17 Oct 2012

EUREKA Postscript : Implement a foreign exchange transaction tax globally

In my post at 5h30 this morning, I was concentrating on the idea of a simple Financial Transaction Tax on all foreign exchange trading involving Euros as a way for the European Central Bank to (a) limit the fluctuations in the value of the Euro and discourage speculation, and (b) gain some very useful (and potentially very large) amounts of tax revenue which could be distributed among the 17 Eurozone countries as a function of each country's population size.

Such a move is clearly justified by the fact that while Euros are involved in nearly 40% of all trades, the BIS data shows that only 11.5% of the trading actually occurs within the 17 Eurozone countries (see the table). It only seems reasonable that the Eurozone should have some control over this speculation.

While a unilateral imposition of such a transaction tax by the European Central Bank is totally justifiable, it is clear that it may be difficult to get other countries to agree. In particular, I can imagine that the UK government will do everything in its power to block such a move. With 36.7% of the transactions being handled in the UK, Cameron and Osborne will probably do what they are paid to do - namely, protect the interests of their chums in the City.
But maybe the solution would be to make the move at a global level. Suppose that all governments could get together and agree that currency speculation is in nobody's interest. This seems like an obvious conclusion. The fact that the exchange rates between dollars and euros and pounds and yen can change literally every minute is a clear handicap for trading. It means that noone can predict how much things will cost them even over a scale of a few weeks. This has to be nonsense.

So, imagine that all governments agreed to impose the tax on currency exchanges, and that the revenue generated would be paid directly to the central banks for each currency - the Federal Reserve in the USA, the Bank of England in the UK, the European Central Bank for the Eurozone and so forth. As you can see from the table on the right, this would mean that each currencies central bank would receive an amount that depended simply on the degree to which their currency was the victim of speculation. The US Treasury would be the biggest winner with 42.4% of the revenue, followed by the European Central Bank with 19.5%, the Japanese Central Bank with 9.5% and the Bank of England with 6.4%.  But all countries would get a share of the pie. And when several countries share the same currency (as in the case of the Euro), then revenue can simply be shared on the basis of population size.

How much could they raise this way? Well, obviously, it depends on the rate of the tax. My suggestion would be to fix the rate at the average rate charged by the banks and the credit card companies for making transactions in foreign currencies. In this way, you could kill two birds with one stone because the banks would be under very strong pressure to reduce the extortionate and totally unjustifiable 2-3% charges they currently levy (see this site for a list of International Transaction Charges for UK based Cards - of the nearly 300 cards on offer, the majority charge either 2.95% or 2.99% and a third of them charge 2.75%.  There are two that charge 2.50%, two that charge 2%, and amazingly, there are actually 12 that don't charge anything. You see, it can be done!).

Obviously, if all cards decided to drop their International Financial Transaction Tax charges, then the central banks might have to impose their own number for the financial transaction tax. I would think that 0.1% would be fine, and could generate up to $1 trillion a year if the traders keep speculating like they do currently. 

The other neat aspect of this method is that it directly punishes the markets when they attempt to attack a currency. The more they speculate, the more they have to pay. It seems extremely fair and reasonable to me.

Is there anyone out there listening?


  1. Very interesting new approach. Might be easy for the Eurozone to negotiate deals with smaller entities, i.e. Sweden or New Zealand. Everyone would like a few billions extra pocket money, I am sure.

    In the worst case it kills all trades with profits of less than 0.1%. And who profits from these anyways?

  2. Thanks Christian.

    Yes, I think that this really could work. Actually, you could have a situation where, for example, the Eurozone countries implement the scheme first and tax transactions involving not just euros, but also dollars, sterling, yen etc. They then say to the Americans, the Brits and the Japanese that they would be very happy to hand over the part corresponding to dollars, pounds and yen, but in exchange, the other countries have to implement the same system.

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