In Other Words

A Taxing Debate

Novo, Vols. 61/62, November 2002–February 2003, Frankfurt Anti-globalization activists and some mainstream politicians have seized on the notion of a Tobin tax as an antidote to what they see as globalization’s poisonous inequities. European leaders in particular, including French President Jacques Chirac and at times German Chancellor Gerhard Schroeder, have joined in a curious alliance ...

Novo, Vols. 61/62, November 2002–February 2003, Frankfurt

Anti-globalization activists and some mainstream politicians have seized on the notion of a Tobin tax as an antidote to what they see as globalization’s poisonous inequities. European leaders in particular, including French President Jacques Chirac and at times German Chancellor Gerhard Schroeder, have joined in a curious alliance with globalization’s malcontents to rally behind a tax on global currency transactions. Such a tax, proponents suggest, would discourage destabilizing, short-term speculation and prevent casino-style financial exuberance from wreaking havoc in emerging markets. This measure could also provide a fresh source of money to aid the world’s poor: The European Commission estimates the annual global revenue from such a tax (assuming a 0.1 percent rate) could total $200 billion, three times the annual global total of official development assistance. Indeed, the mere contemplation of this initiative by Europe’s top institution underscores the extent to which the old continent considers the Tobin tax a concrete and appealing tool to tame globalization and build capitalism à l’européenne.

In the 10th anniversary edition of Novo, a German bimonthly magazine of political economy, science, and ideas, Berlin-based economist Alexander Ewald argues that the Tobin tax is a misguided approach. That Novo would feature a counterzeitgeist voice is no surprise, as the magazine prides itself on challenging mainstream European views, sometimes a bit too predictably. Genetically modified food? Give us more. Ecoproducts? A farce. The power of logos? Don’t worry. The end of history? No, the beginning. However, at its best, Novo provides fresh thinking — such as Ewald’s — on key topics on the European agenda.

Ewald argues that the real economy — where actual goods and services are produced and traded — is more closely linked to global financial markets than Tobin tax enthusiasts admit. Companies use their available cash to trade in currency markets as a hedge against the risks inherent in their mainline businesses. Moreover, capital will always travel wherever potential returns are highest, a dynamic that a tax cannot slow. In short, the Tobin tax would not be the brake on financial globalization that supporters seek.

The author also takes issue with the notion that the Tobin tax could have prevented or mitigated the collapse of some Asian economies in 1997. Ewald believes the tax would have been too low to curb the massive movements of capital at the time. Yet, even if the Tobin tax could produce its desired effects, Ewald asks, who would administer the tax and collect the revenue? Likely candidates include the International Monetary Fund (IMF), the World Bank, and the world’s top central banks. But such an arrangement would backfire on anti-globalists, since rich countries invariably call the shots in those organizations. Ewald suggests that greater equality between rich and developing nations will come only if political leaders in poor countries fight for their right to participate and make decisions in these institutions — regardless of whether the Tobin tax is in place.

Ewald’s article is but one of countless voices being heard on the Tobin tax in Europe, and many of them are more favorable to the measure. For example, the French-based activist association Attac, which provides the intellectual drive behind the anti-globalization movement, started in 1998 as a lobby group for the tax. Yale economist James Tobin first proposed the tax in the early 1970s, but only with the recent financial crises in Asia and Latin America and the rise of anti-globalist sentiment have his ideas become hip in mainstream Europe. Anti-globalists are routinely accused of misunderstanding or neglecting basic economics, so the semitechnical language surrounding the Tobin tax provides some intellectual cover for activists and party leaders alike — even if they can’t tell a currency board from a surfboard. Ironically, Tobin himself has expressed suspicion in this regard. "I have nothing to do with them [the Tobin tax promoters in Europe] and am not informed of their platforms," Tobin wrote in the Financial Times in September 2001. He also professed his support for free trade and capital investment in poor countries, even adding, "ideally, the IMF could be the instrument for administering the transactions tax.”

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