Tobin tax
Encyclopedia
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. 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
of monetary
management ended in 1971. Prior to 1971, one of the chief features of the Bretton Woods system was an obligation for each country to adopt a monetary policy
that maintained the exchange rate
of its currency within a fixed value—plus or minus one percent—in terms of gold
. Then, on August 15, 1971, United States President Richard Nixon
announced that the United States dollar
would no longer be convertible to gold
, effectively ending the system. This action created the situation whereby the U.S. dollar became the sole backing of currencies and a reserve currency
for the member states of the Bretton Woods system, leading the system to collapse in the face of increasing financial strain in that same year. In that context, Tobin suggested a new system for international currency stability, and proposed that such a system include an international charge on foreign-exchange
transactions.
In 2001, in another context, just after "the nineties' crises
in Mexico, Southeast Asia and Russia," which included the 1994 economic crisis in Mexico
, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis, Tobin summarized his idea:
Though James Tobin suggested the rate as "let's say 0.5%", in that interview setting, others have tried to be more precise in their search for the optimum rate.
was to find a way to manage exchange-rate volatility. In his view, "currency exchanges transmit disturbances originating in international financial markets. National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exchanges, without real hardship and without significant sacrifice of the objectives of national economic policy with respect to employment, output, and inflation.”
Tobin saw two solutions to this issue. The first was to move “toward a common currency, common monetary and fiscal policy, and economic integration.” The second was to move “toward greater financial segmentation between nations or currency areas, permitting their central banks and governments greater autonomy in policies tailored to their specific economic institutions and objectives.” Tobin’s preferred solution was the former one but he did not see this as politically viable so he advocated for the latter approach: “I therefore regretfully recommend the second, and my proposal is to throw some sand in the wheels of our excessively efficient international money markets.”
Tobin’s method of “throwing sand in the wheels” was to suggest a tax on all spot conversions of one currency into another, proportional to the size of the transaction. He said:
In the development of his idea, Tobin was influenced by the earlier work of John Maynard Keynes
on general financial transaction taxes:
Keynes' concept stems from 1936 when he proposed that a transaction tax
should be levied on dealings on Wall Street
, where he argued that excessive speculation by uninformed financial traders increased volatility. For Keynes (who was himself a speculator) the key issue was the proportion of 'speculators' in the market, and his concern that, if left unchecked, these types of players would become too dominant. Keynes writes:
in 1995, "Analysis has shown that the Tobin tax as originally proposed is not viable and should be laid aside for good." Furthermore, he said:
Spahn suggested an alternative involving
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."
(CTT) in the manner of Tobin's original idea, and other times it has been used interchangeably with the various different ideas of a more general financial transaction tax
(FTT). In both cases, the various ideas proposed have included both national and multinational concepts.
A 2001 example of its association with the specific currency transaction tax is shown here:
A 2009 example of its association with a general financial transaction tax is shown here:
and fluctuation in exchange rates: "Money scrambles around the globe in quest of the banker’s holy grail – sound money of stable value – while undermining every attempt by cash-strapped governments to provide the very stability the wealthy crave."
Frank then corroborates Tobin's comments on the problems this instability can create (e.g. high interest rates) for developing countries
such as Mexico (1994), countries in South East Asia (1997), and Russia (1998). She writes, "Governments of developing countries try to peg their currencies, only to have the peg undone by capital flight. They offer to dollarize
or euro
ize, only to find themselves so short of dollars that they are forced to cut off growth. They raise interest rates to extraordinary levels to protect investors against currency losses, only to topple their economies and the source of investor profits. ... IMF bailouts provide a brief respite for international investors but they are, even from the perspective of the wealthy, a short-term solution at best ... they leave countries with more debt and fewer options."
, leading to an increase of long-term investor utility
or more predictable levels of exchange rates. The impact of such a tax on volatility is of particular concern because the main justification given for this tax by Tobin was to improve the autonomy of macroeconomic policy by curbing international currency speculation and its destabilizing effect on national exchange rates. Economist Korkut Erturk states:
Most studies of the likely impact of the Tobin tax on financial markets volatility have been theoretical—researches conducted laboratory simulations or constructed economic models. Some of these theoretical studies have concluded that a transaction tax could reduce volatility by crowding out speculators or eliminating individual 'noise
traders' but that it 'would not have any impact on volatility in case of sufficiently deep global markets such as those in major currency pairs, unlike in case of less liquid markets, such as those in stocks and (especially) options, where volatility would probably increase with reduced volumes. Behavioral finance
theoretical models, such as those developed by Wei and Kim (1997) or Westerhoff and Dieci (2004) suggest that transaction taxes can reduce volatility, at least in the foreign exchange market. In contrast, some papers find a positive effect of a transaction tax on market volatility. Lanne and Vesala (2006) argue that a transaction tax "is likely to amplify, not dampen, volatility in foreign exchange markets", because such tax penalises informed market participants disproportionately more than uninformed ones, leading to volatility increases.
In most of the available empirical studies however, no statistically significant causal link has been found between an increase in transaction costs (transaction taxes or government-controlled minimum brokerage commissions) and a reduction in volatility—in fact a frequent unintended consequence observed by 'early adopters' after the imposition of a financial transactions tax (see Werner, 2003) has been an increase in the volatility of stock market returns, usually coinciding with significant declines in liquidity (market volume) and thus in taxable revenue (Umlauf, 1993).
