The Tobin tax, or, whatta fuck?

The Tobin tax, more accurately described as a tax on funds transfers, is a favorite subject among anti‐globalization activists. Those who see globalization as an all‐out threat to national interests, controlled economical progress and general human well‐being view it with almost supernatural reverence, touting it as a panacea to the grave trouble assumed to be caused by a global economy run amok. The theory goes, financial markets are inherently volatile, yet very important to national economies. Through this dependency, national economies, and through them, the well‐being of large numbers of people, have become susceptible to the shocks generated by rapid large scale financial transactions. Hence, financial speculation should be discouraged, and low rate taxing of transactions ought to be the ideal stabilizing force as it both reduces the incentive to engage in multiple, rapid spot transactions and also has the potential to generate vast sums of tax revenue. The financial unstability of the Far East is cited as an example of what can happen when no such stabilizer is present, and at least here in Finland, the idea seems to be pretty popular among the legislative body.

The idea is sound in that taxation always works as a stabilizer. What I mean by that is that it hinders economic development, slowing it down and limiting the total impact it can have. Essentially, taxes impose a limit on the efficiency of resource allocation a market economy can achieve. As the apparent goal is to temper the rapid reactions a largely computerized economy can exhibit to a level that better suits the speed of everyday human affairs, this seems like a humane, decent thing to do. But a simple counter‐example shows the fallacy: 100% taxation on transactions would result in a situation where it is never advantageous for a person to buy any products or services from another, making trade impossible. Any step up from 0% is a step towards this end, and while it is clear that even one person economies can in principle survive (that’s guaranteed by evolution), it is clearly the case that the wider the economy, the better its total chances of survival and internal efficiency.

So I fear that the people supporting the tax do not really see the big picture. They see the terrible errors in extra taxation even less. This Tobin tax, named after Nobel laureate James Tobin who proposed something vaguely like it in the seventies, would in my mind be a truly ass‐backwards, utterly conservative thing to attempt to impose.

First of all, most of the problems supposedly eased by the tax aren’t really caused by what people call globalization at all. For instance, the prime troublemaker cited in favor of the tax is exchange rate fluctuation and deliberate attacks on currency value. But it’s well known that a large part of those fluctuations, if not all, is actually generated by poor decisions on behalf of national governments. Even while it’s very difficult to trace causal relationships in complex dynamic systems like the international economy, there is reason enough to believe that speculation on the exchange market is actually a balancing force working against artificial, distorted values of currencies. Thinking about the issue this way, the fluctuations come from the simple laws of economy and common sense overpowering government interference. If no such interference were to take place, there would be no glitches but only gradual, predictable change, highlighting the fact that contrary to common belief, free markets are inherently stable.

Second, no governmental process can generate revenue. The money does not appear from thin air, but comes from somebody’s pocket. Even if we talk about taxing international funds transfers only, something sufficiently abstract to raise the suspicions of any layman, that just means that it is international corporations which are being fleeced. Now, that works because people are afraid of Big Business. It is an easy scapegoat for the trouble one gets when nation states attempt to sustain their control over an economy going global. But the bottomline is, either the consumers of the products those Big Bad Companies produce will end up shouldering the bill, or international trade will suffer and some products whose production necessitates global cooperation will fall in availability. Coffee? Better prepare to cut back on that.

What is also curious is that people seem to have no real sense of what such things as currency trading, derivatives or bearer bonds are all about. Many people view them as ways for some crooked bankers to pocket some easy cash. No wonder then that people feel envy and animosity towards partakers in the international market. I’ve never been one to do that (and probably never will). I think the market serves a very valuable part in any economy, no matter how chaotic and unfair it may seem. For instance, derivatives give traders a way to insure their transactions against any external fluctuation caused by exchange rate changes. Yes, they can lead to enormous wins and losses. No, that is not bad as the overall effect is to cause realistic exchange rates and price structures to arise, thus contributing to long term stability. The same goes for exchange rate speculation. People just do not seem to understand the basic emergent nature of any free market economy, so eloquently described by Adam Smith as the Invisible Hand: economy takes care of itself, when let to run its course. The only external guarantee that is needed is predictability, the minimally disruptive form of which appears to be forced adherence to consensual contracts. What emerges is a well working economy with a sort of internal homeostasis. Speculation is an important part of that homeostasis, as witnessed by the potentially vast capital gains which attend it. Attacking such self‐preservation mechanisms is akin to introducing disease into a biological organism; i.e. not a thing to do if you want to preserve the subject.

