In New York on 20 September 2004, world leaders reaffirmed their commitment to the global fight against poverty and hunger at the Summit for Action Against Hunger and Poverty and endorsed the campaign to gather necessary funds through both traditional and innovative mechanisms to assist in that fight. (1) This initiative builds on the Geneva declaration adopted in January with leadership from the presidents of Brazil, France, Chile, and Spain and UN Secretary-General Kofi Annan--the "Quintet Against Hunger." (2)
Financing such efforts is always a problem; proposals have included taxation on carbon emissions, financial transactions, and arms trade along with the creation of special drawing rights (SDRs) and an international financial facility. On 20 September, the World Commission on the Social Dimension of Globalization presented A Fair Globalization: Creating Opportunities for All, (3) which also suggested taxing greenhouse gas emissions and certain financial transactions to bankroll a U.S.$50 billion fund to fight poverty.
These initiatives again bring to the fore both the need for and the problems associated with international taxation. There are many shortcomings in global governance, but none is more glaring than the lack of an independent financial base for international activities. It is therefore timely to revisit three proposals for international taxation that have been debated over the past three decades.
Almost ten years before he won the 1981 Nobel Prize for economics, James Tobin unveiled his proposal for a levy on international currency transactions in his Janeway Lectures at Princeton University in 1972. (4) He emphasized repeatedly that his aim was not to generate international revenues but to reduce short-term speculation in currency markets and thereby "to preserve and promote autonomy of national macroeconomic and monetary policies." (5) However, Tobin conceded that substantial revenues would be raised and could be devoted to agreed international programs.
The proposal was received coolly at first, although some countries (for example, Canada) have warmed to the idea since. Most central bankers deemed it impractical, and most economists predicted that it would damage liquidity without reducing volatility in currency markets while also displacing them to tax-free jurisdictions. Tobin's proposal was confined to academic footnotes until 1989-1990, when Joseph Stiglitz and Lawrence Summers rekindled interest. (6) In the wake of the 1994 Mexican crisis, the International Monetary Fund (IMF) began to discuss restrictions on speculative currency movements--"some sand in the wheels of our excessively efficient international money markets." (7) At the March 1995 social summit in Copenhagen, French president Francois Mitterrand referred to the proposal's potential to finance internationally agreed priorities. A few months later, the G7 Economic Summit in Halifax made an indirect reference to "improving the macro-economic performance of economies trapped by external financial pressures." (8)
Interest in the Tobin tax resurfaced during the 1990s because of the enormous growth in foreign currency transactions. The daily turnover in foreign exchange markets was $18 billion in 1972, when most countries had fixed exchange rates, but by 1995, due to floating exchange rates, it had reached $13 trillion. The opportunities for profiting from the movement of currencies and futures trading, options, and derivatives have also expanded.
In December 1995, the UN Development Programme (UNDP) invited several experts, including Professor Tobin, to carry out a "critical and scholarly study of the proposal for a foreign exchange transaction levy." (9) The five main conclusions and policy messages remain pertinent. First, today's foreign exchange markets do not always function optimally; they are marked by excessive, destabilizing volatility. Second, the Tobin tax would reduce short-term trading and strengthen the defensibility of the exchange rate regime but would only modestly, if at all, widen the scope of national policy autonomy. …