For a recent evidence to the contrary, see, e.g., Liu and Zhu (2009), which may be affected by selection bias
given that their Japanese sample is subsumed by a research conducted in 14 Asian countries by Hu (1998), showing that "an increase in tax rate reduces the stock price but has no significant effect on market volatility". As Liu and Zhu (2009) point out, [...] the different experience in Japan highlights the comment made by Umlauf (1993) that it is hazardous to generalize limited evidence when debating important policy issues such as the STT [securities transaction tax] and brokerage commissions."
See also "Tobin tax proponents response to empirical evidence on volatility"
, notes that
in 2001, the tax rate he suggested was 0.5%. His use of the phrase "let's say" ("sagen wir") indicated that he was not, at that point, in an interview setting, trying to be precise. Others have tried to be more precise or practical in their search for the Tobin tax rate.
Tax rates of the magnitude of 0.1%-1% have been proposed by normative
economists, without addressing how practicable these would be to implement. In positive economics
studies however, where due reference was made to the prevailing market conditions, the resulting tax rates have been significantly lower.
According to Garber (1996), competitive pressure on transaction costs (spreads
) in currency markets has reduced these costs to fractions of a basis point
. For example the EUR.USD currency pair
trades with spreads as tight as 1/10 of a basis point, i.e. with just a 0.00001 difference between the bid and offer
price, so "a tax on transactions in foreign exchange markets imposed unilaterally, 6/1000 of a basis point (or 0.00006%) is a realistic maximum magnitude." Similarly Shvedov (2004) concludes that "even making the unrealistic assumption that the rate of 0.00006% causes no reduction of trading volume, the tax on foreign currency exchange transactions would yield just $4.3 billion a year, despite an annual turnover in dozens of trillion dollars.
Accordingly, one of the modern Tobin tax versions, called the Sterling Stamp Duty, sponsored by certain UK charities, has a rate of 0.005% "in order to avoid market distortions", i.e., 1/100 of what Tobin himself envisaged in 2001. Sterling Stamp Duty supporters argue that this tax rate would not adversely affect currency markets and could still raise large sums of money.
The same rate of 0.005% was proposed for a currency transactions tax (CTT) in a report prepared by Rodney Schmidt for The North-South Institute (a Canadian NGO whose "research supports global efforts to [..] improve international financial systems and institutions"),. Schmidt (2007) used the observed negative relationship between bid-ask spreads
and transactions volume in foreign exchange markets to estimate the maximum "non-disruptive rate" of a currency transaction tax. A CTT tax rate designed with a pragmatic goal of raising revenue for various development projects, rather than to fulfill Tobin's original goals (of "slowing the flow of capital across borders" and "preventing or managing exchange rate crises"), should avoid altering the existing "fundamental market behavior", and thus, according to Schmidt, must not exceed 0.00005, i.e., the observed levels of currency transactions costs (bid-ask spreads).
Assuming that all currency market participants incur the same maximum level of transaction costs (the full cost of the bid-ask spread), as opposed to earning them in their capacity of market makers, and assuming that no untaxed substitutes exist for spot currency markets transactions (such as currency futures
and currency exchange traded funds), Schmidt (2007) finds that that a CTT rate of 0.00005 would be nearly volume-neutral, reducing foreign exchange transaction volumes by only 14%. Such volume-neutral CTT tax would raise relatively little revenue though, estimated at around $33 bn annually, i.e., an order of magnitude less than the "carbon tax
[which] has by far the greatest revenue-raising potential, estimated at $130-750 bn annually." The author warns however that both these market-based revenue estimates "are necessarily speculative
", and he has more confidence in the revenue-raising potential of "The International Finance Facility
(IFF) and International Finance Facility for Immunisation (IFFIm)."
In 2000, a representative of another "pro-Tobin tax" non-governmental organization
stated that Tobin's idea was
of the World Bank
, said, on October 5, 2009, that modern technology meant that was no longer the case. Stiglitz said, the tax is "much more feasible today" than a few decades ago, when Tobin recanted.
However, on November 7, 2009, at the G20 finance ministers summit in Scotland, Dominique Strauss-Khan, head of the International Monetary Fund
, said "transactions are very difficult to measure and so it's very easy to avoid a transaction tax."
Nevertheless in early December 2009, economist Stephany Griffith-Jones agreed that the "greater centralisation and automisation of the exchanges and banks clearing and settlements systems ... makes avoidance of payment more difficult and less desirable."
In January, 2010, feasibility of the tax was supported and clarified by researchers Rodney Schmidt, Stephan Schulmeister and Bruno Jetin who noted “it is technically easy to collect a financial tax from exchanges ... transactions taxes can be collected by the central counterparty
at the point of the trade, or automatically in the clearing or settlement process
." (All large-value financial transactions go through three steps. First dealers agree to a trade; then the dealers’ banks match the two sides of the trade through an electronic central clearing system; and finally, the two individual financial instruments are transferred simultaneously to a central settlement system. Thus a tax can be collected at the few places where all trades are ultimately cleared or settled.)
