Currency Transaction Levy (CTL) as a source of long term financing of SME Emergency and Development Funds

1. What is a CTL ?a) 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.b) 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 stability.c) 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.

2. Levy rate and revenue potentiala) 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. b) 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.

3. Is a CTL feasible on national level ? The answer is : YESa) 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.b) 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%. 4. CTL in sovereign Countriesa) We recommend that Governments shall enter with the local Banks into “Agreements on the implementation of a voluntary CTL”.b) 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.c) Proceeds of the CTL shall be lodged in a SMEs- Trust Funds for Economic Development (SMETFED), controlled by the Commission under 4. b)d) 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 Countriese) Governments shall finance a SWOT Study on the strengths, weaknesses, opportunities and threats of a CTL to be worked out by independent experts in co-operation with the University for Entreprenology – IUE, USA.