G20 summit fortunate enough to back tax on international financial transactions – world


A worker watches the G20 media center at the Palazzo dei Congressi in the EUR district of the city, which will host the G20 summit with heads of state from major nations for a two-day meeting from October 30-31, in Rome, Italy, October 22, 2021. [Photo/Agencies]

An international financial transaction tax is needed to curb damaging short-term capital flows and finance the United Nations Sustainable Development Goals.

In addition to acting on climate policy and its financing, the G20 summit in Rome on Saturday and Sunday is also expected to support the long-standing agenda of an international tax on financial transactions.

G20 leaders, at their Pittsburgh summit in 2009, agreed to consider the merits of such a tax given its potential to reduce volatility caused by short-term capital flows and to mobilize resources for the poorest countries in the aftermath of the global financial crisis. . However, the 2011 Cannes summit did not endorse the proposal for an international tax on financial transactions, despite strong support from France, which then chaired the G20, and other European countries.

The inability to act on the tax proposal has cost the world dearly. Quantitative easing in the Western world in the aftermath of the global financial crisis has led to a deluge of short-term capital flows to emerging markets in search of good yields, which has resulted in soaring stock valuations and appreciation of exchange rates. However, the boom was followed by a sharp correction in valuations following the decline in QE in 2013. The once booming emerging markets quickly became the “fragile five”.

There is now a feeling of déjà vu. To support the U.S. government’s stimulus package in the aftermath of the COVID-19 pandemic, another round of quantitative easing was announced by the U.S. Federal Reserve in March of last year, slashing interest rates to short term to zero and resuming large-scale purchases of Treasury securities. The European Central Bank followed suit with the € 750 billion pandemic emergency procurement program.

The abundant and virtually free money in the West is looking for quick returns in emerging markets again, and asset bubbles are forming. Strained emerging market valuations make them vulnerable to correction once the Fed begins to gradually reduce quantitative easing, perhaps in a few months. The threat of a stock market meltdown and widespread disruption in the financial system is real.

Rapid action is needed to reduce the vulnerability of emerging markets to the boom-bust cycle and possible disruption in global financial markets. An international tax on financial transactions could be one such measure.

Originally proposed by Nobel Prize-winning economist James Tobin as a small tax on foreign exchange transactions to “throw sand in the greasy wheels” of international financial markets, the so-called Tobin tax has been discussed over the years. of five decades. and generated a lot of support. It is superior to other capital flow management tools, such as unpaid reserve requirements that have been imposed by some countries to limit volatility. Given the prisoner’s dilemma inherent in such a tax, it is most effective when applied globally.

A cleaner, more generalized and administratively simpler to implement version of the Tobin tax or the tax on international financial transactions could be to tax all foreign exchange transactions, whether they are related to trade or capital markets. . Such a tax ends up taxing short-term flows more than long-term flows, thus achieving the objective of discouraging them.

An equally important role that such a tax can play is to provide an innovative new source of finance to achieve sustainable development goals in the poorest countries.

The global community has found it difficult to meet its development finance commitments, whether it is the United Nations official development assistance target of 0.7% of gross national income or the of the United Nations Framework Convention on Climate Change of $ 100 billion per year for climate finance. Overseas development aid flows, and in particular bilateral aid, have declined rather than increased in recent years, and the outlook has been further clouded by the COVID-19 pandemic. Achieving sustainable development goals and climate action goals by developing countries will remain a challenge if funding is not available.

An international tax on financial transactions can be a perpetual new source of income that does no harm to anyone. On the contrary, it could support the eradication of poverty and hunger and achieve other SDG targets in developing countries.

With global foreign exchange transactions exceeding $ 6.6 trillion per day, according to the Bank for International Settlements, a 0.1% tax would bring in $ 1.65 trillion per year. If we assume that an international tax on financial transactions would moderate transactions by 25 to 33 percent, it would still bring in between $ 1.1 trillion and $ 1.24 trillion per year, or seven to eight times the development assistance to the world. current foreigner. These resources could be distributed to developing countries in proportion to their level of poverty, hunger and other deprivation, the impacts of the pandemic and climate goals.

The forthcoming G20 summit in Rome will be a historic opportunity to show support for the long overdue international tax agenda for financial transactions. Such a tax would not only help limit the disruptive consequences of volatile short-term capital flows, but would also create a perpetual new source of finance to help achieve the Sustainable Development Goals.

Another landmark multilateral initiative of the G20, and perhaps the most laudable of all, would be an international tax on financial transactions.

Nagesh Kumar is director of the Institute for Studies in Industrial Development, a policy think tank based in New Delhi. Kevin Gallagher is director of the Global Development Policy Center at the Pardee School of Global Studies at Boston University.

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