When presented with the problem of speculators shifting operations to offshore
tax havens, a representative of a “pro Tobin tax” NGO argued as follows:
Based on digital technology, a new form of taxation, levied on bank transactions, was successfully used in Brazil from 1993 to 2007 and proved to be evasion-proof, more efficient and less costly than orthodox tax models. In his book, Bank transactions: pathway to the single tax ideal, Marcos Cintra carries out a qualitative and quantitative in-depth comparison of the efficiency, equity and compliance costs of a bank transactions tax relative to orthodox tax systems, and opens new perspectives for the use of modern banking technology in tax reform across the world.
In the year 2000, "eighty per cent of foreign-exchange trading [took] place in just seven cities. Agreement [to implement the tax] by [just three cities,] London, New York and Tokyo alone, would capture 58 per cent of speculative trading."
The revenues from taxes were disappointing; for example, revenues from the tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kronor per year. They did not amount to more than 80 million Swedish kronor in any year and the average was closer to 50 million. In addition, as taxable trading volumes fell, so did revenues from capital gains taxes, entirely offsetting revenues from the equity transactions tax that had grown to 4,000 million Swedish kronor by 1988.
On the day that the tax was announced, share prices fell by 2.2%. But there was leakage of information prior to the announcement, which might explain the 5.35% price decline in the 30 days prior to the announcement. When the tax was doubled, prices again fell by another 1%. These declines were in line with the capitalized value of future tax payments resulting from expected trades. It was further felt that the taxes on fixed-income securities only served to increase the cost of government borrowing, providing another argument against the tax.
Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991 the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.
Wrobel's studies do not address the global economy as a whole, as James Tobin did when he spoke of "the nineties' crises
in Mexico, South East Asia and Russia," which included the 1994 economic crisis in Mexico
, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis.
In addition, ABAC expressed further concerns in the letter:-
Note - APEC's 21 Member Economies are Australia, Brunei Darussalam, Canada, Chile, People's Republic of China, Hong Kong, China, Indonesia, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, The Republic of the Philippines, The Russian Federation, Singapore, Chinese Taipei, Thailand, United States of America, Viet Nam.
The ITUC/APLN stated:
The ITUC shares its support for Tobin Tax with the Trade Union Advisory Council (TUAC), the official OECD trade union body, in a research on the feasibility, strengths and weaknesses of a potential Tobin Tax. ITUC, APLN and TUAC refer to Tobin Tax as the Financial Transactions Tax.
Evan Davis, BBC Radio 4:
Prof. Simon Johnson
:
In 2009, U.S. Representative
Peter DeFazio
of Oregon
proposed a financial transaction tax in his "Let Wall Street Pay for the Restoration of Main Street Bill
". (This was proposed domestically for the United States only.)
It is also possible to estimate the impact of a reduction in stock market volume caused by taxing stock transactions on the rise in the overall unemployment rate. For every 10 percent decline in stock market volume, elasticities estimated by Schwabish implied that a stock transaction ("transfer") tax could cost New York City between 30,000 and 42,000 private-sector jobs, and if the stock market volume reductions reached levels observed by Umlauf (1993) in Sweden after a stock FTT was introduced there ("By 1990, more than 50% of all Swedish trading had moved to London") then according to Schwabish (2005), following an introduction of a FTT tax, there would be 150,000-210,000 private-sector jobs losses in the New York alone.
In 2000, Round argued as follows:
The cost of currency hedges
—and thus "certainty what importers and exporters' money is worth"—has nothing to do with volatility whatsoever, as this cost is exclusively determined by the interest rate differental between two currencies. Nevertheless, as Tobin said, "If ... [currency] is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive."
economists, without addressing the practicability of implementing a tax at these levels. In positive economics
studies however, where due reference was paid to the prevailing market conditions, the resulting tax rates have been significantly lower.
For instance, Edwards (1993) concluded that if the transaction tax revenue from taxing the futures
markets were to be maximized (see Laffer curve
), with the tax rate not leading to a prohibitively large increase in the marginal cost
of market participants, the rate would have to be set so low that "a tax on futures markets will not achieve any important social objective and will not generate much revenue."
, widen bid-ask spreads
for end users such as investors, savers and hedgers, and destroy liquidity.
These Tobin tax proponents have to therefore rely on indirect evidence in their favor, reinterpreting studies which do not deal directly with volatility, but instead with trading volume
(with volume being generally reduced by transaction taxes, though it constitutes their tax base, see: negative feedback
loop). This allows these Tobin tax proponents to state that "some studies show (implicitly) that higher transaction costs might dampen price volatility. This is so because these studies report that a reduction of trading activities is associated with lower price volatility." So if a study finds that reducing trading volume or trading frequency reduces volatility, these Tobin tax supporters combine it with the observation that Tobin-style taxes are volume-reducing, and thus should also indirectly reduce volatility ("this finding implies a negative relationship between [..] transaction tax [..] and volatility, because higher transaction costs will 'ceteris paribus' always dampen trading activities)." (Schulmeister et al., 2008, p. 18).