Next, the tax is touted as being very low rate, making large, rapid transactions, characteristic of financial speculation and the perceived threat, the primary area of impact of the tax. But I’m having a really hard time believing that any source of funding for national governments will stay controlled for long. There is absolutely no way in hell that that is going to happen—the rate will soar, eventually becoming a major obstacle to any international trade.

Furthermore, the previous point leads us to another reason for nation states and their coalitions, like the UN, to support the Tobin tax: international trade, while an excellent source of revenue when tightly regulated, is a direct threat to the existence of nation states. Nations do not produce anything, but parasitize upon societies. They do have their role in upholding basic social cohesion, also called law and order, but in economic terms, they are too darn fat to compete effectively for the larger portion of the services they now forcefully provide. Their only protection is the fact that many of those services do not currently have a true marketplace, thanks to the fragmentation of the globe by national borders with all the regulations, customs barriers and the like. Globalization would mean increased efficiency in structures like global labour allocation, investments, and the sort of goods that are produced. In total, states would soon learn that people are not as dependent on them as they once were. This is of course directly connected to immigration policy (if it weren’t for the borders, we Westeners would see a lot of people rightfully heading this way), national competitiveness (Think you can charge $20 per hour for your IT stuff? Think again when you have to compete with comparable expertise from India.) and law enforcement (Drug control? What is that when various nationalities with different preferred intoxicants begin to mix for real?). Globalization would likely kill nation states in their present form. When viewed from this angle, the Tobin tax is a typical self‐preservative reaction of governments to external and pan‐governmental influence, the earlier examples of which are such utter débȃcles as import taxation and government subsidized export industry.

But perhaps the most interesting part of the discussion is the way the Tobin tax is advertised as a way to fight social injustice, particularly towards the developing nations. This is interesting in that there is little proof that commerce in free markets promotes inequality. Colonialism does, sure, to a degree. But in the case of free market economy, there are both compelling practical evidence and sound theoretical reasons to expect precisely the contrary. This is perhaps the most insidious problem with funds transfer control: while it would probably indeed lend stability to the global economy, it would likely hinder the possibility of third world countries to catch up with the Western ones. Remember what was said above about one man economies: trade and cooperation is what lends entire populi the purchase to a high standard of living. Cutting developing nations out of the loop simply does not help them; it harms them.

Now, as most currency trade occurs in Western countries, it would be likely that most of the produce of the tax would actually go to the people least troubled by whatever shortcomings currency trade may have. And even if some/all of the funds would eventually find their way to developing nations, as so many anti‐globalization buffs hope, it is difficult to see how this could constitute a sustainable, just framework for economic development. Meaning, addicting people to handouts does not get a whole lot done, and making someone else pay for the remedy is morally questionable at best.

Those are real, formidable obstacles to a successfull application of any international tax, and consequently few pro‐Tobin advocates ever fully consider the practical burden, be it political or implementation related, caused by an international tax of any kind. For example, a need for a global jurisdiction and enforcement of the law would be created, something which is simply impossible as long as sovereignty of nations is the norm. The problem isn’t eased by the difficulty of dividing the loot, either. Whose money is it, in the end? It never seems to occur to Tobin’s disciples that taxation might be morally questionable, either. I mean, it’s not just about who has the right to get the money once collected, but more fundamentally about the fact that it was already someone’s before we went ahead and took it. It would be sheer totalitarianism to impose taxes on a whim, or even to right some perceived injustice before sufficient consideration hasn’t been given to the group that will suffer the consequences of such action. No signs of such balancing act being performed can be seen in the current debate.

Finally, the scale of the undertaking would likely be such that effective control might not even be possible: the same impressive numbers that are used to ascertain people of the potential of this sort of tax can be turned around to show the ridiculous number and scale of international financial transactions that are taking place. How on earth does one expect to control something that monstrous?

The Tobin tax is a bad idea. If it’s adopted, there’s little doubt that the reason has more to do with people’s irrational fears towards globalization and populistic policy making than actual utility and rational consideration.