Currency transaction tax
Encyclopedia
A currency transaction tax is a tax
placed on a specific type of currency transaction for a specific purpose. This term has been most commonly associated with the financial sector, as opposed to consumption tax
es paid by consumers.
and the Spahn tax
.
of one currency into another. Named after the economist James Tobin
, the tax is intended to put a penalty on short-term financial round-trip excursions into another currency. Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system
effectively ended.
suggested an alternative involving "a two-tier rate structure consisting of a low-rate financial transactions tax, plus an exchange surcharge at prohibitive rates as a piggyback. The latter would be dormant in times of normal financial activities, and be activated only in the case of speculative attacks. The mechanism allowing the identification of abnormal trading in world financial markets would make reference to a "crawling peg" with an appropriate exchange rate band. The exchange rate would move freely within this band without transactions being taxed. Only transactions effected at exchange rates outside the permissible range would become subject to tax. This would automatically induce stabilizing behavior on the part of market participants."
On June 15, 2004, the Commission of Finance and Budget in the Belgian Federal Parliament approved a bill implementing a Spahn tax. According to the legislation, Belgium
will introduce the Spahn tax
once all countries of the eurozone
introduce a similar law. In July 2005 former Austrian chancellor Wolfgang Schüssel called for a European Union Tobin tax which he thought would base the communities' financial structure on more stable and independent grounds. However, the proposal was rejected by the European Commission.
put forward a proposal, Special Drawing Rights
or SDRs that the rich countries would pledge for the purpose of providing international assistance, without necessarily dismissing the Tobin tax
idea. He stated, "I think there is a case for a Tobin tax... (but) it is not at all clear to me that a Tobin tax would reduce volatility in the currency markets. It is true that it may discourage currency speculation but it would also reduce the liquidity of the marketplace."
, the money moved into another currency for fewer than seven days. In only 1 per cent did the money stay for as long as one year. While the volatile exchange rates caused by all this rapid movement posed problems for national economies, it was the bread and butter of those playing the currency markets. Without constant fluctuations in the currency markets, Schmidt noted, there was little opportunity for profit."
"This certainly seemed to suggest the interests of currency traders and the interests of ordinary citizens were operating at cross-purposes."
"Schmidt also noted another interesting aspect of the foreign- exchange market: The dominant players were the private bank
s, which had huge pools of capital and access to information about currency values. Since much of the market involved moving large sums of money (typically in the tens of millions of dollars) for very short periods of time (often less than a day), banks were perfectly positioned to participate. Among swap transactions
, which represented a major chunk of the foreign exchange market, 86 per cent of the transactions were actually between banks."
A representative of a “pro Tobin tax” NGO argued as follows: "[The Tobin tax] is designed to reduce the power financial markets have to determine the economic policies of national governments. Traditionally, a country’s central bank
buys and sells its own currency on international markets to keep its value relatively stable. The bank buys back its currency when a ‘glut’ caused by an investor selloff threatens to reduce the currency’s value. In the past, most central banks had enough cash in reserve to offset any selloff or ‘attack’. However, this is no longer the case. Speculators now have more cash than all the world’s central banks put together. Official global reserves are less than half the value of one day of global foreign-exchange turnover. Many countries are simply unable to protect their currencies from speculative attack."
"By cutting down on the overall volume of foreign-exchange transactions, a Tobin Tax would mean that central banks would not need as much [reserve money to defend their currency. The tax would allow governments the freedom to act in the best interests of their own economic development, rather than being forced to shape fiscal and monetary policies according to demands of fickle financial markets."
, after an initiative of Presidents Hugo Chavez
from Venezuela
and Néstor Kirchner
from Argentina
.
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
placed on a specific type of currency transaction for a specific purpose. This term has been most commonly associated with the financial sector, as opposed to consumption tax
Consumption tax
A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax...
es paid by consumers.
Types of currency transaction taxes
There are several types of currency transaction taxes that have been proposed, the most prominent being the Tobin taxTobin tax
A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...
and the Spahn tax
Spahn tax
A Spahn tax is a type of currency transaction tax that is meant to be used for the purpose of controlling exchange-rate volatility. This idea was proposed by Paul Bernd Spahn in 1995.-Early history:...