There is yet another reason why some proponents of the Tobin tax maintain that it can reduce volatility, despite prevailing empirical evidence to the contrary. This is possible, because some Tobin tax supporters created a concept of a separate, custom-defined volatility. Rather than adopting one of the standard statistical definitions (e.g., conditional variance
of returns, see Engle, 1982 ) leading economists favoring the Tobin tax prefer to define volatility as a "long-term overshooting of speculative prices" (see Tobin, 1978 and Eichengreen, Tobin and Wyplosz, 1995 ). Evidence about this special type of volatility is missing and this is why some of the proponents, instead of conducting their own tests, prefer to blame financial econometric researchers for not addressing their special needs:
Thus the beneficial impact of transaction taxes on the "Tobin volatility" can co-exist as a valid economic theory even without direct supporting evidence from the statistical volatility research, simply because of the special volatility definition, which allows all economists defending the Tobin tax to escape Popperian falsifiability
.
Another shortcoming of all of the empirical volatility studies pointed out by some of the Tobin tax proponents is the lack of distinction between "basic" and "excessive" volatility, which "might have contributed to the contradictory and, hence, inconclusive results of these studies" (Schulmeister et al., 2008, p. 11-12). Unfortunately, no tests have been conducted so far, which would be able to operationalize "excessive" volatility assumed to exist by the Tobin tax theory (see Schulmeister et al., 2008, p. 11), therefore the acceptance of the Tobin-style transactions tax as a fiscal or monetary policy instrument requires clear understanding that basic theoretical phenomena underlying this tax, such as "excessive" volatility, still remain untested.
"..
Matthew Sinclair, Research Director of TaxPayers' Alliance
, argues that "The whole idea of a Tobin tax is based on the flawed view that trading – or speculation – is a bad thing. The truth is that it isn’t: it helps the process of price discovery, makes markets work better, enhances liquidity, ensures that resources are priced correctly and generally helps oil the cogs of the global economy."
On the other side of the debate were the leaders of Germany who, in May 2008, planned to propose a worldwide ban on oil trading by speculators, blaming the 2008 oil price rises on manipulation by hedge funds. At that time India, with similar concerns, had already suspended futures trading of five commodities.
On December 3, 2009, US Congressman Peter DeFazio
stated, "The American taxpayers bailed out Wall Street during a crisis brought on by reckless speculation in the financial markets, ... This [ proposed financial transaction tax ] legislation will force Wall Street to do their part and put people displaced by that crisis back to work."
On January 21, 2010, President Barack Obama
endorsed the Volcker Rule
which deals with proprietary trading of investment banks and restricts banks from making certain speculative kinds of investments if they are not on behalf of their customers. Former U.S. Federal Reserve Chairman Paul Volcker
, President Obama's advisor, has argued that such speculative activity
played a key role in the financial crisis of 2007–2010.
Volcker endorsed only the UK's tax on bank bonuses, calling it "interesting", but was wary about imposing levies on financial market transactions, because he is "instinctively opposed" to any tax on financial transactions.
, commented directly on the claims of Keynes and Tobin that 'taxes on financial transactions would reduce financial volatility'. Harford wrote:-
transaction taxes and a hypothetical CTT (Tobin) can probably be treated interchangeably. They did not find any evidence on the differential effects of introducing or removing, stock transactions taxes or a hypothetical currency (Tobin) tax on any subset of markets or all markets.
Researchers have used models belonging to the GARCH family to describe both the volatility behavior of stock market
returns and the volatility behavior of foreign exchange rates. This is used as evidence that the similarity between currencies and stocks in the context of a tax designed to curb volatility such as a CTT (or FTT in general) can be inferred from the almost identical (statistically indistinguishable) behavior of the volatilities of equity and exchange rate returns.
According to Stephan Schulmeister, Margit Schratzenstaller, and Oliver Picek (2008), from the practical viewpoint it is no longer possible to introduce a non-currency transactions tax (even if foreign exchange transactions were formally exempt) since the advent of currency derivatives
and currency exchange traded funds. All of these would have to be taxed together under a "non-currency" financial transactions tax (such as under certain proposals] in the U.S. in 2009 which, although not intending to tax currencies directly, would still do so due to taxation of currency futures and currency exchange traded funds). Because these three groups of instruments are nearly perfect substitutes, if at least one of these groups were to be exempt, it would likely attract most market volume from the taxed alternatives.
According to Stephan Schulmeister, Margit Schratzenstaller, and Oliver Picek (2008), restricting the financial transactions tax to foreign exchange only (as envisaged originally by Tobin) would not be desirable. Any "general FTT seems...more attractive than a specific transaction tax" (such as a currency-only Tobin tax), because it could reduce tax avoidance (i.e., substitution of similar untaxed instruments), could significantly increase the tax base and could be implemented more easily on organized exchanges than in a dealership market like the global foreign exchange market. (See also the discussion of tax avoidance as it relates to a currency transaction tax.)
On October 5, 2009, Joseph Stiglitz said that any new tax should be levied on all asset classes – not merely foreign exchange, and would be based on the gross value of the assets, thereby helping to discourage the creation of asset bubbles.
" from 1972 lay dormant for more than 20 years but was revived by the advent of the 1997 Asian Financial Crisis. In December, 1997 Ignacio Ramonet
, editor of Le Monde Diplomatique
, renewed the debate around the Tobin tax with an editorial titled "Disarming the markets". Ramonet proposed to create an association for the introduction of this tax, which was named ATTAC (Association for the Taxation of financial Transactions for the Aid of Citizens). The tax then became an issue of the global justice movement
or alter-globalization
movement and a matter of discussion not only in academic institutions but even in streets and in parliaments in the UK, France, and around the world.
