Financial Post G7 Record

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[Financial Post G7 Record]

Financial Post, Weekly edition, Tue 30 May 95, page 14

Keywords: International finance Foreign exchange Taxation Economic summits Economists James Tobin

Tobin tax not on G-7's agenda

It is a relief to hear that a controversial tax that would be levied on international currency transactions is not going anywhere fast.

Considering this news comes from the author of the tax proposal himself, it carries a certain credibility. Nobel Prize-winning U.S. economist James Tobin, in Ottawa yesterday to talk to union leaders and Prime Minister Jean Chretien, said what is now termed the Tobin tax will not be a big hit among the G-7 leaders who gather in Halifax in June. Reforming the world financial system will be a major topic of debate for the heads of state.

''They don't have the political will to do it. They are not going to accept it [a tax] at this time, that is for sure,'' said Tobin, who developed the idea in 1978.

But it may be the application of common sense - not a lack of political will - that has persuaded the G-7 leaders the Tobin tax is not a wise idea. This levy - the proposed rate is about half a percent - is designed to curb currency speculation. It is a particularly comforting idea for people who think that currency speculators - rather than economic fundamentals - are primarily responsible for recent wild gyrations in some of the world's currencies.

And as the tax would have the capability of raising enormous amounts of money, it has also become a big favorite of a host of social groups. They see it as a way to fund social programs, particularly those needed to combat unemployment that results from rapid technological change.

It is true that the tax might discourage the frequency of some speculation. But it would do nothing to dissuade companies from using legitimate hedging techniques. And Bank of Canada Governor Gordon Thiessen - no fan of the idea - has said it could also hurt day-to-day transactions that yield only small margins. Proponents of the tax must realize that the recent fluctuations in the value of the C$ have more to do with the sorry state of the country's balance sheet than the actions of currency speculators.

Rather than ruminate over raising taxes, G-7 leaders should spare a thought for reducing taxes and cutting expenditures. That is the best recipe to create jobs and promote economic growth.

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Revised: June 3, 1995

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