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The Currency Transaction Levy: An innovative source of SMEs financing

Guest post by: Norbert Knoll von Dornhoff

Article Overview: James Tobin (Nobel Memorial Prize in Economic Sciences in 1981) was widely known for his suggestion of a tax on foreign exchange transactions, now known as the "Tobin tax". This was designed to reduce speculation in the international currency markets, which he saw as dangerous and unproductive. He suggested that the proceeds of the tax could be used to fund projects for the benefit of Third World countries, or to support the United Nations. James Tobin and other economists, e.g. David Felix, Rodney Schmidt, Paul Bernd Spahn have examined the possibility of levying a charge on international monetary transactions as a means to reduce exchange rate volatility and promote international economic stabilit

The Currency Transaction Levy: An innovative source of SMEs financing

Levy rate and revenue potential

The Currency Transaction Tax (CTT) is in the last years emerging as a leading new financial instrument for governments seeking to raise funds of independent and stable monies. These funds are needed for national and international development and projects addressing actual issues such as public health, research, education and training, crises emergency measures and climate change.

The foreign exchange market is the largest market in the world, with an estimated $1.9 trillion currency traded per day (2004). This means that in less than one year, currency worth 10 times the global GDP is traded. Of this massive amount, international trade in goods and services, which requires foreign exchange, accounts for only a small percentage ($9 trillion per year) of the total trading.

The revenue generating potential of a tax is tremendous. A levy rate ranging from 0.005 to 0.25 percent would generate between $15 and $300 billion per year, of which a substantial amount could be allocated to promote international economic development and prevent SMEs from bankruptcy in times of financial crises.



Is a CTL feasible on national level ? The answer is : YES

There is extensive experience with (currency) and securities transaction levies (taxes), in various countries, and there have been highly qualified studies of their effects. Often the defenders of unfettered financial markets argue that such a tax will reduce liquidity and thus hurt the customers who depend on the market. The historical experience with small taxes seems to be that there is no discernible effect on volatility. In some cases the volume of trading within the country may slightly be affected. But what the tax does usually do is raise a lot of money for productive purposes.

The UK has long had a securities transactions tax known as a stamp duty on the order of 0.3%. Sweden introduced a 0.50 per cent tax on the purchase and sale of equities in 1984, and kept it until 1991. India introduced a securities transactions tax in 2004 and Japan, Korea, Taiwan and Hong Kong did so earlier; in these cases there were not significant reductions in either price volatility or market turnover. Other countries that have had financial turnover taxes of at least 0.10% include Australia, Austria, Finland, Germany, Malaysia, and Singapore. In addition there are other countries that have smaller trading fees. Even the United States imposes an SEC fee of .0033%.

Three key advancements make an unilateral CTL feasible. Firstly, the introduction of Real Time Gross Settlement (RTGS) eliminates settlement risk by ensuring the act of buying and selling takes place simultaneously, in ‘real time’. Secondly, the Continuous Linked Settlement (CLS) Bank was launched in 2004 in order to centralise the location of wholesale foreign exchange transactions. Thirdly, transactions now universally use SWIFT as their messaging system. This has stabilised, centralised and standardised trading allowing a CTL to be applied automatically every time a trade takes place, making collection inexpensive and unavoidable. These technical advancements combined with the fact that countries can implement the levy unilaterally and do not require global agreement have definitively answered any historic uncertainty over the proposal’s feasibility.

CTL in sovereign Countries

We recommend that Governments shall enter with the local Banks into “Agreements on the implementation of a voluntary CTL”. Rating of the CTL on all cross boarder currency transactions and use of proceeds shall be decided by “National Commissions on CTL” whose members shall be Government Representatives, Delegates of entrepreneurs and employees organisations. Proceeds of the CTL shall be lodged in a SMEs- Trust Funds for Economic Development (SMETFED), controlled by the Commission under 4. b)

SMETFED shall e.g. finance:

-Overhead cost of national SME supporting Organisations

-Micro-credits for SMEs and their employees

-Start-up equity financing for young entrepreneurs

-SME projects in developing Countries

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Article Tags: crisis, currency, development, financing, levy, sme, tax, transacion, wusme



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Re: Women and Financing - It's Difficult! - I found this paragraph of interest (in the article from Nana's link: [quote="Nana":3r7womqv]Other studies show that women operate more service and retail establishments than men, which might explain their difficulty in getting financing since financial institutions often consider these two sectors more risky. However, although women are generally less inclined than men to apply for financing, when they do, they are more likely to get it. According to a study by Industry Canada on SME financing in Canada, in 2000 majority female-owned SMEs obtained a loan approval rate of 82%, which is slightly higher than the approval rate for majority male-owned businesses (80%). This suggests that when they do apply for financing, businesswomen submit excellent applications. [/quote:3r7womqv] They say, "Women are more likely to get [financing]." But the difference is only 2 percentage points! Big deal! And, that was only for one year, 2000. I'd like to know what the 10-year average is. Numbers can be manipulated to mean anything you want them to mean...it all depends on what you want to show.
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