Workable Tobin tax

Your article “Tobin tax: Could it work?” (OECD Observer, No. 231/232) supposes that the tax would be levied at the dealing sites, which would create huge administrative problems and make it unfeasible. The foreign exchange (Forex) market has two sides to it. According to Rodney Schmidt, a Canadian economist from North-South Institute, while dealing is not organised, settlement, which usually operates two days later via the back office, is very regulated, centralised and organised – the money is closely tracked.
Mr Schmidt suggests that centralised payments systems could be used to collect the tax. Systems have been modernised lately, easily distinguishing a Forex trade. It is very simple to programme a computer to take a percentage of each trade. The central bank could do this or designate a payments system. Thus the administrative cost would be zero and avoidance would be practically zero for the currencies that are covered by the Tobin tax.As to which currencies to tax, a handful of currencies dominate, such as the dollar, the euro and the yen. Even exchanging Indonesian rupiahs for Russian rubles needs to go through such a vehicle currency. So if these major currencies were covered by the Tobin tax it would already be nearly global. Also, if only one major currency is outside of the Tobin net, even the US, then if everyone else is covered by the tax, US dollars traded would be taxed as well.You also suggest that a Tobin tax would cause liquidity to fall. But if the Tobin tax, through a managed flow, could at least decrease the amplitude of a currency crisis, then in fact there would be increased liquidity in that currency. Also, it could be argued that there is too much liquidity in the Forex market, which is a fundamental problem as profits are too easily made in transactions that hurt the real economy.Matti Kohonen London, UK© OECD Observer No. 233, August 2002

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