In an interview given to the Italian independent radio network Radio Popolare
in July 2001 James Tobin distanced himself from the global justice movement
. «There are agencies and groups in Europe that have used the Tobin Tax as an issue of broader campaigns, for reasons that go far beyond my proposal. My proposal was made into a sort of milestone for an antiglobalization program». James Tobin's interview with Radio Popolare
was quoted by the Italian foreign minister at the time, former director-general of the World Trade Organisation Renato Ruggiero
, during a Parliamentary debate on the eve of the G8 2001 summit in Genoa.
Afterwards James Tobin distanced himself from the global justice movement
also in an interview given to Der Spiegel
in 2001, and continued to state the validity of his proposal,
Tobin observed that, while his original proposal had only the goal of "putting a brake on the foreign exchange trafficking", the antiglobalization movement had stressed "the income from the taxes with which they want to finance their projects to improve the world". He declared himself not contrary to this use of the tax's income, but stressed that it was not the important aspect of the tax.
ATTAC and other organizations have recognized that while they still consider Tobin's original aim as paramount, they think the tax could produce funds for development needs in the South (such as the Millennium Development Goals
), and allow governments, and therefore citizens, to reclaim part of the democratic space conceded to the financial markets.
In March, 2002, London School of Economics
Professor Willem Buiter, who studied under James Tobin, wrote a glowing obituary for the man, but also remarked that, "This [Tobin Tax] ... was in recent years adopted by some of the most determined enemies of trade liberalisation, globalisation and the open society." Buiter added, "The proposal to use the Tobin tax as a means of raising revenues for development assistance was rejected by Tobin, and he forcefully repudiated the anti-globalisation mantra of the Seattle crowd." In September 2009, Buiter also wrote in the Financial Times
, "Tobin was a genius ... but the Tobin tax was probably his one daft idea".
In those same "years" that Buiter spoke of, the Tobin tax was also "adopted" or supported in varying degrees by the people who were not, as he put it, "enemies of trade liberalisation." Among them were several supporters from 1990 to 1999, including Larry Summers and several from 2000 to 2004, including lukewarm support from George Soros.
manage a Tobin tax would solve this problem and would give the UN a large source of funding independent from donations by participating states. However, there have also been initiatives of national dimension about the tax. (This is in addition to the many countries that have foreign exchange controls
.)
Whilst finding some support in countries with strong left-wing political movements such as France and Latin America
, the Tobin tax proposal came under much criticism from economists and governments, especially those with liberal markets and a large international banking sector, who said it would be impossible to implement and would destabilise foreign exchange markets.
Most of the actual implementation of Tobin taxes, whether in the form of a specific currency transaction tax
, or a more general financial transaction tax
, has occurred at a national level. In July, 2006, analyst Marion G. Wrobel examined the international experiences of various countries with financial transaction taxes.
The revenues from taxes were disappointing; for example, revenues from the tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kronor per year. They did not amount to more than 80 million Swedish kronor in any year and the average was closer to 50 million. In addition, as taxable trading volumes fell, so did revenues from capital gains taxes, entirely offsetting revenues from the equity transactions tax that had grown to 4,000 million Swedish kronor by 1988.
On the day that the tax was announced, share prices fell by 2.2%. But there was leakage of information prior to the announcement, which might explain the 5.35% price decline in the 30 days prior to the announcement. When the tax was doubled, prices again fell by another 1%. These declines were in line with the capitalized value of future tax payments resulting from expected trades. It was further felt that the taxes on fixed-income securities only served to increase the cost of government borrowing, providing another argument against the tax.
Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991 the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.
Wrobel's studies do not address the global economy as a whole, as James Tobin did when he spoke of "the nineties' crises
in Mexico, South East Asia and Russia," which included the 1994 economic crisis in Mexico
, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis.
(FTT) is Stamp Duty Reserve Tax (SDRT) and stamp duty
. Stamp duty was introduced as an ad valorem tax on share purchases in 1808, preceding by over 150 years the Tobin tax on currency transactions. Changes were made in 1963. In 1963 the rate of the UK Stamp Duty was 2%, subsequently fluctuating between 1% and 2%, until a process of its gradual reduction started in 1984, when the rate was halved, first from 2% to 1%, and then once again in 1986 from 1% to the current level of 0.5%.
The changes in Stamp Duty rates in 1974, 1984, and 1986 provided researchers with "natural experiments", allowing them to measure the impact of transaction taxes on market volume, volatility, returns, and valuations of UK companies listed on the London Stock Exchange
. Jackson and O'Donnel (1985), using UK quarterly data, found that the 1% cut in the Stamp Duty in April 1984 from 2% to 1% lead to a "dramatic 70% increase in equity turnover" . Analyzing all three Stamp Duty rate changes, Saporta and Kan (1997) found that the announcements of tax rate increases (decreases) were followed by negative (positive) returns, but even though these results were statistically significant, they were likely to be influenced by other factors, because the announcements were made on Budget Days. Bond et al. (2005) confirmed the findings of previous studies, noting also that the impact of the announced tax rate cuts was more beneficial (increasing market value more significantly) in case of larger firms, which had higher turnover, and were therefore more affected by the transaction tax than stocks of smaller companies, less frequently traded.