.
Tobin tax
A Tobin tax is a tax on all spot conversionsSpot market
The spot market or cash market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date...
of one currency into another. Named after the economist James Tobin
James Tobin
James Tobin was an American economist who, in his lifetime, served on the Council of Economic Advisors and the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities. He developed the ideas of Keynesian economics, and advocated government intervention to...
, the tax is intended to put a penalty on short-term financial round-trip excursions into another currency. Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
effectively ended.
Spahn tax
In 1995, Paul Bernd SpahnPaul Bernd Spahn
Paul Bernd Spahn is emeritus professor of public finance at the Goethe University, Frankfurt am Main, Germany.He was born in Darmstadt, Germany....
suggested an alternative involving "a two-tier rate structure consisting of a low-rate financial transactions tax, plus an exchange surcharge at prohibitive rates as a piggyback. The latter would be dormant in times of normal financial activities, and be activated only in the case of speculative attacks. The mechanism allowing the identification of abnormal trading in world financial markets would make reference to a "crawling peg" with an appropriate exchange rate band. The exchange rate would move freely within this band without transactions being taxed. Only transactions effected at exchange rates outside the permissible range would become subject to tax. This would automatically induce stabilizing behavior on the part of market participants."
On June 15, 2004, the Commission of Finance and Budget in the Belgian Federal Parliament approved a bill implementing a Spahn tax. According to the legislation, Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
will introduce the Spahn tax
Spahn tax
A Spahn tax is a type of currency transaction tax that is meant to be used for the purpose of controlling exchange-rate volatility. This idea was proposed by Paul Bernd Spahn in 1995.-Early history:...
once all countries of the eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
introduce a similar law. In July 2005 former Austrian chancellor Wolfgang Schüssel called for a European Union Tobin tax which he thought would base the communities' financial structure on more stable and independent grounds. However, the proposal was rejected by the European Commission.
Special Drawing Rights
On September 19, 2001, retired speculator George SorosGeorge Soros
George Soros is a Hungarian-American business magnate, investor, philosopher, and philanthropist. He is the chairman of Soros Fund Management. Soros supports progressive-liberal causes...
put forward a proposal, Special Drawing Rights
Special Drawing Rights
Special Drawing Rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund . Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged...
or SDRs that the rich countries would pledge for the purpose of providing international assistance, without necessarily dismissing the Tobin tax
Tobin tax
A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...
idea. He stated, "I think there is a case for a Tobin tax... (but) it is not at all clear to me that a Tobin tax would reduce volatility in the currency markets. It is true that it may discourage currency speculation but it would also reduce the liquidity of the marketplace."
Impacts
In 1994, Canadian economist Rodney Schmidt noted that "in two-thirds of all the outright forward and currency swap transactionsCurrency swap
A currency swap is a foreign-exchange agreement between two parties to exchange aspects of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency; see foreign exchange derivative. Currency swaps are motivated by comparative advantage...
, the money moved into another currency for fewer than seven days. In only 1 per cent did the money stay for as long as one year. While the volatile exchange rates caused by all this rapid movement posed problems for national economies, it was the bread and butter of those playing the currency markets. Without constant fluctuations in the currency markets, Schmidt noted, there was little opportunity for profit."
"This certainly seemed to suggest the interests of currency traders and the interests of ordinary citizens were operating at cross-purposes."
"Schmidt also noted another interesting aspect of the foreign- exchange market: The dominant players were the private bank
Private bank
Private banks are banks that are not incorporated. A private bank is owned by either an individual or a general partner with limited partner...
s, which had huge pools of capital and access to information about currency values. Since much of the market involved moving large sums of money (typically in the tens of millions of dollars) for very short periods of time (often less than a day), banks were perfectly positioned to participate. Among swap transactions
Currency swap
A currency swap is a foreign-exchange agreement between two parties to exchange aspects of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency; see foreign exchange derivative. Currency swaps are motivated by comparative advantage...
, which represented a major chunk of the foreign exchange market, 86 per cent of the transactions were actually between banks."
