Tobin Tax in Question at G8 and G20 Youth Summits in Washington

ByAdrien Lehman

In Washington, D.C., the G8 and G20 Youth Summits now have a financial committee. This committee is focusing on the regulation and the supervision of the international financial system. The “Tobin Tax” is at the center of all major debates.

The Tobin Tax is intended to put a penalty on short-term financial excursions into another currency. It is one of the top financial stories since the beginning of the Great Recession of 2008. Nobel Laureate and economist James Tobin originally defined this tax in 1972 as a tax on all spot conversions of one currency into another. One of the goals of this new committee is to define a tax which is useful to answerer today's financial troubles.

Taxing short term capital inflows will give the ability to control exchange rates and to mitigate financial crisis in the future. This proposal is based on the idea that currency speculation has a negative impact on exchange rates. Taxing the short-term capital flows will not affect families or entrepreneurs because it is applied only to financial instruments. It can thus be a useful tax, and one that can create a fund to smooth all the ebbs and flows in the business cycle.

The other young members of the committee have very different positions. Brazil is the only nation to have this tax already in place. The European Union and its member states are also in favor of a low tax, but one that is as broad as possible. Taxes should be shared with the seller and the buyer. Each country could do whatever they want with revenue. For example emerging countries could use it for development, but the European countries need it now to deal with the sovereign debt crisis.

At the opposite end, the United States and Australia do not believe this is a good idea in the current climate. These nations believe the Tobin Tax won’t reduce the chances of a future crisis, it will only do the opposite. China is also supporting this position : Tobin tax will inhibit the market. We don’t restrictions in the market. It will cost more money to move capital. China doesn’t think its necessary to implement the tax now.

The IMF was also present on this first day of talks. It wouldn't endorse the Tobin Tax but it would love to explore the idea in the future.

 As we can see, there is no consensus on this point after one day of negotiations and there are almost 10 other points on this agenda. It seems that even in a youth summit and 40 years after its first evocation by James Tobin, this tax won't be subject to an agreement.