Because the UK tax code provides exemptions from the Stamp Duty Reserve Tax for all financial intermediaries, including market makers, investment banks and other members of the LSE, and due to the strong growth of the contracts for difference (CFD) industry, which provides UK investors with untaxed substitutes for LSE stocks, according to the Oxera (2007) report, more than 70% percent of the total UK stock market volume, including the entire institutional volume remained (in 2005) exempt from the Stamp Duty, in contrast to the common perception of this tax as a "tax on bank transactions" or a "tax on speculation". On the other hand, as much as 40% of the Stamp Duty revenues come from taxing foreign residents, because the tax is "chargeable whether the transaction takes place in the UK or overseas, and whether either party is resident in the UK or not."
firm Intelligence Capital, who found that a tax on Pound sterling
wherever it was traded in the world, as opposed to a tax on all currencies traded in the UK, was indeed feasible and could be unilaterally implemented by the UK government.
The Sterling Stamp Duty, as it became known, was to be set at a rate 200 times lower than Tobin had envisaged in 2001, which “pro Tobin tax” supporters claim wouldn't have affected currency markets and could still raise large sums of money. The global currency market grew to $3,200 billion a day in 2007, or £400,000 billion per annum with the trade in sterling, the fourth most traded currency in the world, worth £34,000 billion a year. A sterling stamp duty set at 0.005% as some claim would have raised in the region of £2 billion a year in 2007. The All Party Parliamentary Group for Debt, Aid and Trade published a report in November 2007 into financing for development in which it recommended that the UK government undertake rigorous research into the implementation of a 0.005% stamp duty on all sterling foreign exchange transactions, to provide additional revenue to help bridge the funding gap required to pay for the Millennium Development Goals
.
Haq, Mahbub ul; Kaul, Inge; Grunberg, Isabelle (August 1996). The Tobin Tax: Coping with Financial Volatility. Oxford University Press. ISBN 978-0-19-511180-4.
. However, it was overturned by March 2002 by the French Senate
.
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 Tobin 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 to base the communities' financial structure on more stable and independent grounds. However, the proposal was rejected by the European Commission
.
On November 23, 2009, the President of the European Council
, Herman Van Rompuy
, after attending a meeting of the Bilderberg Group
argued for a European version of the Tobin tax. This tax would go beyond just financial transactions: "all shopping and petrol would be taxed.".
Countering him was his sister, Christine Van Rompuy, who said, "any new taxes would directly affect the poor".
On June 29, 2011, the European Commission called for Tobin-style taxes on the EU's financial sector to generate direct revenue starting from 2014. At the same time it suggested to reduce existing levies coming from the 27 member states.
passed a resolution directing the government to "enact a tax on financial transactions in concert with the international community." However, ten years later, in November 2009, at the G20 finance ministers summit in Scotland, the representatives of the minority government
of Canada spoke publicly on the world stage in opposition to that Canadian House of Commons
resolution.
In September 2009, French president Nicolas Sarkozy
brought up the issue of a Tobin tax once again, suggesting it be adopted by the G20.
On November 7, 2009, prime minister Gordon Brown said that G-20 should consider a tax on speculation, although did not specify that it should be on currency trading alone. The BBC reported that there was a negative response to the plan among the G20.
By December 11, 2009, European Union
leaders expressed broad support for a Tobin tax in a communiqué sent to the International Monetary Fund
. On that day, the Financial Times
reported the following:
For supporters of a Tobin tax, there is a wide range of opinion on who should administer a global Tobin tax and what the revenue should be used for. There are some who think that it should take the form of an insurance: In early November 2009, at the G20 finance ministers summit in Scotland, the British Prime Minister "Mr. Brown
and Nicolas Sarkozy
, France’s president, suggested that revenues from the Tobin tax could be devoted to the world’s fight against climate change, especially in developing countries. They suggested that funding could come from “a global financial transactions tax." However British officials later argued the main point of a financial transactions tax would be provide insurance for the global taxpayer against a future banking crisis."
This scenario is possible, given the events in May and June, 2010:
On June 28, 2010, the European Union's executive said it will study whether the European Union should go alone in imposing a tax on financial transactions
after G20 leaders failed to agree on the issue.
The financial transactions tax would be separate from a bank levy, or a resolution levy, which some governments are also proposing to impose on banks to insure them against the costs of any future bailouts. EU leaders instructed their finance ministers, in May, 2010, to work out by the end of October 2010, details for the banking levy, but any financial transaction tax remains much more controversial.
from Venezuela
and Néstor Kirchner
from Argentina
.
." These are eight international development
goals that 192 United Nations member states
and at least 23 international organizations have agreed (in 2000) to achieve by the year 2015. They include reducing extreme poverty
, reducing child mortality
rates, fighting disease epidemics such as AIDS
, and developing a global partnership for development.
In 2000, a representative of a “pro Tobin tax” NGO proposed the following:
At the UN September 2001 World Conference against Racism, when the issue of compensation for colonialism and slavery arose in the agenda, Fidel Castro
, the President of Cuba
, advocated the Tobin Tax to address that issue. (According to Cliff Kincaid, Castro advocated it "specifically in order to generate U.S. financial reparations to the rest of the world," however a closer reading of Castro's speech shows that he never did mention "the rest of the world" as being recipients of revenue.) Castro cited Holocaust reparations as a previously established precedent for the concept of reparation
s.
