European Banking Federation Rejects Tax Proposal On Foreign Exchange Transactions

Ulrika Lomas, Tax-news.com, Brussels

29 March 2001

In a paper released this week the European Banking Federation (FBE) said that the Tobin tax proposal on foreign exchange transactions is not the answer to tackling volatility in the international financial markets.

The Tobin tax, named after US economist James Tobin in the 1970s, is a global tax introduced on short-term, speculative financial transactions in foreign exchange markets which has been implemented on previous occasions to counterbalance financial crises such as those in Mexico (1995), Southeast Asia (1997), Russia (1998), Brazil (1999) and more recently, Turkey. The aim of the Tobin tax, explains the FBE is to discourage operators from performing short-term forex transactions in the attempt to 'curb the instability of capital markets by reducing the number of speculative transactions ... and to raise revenue for development aid or related causes'

The FBE has stated that it believes the Tobin tax should not be implemented for three reasons. Firstly it is not feasible in practice, the FBE says: it would have to be introduced simultaneously by all countries in order to avoid diversion of financial activity - the chances of reaching the necessary worldwide consensus for such a concerted move are scarce ... moreover, the tax would introduce new complexities into the workings of international financial markets, rendering any control of the system practically imposible and hence difficult to enforce.'

Secondly, said the FBE, the tax would have disruptive and frequently unjustified side effects. For example it would be incorporated into interest rates or spread between the buying and selling prices of currencies, the FBE noted: 'The fairness of imposing such a burden on exporters who hedge against the risk of monetary fluctuations, or on savers, concerned to diversify their investments, is questionable.'

Finally the Tobin tax would be ineffective in achieving its original aim of countering market volatility and averting financial crisis. The FBE argued that the tax would be unable to combat the problems that affect the developing and newly industrialised countries whose markets are more prone to volatility such as too rigid and unsustainable exchange rate policies, weak domestic financial sectors with little or no supervision and burdens of heavy foreign debt. Furthermore, the FBE points out that the majority of international short-term financial transactions (80%-90%) are carried out by industrialised countries: 'hence they do not pose a threat to the stability of the financial markets of less developed economies. A tax on these transactions would reduce the liquidity of international financial markets, resulting in more rather than less volatility.'

Published in the form of an FBE letter, the paper is based on the advice of senior economists of European banks and associations. The full text of the FBE paper can be found at: http://www.fbe.be/f_e_news.htm

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