A tax for globalisation based on solidarity

Article published in O Estado de S. Paulo by Marcio Pochmann and Giorgio Romano Schutte

The most recent meeting of the G20 in Pittsburgh ended with a declaration in which the participants affirmed that they were meeting in the midst of a critical moment in the crisis, and wished “to turn the page on an era of irresponsibility” and to adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy.

Such irresponsibility has in effect taken root, and went hand in hand with a process of concentration of revenue based on profits generated in the financial sphere, outside the real economy. The much-maligned bonuses produced for certain individuals wealth in excess of the GDP of many countries in the southern hemisphere. The production of such financial riches is conducted as far as possible from the purview of financial regulations, and makes extensive use of tax havens. Moreover, we have seen the inability of the international community to fulfil the commitments entered into in the Millennium Development Goals, and this despite the fact that the hunger and poverty reduction targets, due to be achieved in 2015, are rather modest.

Discussion of regulatory controls on financial markets cannot however be restricted to the restoration of the previously existing mechanisms; it must be seen as an opportunity to arrive at a world economic order that is sustainable, multilateral and less asymmetrical. Part of that effort involves the implementation of international mechanisms based on solidarity and aimed at eradicating hunger and extreme poverty. It seems fair that in order to create this global public good we should ask for a contribution from the sectors most enriched by the advancement of globalisation, that is to say the financial sectors, by means of a tax on international financial flows.

In the 1970s, Nobel Laureate James Tobin, following on from the innovative ideas of Keynes, invented the concept of a tax that would limit speculation and fluctuations on foreign currency markets. This tax was to be sufficiently high to ensure that it would have a stabilising effect. In 2004, Presidents Lula (Brazil), Chirac (France) and Lagos (Chile) approached such a tax on financial flows from a new angle as part of the Global Action Against Hunger and Poverty initiative. Under this proposal, the tax would be used solely as a means of raising funds for development without affecting market liquidity. The percentage of the levy should be very low in order to minimise the effects on the financial markets and the risks of evasion. However, even very low percentages could generate very substantial revenue due to the great volume of these flows. The figures of the Bank for International Settlements (BIS) show that every year there is a total flow of USD777.5 trillion. With a minimal impact on transactions caused by the introduction of such a tax, a levy of 0.005% would guarantee approximately USD33 billion for solidarity programmes to combat hunger and extreme poverty.

The discussion has been relaunched by a group of 12 countries, among them Brazil, France, Chile, Spain, Germany and even the United Kingdom, the latter the world’s principal hub for foreign exchange transactions, which set up in October 2009 a special team and an expert committee to draft a report that will provide input for the debate in the discussion forums. Even the IMF, for which this subject has long been taboo, is to submit at the next G20 summit in June 2010 in Canada the results of a study devoted to the topic.

There can be no doubt that the political viability of this proposal is also linked to proposals for the use of the funds, including governance, which is also important for its credibility. It is for this reason that the expert group must also put forward ideas on fund allocation and democratic control.
The taxation of financial funds will certainly be on the agenda of various summits and institutions for global governance in 2010 and will need to be among the proposals on new regulations for the international financial system to be debated. In 2010, the United Nations will also be carrying out an evaluation of the Millennium Development Goals (2015). That is why it is appropriate to discuss once again such a tax on international capital flows which would create a financial mechanism for development and an alliance based on solidarity for the eradication of hunger and extreme poverty.

Marcio Pochmann, President of Institute of Applied Economics Research (IPEA), is a member of the expert committee on the taxation of financial flows.

Giorgio Romano Schutte is the coordinator of international political studies at IPEA.