Castro also suggested that the United Nations be the administrator of this tax, stating the following:
On March 6, 2006, US Congressman Ron Paul
stated the following:
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...
, was originally defined as a tax
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...
on all spot conversions
Spot 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
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
into another. The tax is intended to put a penalty on short-term financial round-trip excursions into another currency.
Tobin suggested his currency transaction tax
Currency transaction tax
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 taxes paid by consumers....
in 1972 in his Janeway Lectures at Princeton
Princeton University
Princeton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....
, 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...
of monetary
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
management ended in 1971. Prior to 1971, one of the chief features of the Bretton Woods system was an obligation for each country to adopt a monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
that maintained the exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
of its currency within a fixed value—plus or minus one percent—in terms of gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
. Then, on August 15, 1971, United States President Richard Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...
announced that the United States dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
would no longer be convertible to gold
Convertibility
Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies must be exchanged....
, effectively ending the system. This action created the situation whereby the U.S. dollar became the sole backing of currencies and a reserve currency
Reserve currency
A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves...
for the member states of the Bretton Woods system, leading the system to collapse in the face of increasing financial strain in that same year. In that context, Tobin suggested a new system for international currency stability, and proposed that such a system include an international charge on foreign-exchange
Foreign exchange market
The 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...
transactions.
In 2001, in another context, just after "the nineties' crises
Liquidity crisis
In 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...
in Mexico, Southeast Asia and Russia," which included the 1994 economic crisis in Mexico
1994 economic crisis in Mexico
The 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....
, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis, Tobin summarized his idea:
The tax on foreign exchange transactionsForeign 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...
was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rateInterest rateAn interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crisesLiquidity 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...
in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets.
Though James Tobin suggested the rate as "let's say 0.5%", in that interview setting, others have tried to be more precise in their search for the optimum rate.
Tobin's concept
James Tobin's purpose in developing his idea of a currency transaction taxCurrency transaction tax
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 taxes paid by consumers....
was to find a way to manage exchange-rate volatility. In his view, "currency exchanges transmit disturbances originating in international financial markets. National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exchanges, without real hardship and without significant sacrifice of the objectives of national economic policy with respect to employment, output, and inflation.”
Tobin saw two solutions to this issue. The first was to move “toward a common currency, common monetary and fiscal policy, and economic integration.” The second was to move “toward greater financial segmentation between nations or currency areas, permitting their central banks and governments greater autonomy in policies tailored to their specific economic institutions and objectives.” Tobin’s preferred solution was the former one but he did not see this as politically viable so he advocated for the latter approach: “I therefore regretfully recommend the second, and my proposal is to throw some sand in the wheels of our excessively efficient international money markets.”
Tobin’s method of “throwing sand in the wheels” was to suggest a tax on all spot conversions of one currency into another, proportional to the size of the transaction. He said:
It would be an internationally agreed uniform tax, administered by each government over its own jurisdiction. Britain, for example, would be responsible for taxing all inter-currency transactions in Eurocurrency banks and brokers located in London, even when sterling was not involved. The tax proceeds could appropriately be paid into the IMF or World Bank. The tax would apply to all purchases of financial instruments denominated in another currency---from currency and coin to equity securities. It would have to apply, I think, to all payments in one currency for goods, services, and real assets sold by a resident of another currency area. I don't intend to add even a small barrier to trade. But I see offhand no other way to prevent financial transactions disguised as trade.
In the development of his idea, Tobin was influenced by the earlier work of John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
on general financial transaction taxes:
I am a disciple of Keynes, and he, in his famous chapter XII of the General Theory on Employment Interest and Money, had already prescribed a tax on transactions, with the aim of linking investors to their actions in a lasting fashion. In 1971 I transferred this idea to exchange markets.
Keynes' concept stems from 1936 when he proposed that a transaction tax
Financial transaction tax
A 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...
should be levied on dealings on Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
, where he argued that excessive speculation by uninformed financial traders increased volatility. For Keynes (who was himself a speculator) the key issue was the proportion of 'speculators' in the market, and his concern that, if left unchecked, these types of players would become too dominant. Keynes writes:
Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation.
The introduction of a substantial government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.
The Spahn tax
According to 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....
in 1995, "Analysis has shown that the Tobin tax as originally proposed is not viable and should be laid aside for good." Furthermore, he said:
Spahn suggested an alternative involving
Special Drawing Rights
On September 19, 2001, retired speculator George Soros put forward a proposal, Special Drawing RightsSpecial 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 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."
Scope of the Tobin concept
The term "Tobin tax" has sometimes been used interchangeably with a specific currency transaction taxCurrency transaction tax
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 taxes paid by consumers....
(CTT) in the manner of Tobin's original idea, and other times it has been used interchangeably with the various different ideas of a more general financial transaction tax
Financial transaction tax
A 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...
(FTT). In both cases, the various ideas proposed have included both national and multinational concepts.
