Transaction Tax

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Burl Humana

Transaction taxes have been proposed on both international and national levels as a development tool to help groups of people with less financial strength. An international cash transaction tax could help the global good by raising substantial funds to support the Millennium Development Goals set by the United Nations. This tax also has the potential of stemming damaging speculative attacks on the currencies of middle-income developing countries aiding in their financial stability. National transaction taxes have also been suggested to create even handedness and fairness by allowing the wealthy to carry the larger share of the tax burden.


The implementation of transaction taxes are seen as a way to broaden the tax base by the collection of tax on the voluntary exchange of money that is not currently taxed. Primary examples of this are the purchase and sale of stocks, bonds, and foreign exchange transactions. Transaction taxes have been proposed on both national and international levels for various reasons.


Many support the idea of an international currency transaction tax (ICTT) on voluntary currency transactions as an innovative financing tool to raise money for international development. One of the most urgent local problems that needs to be addressed is starvation in the sub-Sahara region of Africa, though The United Nations has defined several areas of need around the world with the Millennium Development Goals (MDG’s). "The MDG's are as follows: Eradicate extreme poverty and hunger, achieve universal primary education; promote gender equality and empower women; reduce child mortality; improve maternal health; combat HIV/Aids, malaria and other diseases; ensure environmental sustainability; and, develop a global partnership for development." (Spratt 2005) The G8 have also pledged money for the achievement of the MDG's by the year 2015. Whether the G8 money becomes a reality or not, there is still a huge need for funding to help implement these important goals.

The idea of a transaction tax has been around for a long time and was presented in London in 1936 by James Maynard Keynes. However, a transaction tax is commonly known as a Tobin Tax, named after Nobel laureate James Tobin. In 1970 James Tobin recommended the use of a transaction tax to discourage speculation in the foreign exchange (FX) market. Reducing speculation has the expected result of lowering market volatility. This volatility can be very damaging to developing countries when their currencies are unstable. In this way the transaction tax has a second development function in bringing mid-income countries in line with underlying fundamentals that promote long term investment in their country. India has already implemented its own national transaction tax on securities trades as a means to simplify the tax regime and to reduce speculation in Indian financial markets.

Even in wealthier nations like the USA the idea of instituting a transaction tax is floated as a means to broaden the tax base, delete the marginal tax, and overhaul a complex tax system. This type of national transaction tax allows the wealthy to carry a larger share of the tax burden based on their easy access to financial markets and the less fortunate to carry a smaller burden in relation to their lower income and assets.

There are many critics of the Tobin tax. Some economists say the reduction of speculation also means the reduction of liquidity which can have its own damaging effects. Other economists have produced studies to show that curbing speculation does not reduce currency volatility. Often critics are those who would be most affected by paying the new tax and their criticisms generally reflect their desire for maximum self enrichment. However, there are many around the world, including wealthy people who would be affected by the tax, that like the charitable development that could be funded by this type of financing.

New technology and communications systems along with the internet make it possible to collect a transaction tax with efficiency and make avoidance extremely difficult. Electronic technology of the bank clearing system already in place could be digitally fitted with a financial equivalent of the EZ pass that is now used to speed traffic through toll booths on highways. International payment and collection systems like the CLS (continuously linked settlement) Bank already link automated domestic LVPS (large value payment systems) making the collection of a transaction tax a realistic idea.


By allowing a transaction tax at either a national or international level, disparities between the rich and poor can be mitigated to some degree. The poor won't bare an over proportionate amount of tax in relation to their incomes. Needs of people in developing countries can be served by taxes reaped from the wealthiest who perform large national or international transactions. Financial markets can also be strengthened in developing countries creating a win win situtation.

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