In the September 24th New York Times, there’s an op-ed column advocating a “tiny tax” on foreign exchange transactions. The author, Phillipe Douste-Blazy, proposes a tax of one two-hundredth of one percent on foreign exchange transactions of the most-traded currencies. That small tax would raise $33 billion dollars per year. He proposes using it for global health improvement programs. The tax itself looks like a good idea to me, although there is a huge number of competing uses for the revenue. Just looking at global issues, there is of course also a need for money to address climate change. And each country involved has its own domestic needs. But let’s just look at the math for a minute.
He estimates global foreign exchange transactions to be 800 trillion US dollars per year. (That’s a U.S. trillion, one million million.). According to the World Trade Organization, total trade in goods and services was approximately 20 trillion dollars in 2008. That multiple–foreign exchange transactions are 40 times actual trade in goods and services– is in line with what I’ve seen in several places. Foreign exchange transactions dwarf international trade.
What do we traders get as a side benefit of this huge market? We get a very transparent market and really small costs to exchange money. This is a good deal. How much would a transaction tax reduce transaction volume? I don’t know, but even if it reduced it 50%, actual international trade would still be tiny compared to financial trade. We’d still get a benefit. And humanitarian projects around the world need the money.