ghost of the Tobin Tax
A significant portion of the report was dedicated to dispelling outdated criticisms, starting with the necessary distinction between the proposed levy and the original Tobin Tax. James Tobin’s 1970s proposal advocated for a one per cent tax specifically designed to impede trading and alter market behaviour to prevent speculation. The Currency Transaction Development Levy, proposed at a rate two hundred times smaller, was designed expressly to raise revenue for international development without disrupting normal market operations or liquidity.
The authors also decisively tackled the persistent threat of financial evasion and capital flight. They argued that the profound financial and operational benefits of participating in secure, efficient networks like the Continuous Linked Settlement system far outweighed the negligible cost of a 0.005 per cent tax. For example, participating in this modern settlement system allowed banks to reduce their net funding requirements by over ninety per cent, saving the participants an estimated 5.4 billion dollars annually in liquidity costs alone. Furthermore, the system generated immense efficiency savings, allowing participants to increase their transaction volumes by thirty-two per cent without increasing operating headcount. It was, therefore, economically irrational for a major international bank to abandon this vital, risk-free infrastructure to evade a microscopic development levy.
Furthermore, the report clarified that shifting trades into over-the-counter derivatives would not offer a viable loophole. These exotic instruments ultimately generated massive hedging footprints within the traditional, taxable spot market, and were increasingly being settled through the exact same centralized, electronic systems that would collect the tax.
A Readymade Blueprint for Action
Ultimately, "Taking the Next Step" proved that a currency levy was an ideal, readymade mechanism to generate the billions of dollars needed for global development. Authored by David Hillman, Sony Kapoor, and Dr Stephen Spratt, the report demonstrated that the technical infrastructure to collect the tax was already fully operational, and the economic arguments against it were obsolete. We invite all supporters, policymakers, and researchers to download and read the full original report to understand the robust mechanics and strategic vision behind this vital development financing proposal.
Frequently Asked Questions
How is the Currency Transaction Development Levy different from the Tobin Tax?
James Tobin’s original 1970s proposal was a 1 per cent tax designed to deliberately slow down currency trading and deter speculation. The Currency Transaction Development Levy is 200 times smaller (0.005 per cent) and is designed solely to generate reliable revenue for international development without disrupting normal market operations.
Why can’t banks simply move their trading offshore to avoid the levy?
The levy is applied to the currency itself, not the geographic location of the trade. Because all foreign exchange trades must ultimately be cleared through centralised electronic systems overseen by the currency's central bank (such as the Continuous Linked Settlement Bank), the tax is automatically collected at settlement, rendering geographic tax havens irrelevant.
How would the generated revenue be used?
The 2006 report recommended targeting three strategic weak spots in international development: funding the provision of clean drinking water and basic sanitation, investing in human resources for health to staff clinics and combat pandemics, and expanding the UN Central Emergency Response Fund to react rapidly to natural disasters.
Would the levy hurt ordinary businesses or individuals?
No, the economic impact is exceptionally minor and highly dispersed. Transactions by everyday individuals constitute less than 0.1 per cent of the market, and the cost to corporate exporters was calculated to be a negligible 0.3 per cent of their average annual profits an impact far smaller than routine daily market fluctuations.
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