A representative of a “pro Tobin tax” NGO argued as follows: "[The Tobin tax] is designed to reduce the power financial markets have to determine the economic policies of national governments. Traditionally, a country’s central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
buys and sells its own currency on international markets to keep its value relatively stable. The bank buys back its currency when a ‘glut’ caused by an investor selloff threatens to reduce the currency’s value. In the past, most central banks had enough cash in reserve to offset any selloff or ‘attack’. However, this is no longer the case. Speculators now have more cash than all the world’s central banks put together. Official global reserves are less than half the value of one day of global foreign-exchange turnover. Many countries are simply unable to protect their currencies from speculative attack."
"By cutting down on the overall volume of foreign-exchange transactions, a Tobin Tax would mean that central banks would not need as much [reserve money to defend their currency. The tax would allow governments the freedom to act in the best interests of their own economic development, rather than being forced to shape fiscal and monetary policies according to demands of fickle financial markets."
Currency transaction taxes that have been implemented
In early November 2007, a regional Tobin tax was adopted by the Bank of the South in Latin AmericaLatin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
, after an initiative of Presidents Hugo Chavez
Hugo Chávez
Hugo Rafael Chávez Frías is the 56th and current President of Venezuela, having held that position since 1999. He was formerly the leader of the Fifth Republic Movement political party from its foundation in 1997 until 2007, when he became the leader of the United Socialist Party of Venezuela...
from Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
and Néstor Kirchner
Néstor Kirchner
Néstor Carlos Kirchner was an Argentine politician who served as the 54th President of Argentina from 25 May 2003 until 10 December 2007. Previously, he was Governor of Santa Cruz Province since 10 December 1991. He briefly served as Secretary General of the Union of South American Nations ...
from Argentina
Argentina
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...
.
Chronology of supporters, opposers and other significant events
See also the Supporters and Opposers of the Tobin tax- 1972 - Supporter: James TobinJames TobinJames Tobin was an American economist who, in his lifetime, served on the Council of Economic Advisors and the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities. He developed the ideas of Keynesian economics, and advocated government intervention to...
, author of a "tax on foreign exchange transactions" which was later dubbed "Tobin taxTobin taxA Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...
" - June, 2000 - Thomas PalleyThomas PalleyThomas Palley is a United States-based economist who has served as the chief economist for the US – China Economic and Security Review Commission. He is currently Schwartz Economic Growth Fellow at the New America Foundation.- Career :...
publishes "Destabilizing Speculation and the Case for an International Currency Transactions Tax" - April 1, 2001 - Supporters: Peter Wahl and Peter Waldow publish "Currency Transaction Tax - a Concept with a Future"
- In 2001 the charity War on WantWar on WantWar on Want is an anti-poverty charity based in London, England. It seeks to highlight the needs of poverty-stricken areas around the world and lobbies governments and international agencies to tackle problems as well as raising public awareness of the concerns of developing nations while...
released The Robin Hood TaxRobin Hood taxThe Robin Hood tax commonly refers to a package of financial transaction taxes , proposed by a campaigning group of civil society NGOs. Campaigners have suggested the tax could be implemented globally, regionally or unilaterally by individual nations...
, a report presenting their case for a currency transactions tax. War on Want also sets up the Tobin Tax Network to develop the proposal and press for its introduction. - September, 2006 - The term "currency transaction tax (CTT)" was used in a publication by Stephen Spratt
- October, 2007 - Rodney Schmidt publishes The Currency Transaction Tax: Rate and Revenue Estimates
See also
- ATTAC (Association for the Taxation of Financial Transactions for the Aid of Citizens)
- Bank for International SettlementsBank for International SettlementsThe Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
- Bank taxBank taxA bank tax is a tax on banks. One of the earliest modern uses of the term "bank tax" occurred in the context of the Financial crisis of 2007–2010....
- Central banks - which issue currency
- Credit crunchCredit crunchA credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...
- Currencies
- Currency crisisCurrency crisisA currency crisis, which is also called a balance-of-payments crisis, is a sudden devaluation of a currency caused by chronic balance-of-payments deficits which usually ends in a speculative attack in the foreign exchange market. It occurs when the value of a currency changes quickly, undermining...
