The Currency Transaction Tax (CTT) is emerging as a leading new financial instrument for governments seeking to raise large amounts of global, independent, and stable monies. These funds are needed for international development and projects addressing global issues such as public health and climate change. Key questions in developing the CTT are: what should be its rate, how much money would it raise, and how would it affect foreign exchange markets?
In this study, Rodney Schmidt exploits the fact that the CTT, which has not yet been implemented, is functionally equivalent in foreign exchange markets to the bid-ask spread: both are transaction costs. The immediate effect of a CTT newly applied would be to increase bid-ask spreads. To see how the tax would operate in the market, then, he examines statistically the historical relationship between bid-ask spreads and the volume of foreign exchange transactions. Based on this relationship, his goal is to identify a tax rate that can raise a lot of money without disrupting the market. He finds that, at a rate of 0.5 basis points (0.005%), post-implementation changes in spreads and transaction volumes would be well within normal experience. A CTT of 0.5 basis points would raise at least US$33 billion each year.
The CTT is a feasible new source of revenue for development and other global projects. It is safe and easy to implement, and can immediately raise at least US$33 billion of global, independent, and stable revenue each year. The CTT therefore appears to be the most immediate and effective new source of financing sought by the Monterrey Conference on Financing for Development in 2002, and, since then, by the UN and the “Leading Group on Solidarity Levies to Fund Development.”
Rodney Schmidt is Principal Researcher for Finance and Debt at The North-South Institute in Ottawa, Canada. He received his PhD in Economics from the University of Toronto, and worked previously for the Department of Finance and the International Development Research Centre, both of the Government of Canada.