Taxing the Rich to Feed the Poor

There must have been a few sighs among the business elite gathered in Monterrey, Mexico when Germany’s development minister got on stage.

Months after France’s Prime Minister Lionel Jospin gave backing to a controversial tax on international currency trading, German minister Heidemarie Wieczorek-Zeul showed signs she supported the so-called Tobin tax as well.

"We can’t allow ourselves to attach taboos to such ideas," she told foreign dignataries and heads of state at the United Nations-sponsored International Conference for Financing and Development taking place this week.

The tax was first proposed in 1978 by Nobel laureate and former Yale economics professor James Tobin, who died last week. In recent years, the anti-globalization movement has taken it up as a battle cry, much to the dismay of many in the business establishment.

Public financing for the world

The tax, a refined version of Tobin’s initial proposal, would, in essence, create public financing for the world. Advocates say that by attaching a 1 percent tax on all foreign currency trading, billions could be earned to fight against poverty, disease and the rest of society’s ills.

The tax would also hinder speculation on currencies, an unstable practice worth more than $1 trillion. Critics of speculation say it has led to several spectacular financial crisis in Europe in 1992-1993, Asia in 1997 and Russia in 1998.

The 1 percent tax would reduce short-term and more speculative currency trades. The effect would shrink the currency market, making nations more able to intervene to save their currencies.

Impossible to enforce

But critics say the proposed tax is unreasonably high, given its pure purpose is the stop of short-term speculation. The tax would also be almost impossible to enforce, requiring an almost global cooperation.

The head of Deutsche Bank’s Economics and Finance research wing, Ulrich Schröder called the tax counterproductive. Schröder, who was attending the conference as well, said it would be an obstacle to investment and commerce.

The tax idea has gained more steam in Europe recently, however. Last Fall, Jospin proposed the Tobin tax at a meeting for Europe’s finance ministers. Belgium has also expressed support for the idea.

This week, Wieczorek-Zeul presented a paper by Frankfurt economist Paul Bernd Spahn to the conference delegates. The paper argues that the Tobin tax is possible in a revised form. Spahn also argues that Europe, if necessary, can go alone in implementing it.