- Currency transaction reportCurrency transaction reportA currency transaction report is a report that U.S. financial institutions are required to file for each deposit, withdrawal, exchange of currency, or other payment or transfer, by, through, or to the financial institution which involves a transaction in currency of more than $10,000...
- Exorbitant privilegeExorbitant privilegeThe exorbitant privilege is a term coined in the 1960s by Valéry Giscard d'Estaing, then the French Minister of Finance.This quote is generally misattributed to Charles de Gaulle, who is said to have had somewhat similar views....
- Financial markets
- Financial transaction taxFinancial transaction taxA financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
- Fluctuation in exchange rates
- Foreign exchange controlsForeign exchange controlsForeign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents.Common foreign exchange controls include:...
- Foreign exchange derivativeForeign exchange derivativeA Foreign exchange derivative is a financial derivative where the underlying is a particular currency and/or its exchange rate. These instruments are used either for currency speculation and arbitrage or for hedging foreign exchange risk. For detail see:...
- Foreign exchange marketForeign exchange marketThe foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
- Liquidity crisisLiquidity crisisIn financial economics, liquidity is a catch-all term that may refer to several different yet closely related concepts. Among other things, it may refer to Asset Market liquidity In financial economics, liquidity is a catch-all term that may refer to several different yet closely related...
- Money marketMoney marketThe money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
- Noise (economic)Noise (economic)Economic noise, or simply noise, describes a theory of pricing developed by Fischer Black. To Black, noise is the opposite of information. Sometimes it's hype, other times it's inaccurate ideas, other times it's inaccurate data; noise has many forms...
- Paul Bernd SpahnPaul Bernd SpahnPaul Bernd Spahn is emeritus professor of public finance at the Goethe University, Frankfurt am Main, Germany.He was born in Darmstadt, Germany....
- Robin Hood TaxRobin Hood taxThe Robin Hood tax commonly refers to a package of financial transaction taxes , proposed by a campaigning group of civil society NGOs. Campaigners have suggested the tax could be implemented globally, regionally or unilaterally by individual nations...
- Spahn taxSpahn taxA Spahn tax is a type of currency transaction tax that is meant to be used for the purpose of controlling exchange-rate volatility. This idea was proposed by Paul Bernd Spahn in 1995.-Early history:...
- SpeculationSpeculationIn finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
- Speculative attackSpeculative attackA speculative attack is a term used by economists to denote a precipitous acquisition of something by previously inactive speculators. The first model of a speculative attack was contained in a 1975 discussion paper on the gold market by Stephen Salant and Dale Henderson at the Federal Reserve Board...
- Speculation in foreign exchange markets
- Spot marketSpot marketThe spot market or cash market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date...
- Sudden stop (economics)Sudden stop (economics)A sudden stop in capital flows is defined as a sudden slowdown in private capital inflows into emerging market economies, and a corresponding sharp reversal from large current account deficits into smaller deficits or small surpluses. Sudden stops are usually followed by a sharp decrease in output,...
- Tobin taxTobin taxA Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...
- Transfer taxTransfer taxA transfer tax is a tax on the passing of title to property from one person to another.In a narrow legal sense, a transfer tax is essentially a transaction fee imposed on the transfer of title to property. This kind of tax is typically imposed where there is a legal requirement for registration of...
- Volatility (finance)Volatility (finance)In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
- Volatility riskVolatility riskVolatility risk is the risk of a change of price of a portfolio as a result of changes in the volatility of a risk factor. It usually applies to portfolios of derivatives instruments, where the volatility of its underlyings is a major influencer of prices....
- Consequences of currency volatility
- 1990s work of War on Want
Related economic crises
- 1994 economic crisis in Mexico1994 economic crisis in MexicoThe 1994 Economic Crisis in Mexico, widely known as the Mexican peso crisis, was caused by the sudden devaluation of the Mexican peso in December 1994....
- 1997 Asian Financial Crisis
- 1998 Russian financial crisis
- Argentine economic crisis (1999–2002)
- Financial crisis of 2007–2010