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City Firm Experiments With 'Tobin Tax'

by Robert Lee,, London

22 May 2007

A City-based international financial services firm has begun a week-long experiment with a 'Tobin tax' on its foreign exchange transactions.

According to a report in the UK daily the Guardian, INTL, which facilitates wholesale, cross-border financial flows, yesterday began charging a 0.005% levy on this week's trades to raise an estimated GBP5,000 to GBP10,000 (US$10,000 to US$20,000) for various development charities.

"With minimal impact on our profits we are able to make a beneficial contribution to the lives of people in a poorer country - the more business we do, the more benefit to the developing world," Philip Smith, director at INTL, was quoted by the paper as observing.

"If we can act as the first rung on the ladder towards this new way of raising aid revenue through currency transactions, we'll be a very proud company," he added.

The main aim of a 'Tobin Tax,' first mooted by the late Nobel Prize winner, James Tobin, in the early 1970s, is to dampen the volume in the foreign currency markets in a bid to calm periods of volatility driven by speculation. The idea has gained support amongst many pressure groups as a way of minimising damage caused to developing economies from wild currency fluctuations. However, the political establishments in many countries have been, at best, divided on the proposal.

Recent notable advocates of some form of Tobin tax have included former French president Jacques Chirac, who used a G-8 summit in 2005 to push his idea for an 'International Development Tax' to help reduce third world poverty, and soon-to-be British Prime Minister Gordon Brown, who has proposed an international finance facility to help fund third world development projects. However, the financial community has never been keen on the idea, and a global consensus has been impossible to achieve.

Speaking in 2004, Klaus Liebscher, a member of the European Central Bank’s governing council, rejected a proposal for a Tobin tax to help fund the European Union budget, saying it would have a negative impact on investment within the community and "pour sand in the engines of the financial markets."

Although some prominent European politicians are supportive of the Tobin tax concept, the idea has seemingly not gained much ground in the governmental machinery of the European Union, and a report released by the European Commission in 2002 dismissed the proposal as unrealistic.

That same year, an OECD report also poured cold water over the idea, concluding that there is no evidence that a tax on currency transactions would achieve its desired effect. According to the OECD, where transaction charges have been imposed there has been "no appreciable reduction" in currency volatility.

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