A 2001 example of its association with the specific currency transaction tax is shown here:
"The concept of a Tobin tax has experienced a resurgence in the discussion on reforming the international financial system. In addition to many legislative initiatives in favour of the Tobin tax in national parliaments, possible ways to introduce a Tobin-style currency transaction tax (CTT) are being scrutinised by the United Nations."
A 2009 example of its association with a general financial transaction tax is shown here:
"European Union leaders urged the International Monetary Fund on Friday to consider a global tax on financial transactions in spite of opposition from the US and doubts at the IMF itself. In a communiqué issued after a two-day summit, the EU’s 27 national leaders stopped short of making a formal appeal for the introduction of a so-called “Tobin tax” but made clear they regarded it as a potentially useful revenue-raising instrument."
Evaluating the Tobin tax as a Currency Transaction Tax (CTT)
See also Evaluating the Tobin tax as a general Financial Transaction TaxAre different players in the economy operating at cross purposes to each other?
In 1994, Canadian economist Rodney Schmidt noted thatThe appeal of stability to many players in the world economy
In 1972, Tobin examined the global monetary system that remained after the Bretton Woods monetary system was abandoned. This examination was subsequently revisited by other analysts, such as Ellen Frank, who, in 2002 wrote: "If by globalization we mean the determined efforts of international businesses to build markets and production networks that are truly global in scope, then the current monetary system is in many ways an endless headache whose costs are rapidly outstripping its benefits." She continues with a view on how that monetary system stability is appealing to many players in the world economy, but is being undermined by volatilityVolatility (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...
and fluctuation in exchange rates: "Money scrambles around the globe in quest of the banker’s holy grail – sound money of stable value – while undermining every attempt by cash-strapped governments to provide the very stability the wealthy crave."
Frank then corroborates Tobin's comments on the problems this instability can create (e.g. high interest rates) for developing countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
such as Mexico (1994), countries in South East Asia (1997), and Russia (1998). She writes, "Governments of developing countries try to peg their currencies, only to have the peg undone by capital flight. They offer to dollarize
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
or euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
ize, only to find themselves so short of dollars that they are forced to cut off growth. They raise interest rates to extraordinary levels to protect investors against currency losses, only to topple their economies and the source of investor profits. ... IMF bailouts provide a brief respite for international investors but they are, even from the perspective of the wealthy, a short-term solution at best ... they leave countries with more debt and fewer options."
Effect on volatility
One of the main economic hypotheses raised in favor of financial transaction taxes is that such taxes reduce return volatilityVolatility (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...
, leading to an increase of long-term investor utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
or more predictable levels of exchange rates. The impact of such a tax on volatility is of particular concern because the main justification given for this tax by Tobin was to improve the autonomy of macroeconomic policy by curbing international currency speculation and its destabilizing effect on national exchange rates. Economist Korkut Erturk states:
if the Tobin Tax is not stabilizing, then much of the rest of the discussion on its feasibility and other related issues are probably moot.
Theoretical models
Most studies of the likely impact of the Tobin tax on financial markets volatility have been theoretical—researches conducted laboratory simulations or constructed economic models. Some of these theoretical studies have concluded that a transaction tax could reduce volatility by crowding out speculators or eliminating individual 'noise
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...
traders' but that it 'would not have any impact on volatility in case of sufficiently deep global markets such as those in major currency pairs, unlike in case of less liquid markets, such as those in stocks and (especially) options, where volatility would probably increase with reduced volumes. Behavioral finance
Behavioral finance
Behavioral economics and its related area of study, behavioral finance, use social, cognitive and emotional factors in understanding the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market...
theoretical models, such as those developed by Wei and Kim (1997) or Westerhoff and Dieci (2004) suggest that transaction taxes can reduce volatility, at least in the foreign exchange market. In contrast, some papers find a positive effect of a transaction tax on market volatility. Lanne and Vesala (2006) argue that a transaction tax "is likely to amplify, not dampen, volatility in foreign exchange markets", because such tax penalises informed market participants disproportionately more than uninformed ones, leading to volatility increases.
Empirical studies
In most of the available empirical studies however, no statistically significant causal link has been found between an increase in transaction costs (transaction taxes or government-controlled minimum brokerage commissions) and a reduction in volatility—in fact a frequent unintended consequence observed by 'early adopters' after the imposition of a financial transactions tax (see Werner, 2003) has been an increase in the volatility of stock market returns, usually coinciding with significant declines in liquidity (market volume) and thus in taxable revenue (Umlauf, 1993).
For a recent evidence to the contrary, see, e.g., Liu and Zhu (2009), which may be affected by selection bias
Selection bias
Selection bias is a statistical bias in which there is an error in choosing the individuals or groups to take part in a scientific study. It is sometimes referred to as the selection effect. The term "selection bias" most often refers to the distortion of a statistical analysis, resulting from the...
given that their Japanese sample is subsumed by a research conducted in 14 Asian countries by Hu (1998), showing that "an increase in tax rate reduces the stock price but has no significant effect on market volatility". As Liu and Zhu (2009) point out, [...] the different experience in Japan highlights the comment made by Umlauf (1993) that it is hazardous to generalize limited evidence when debating important policy issues such as the STT [securities transaction tax] and brokerage commissions."
See also "Tobin tax proponents response to empirical evidence on volatility"
Historical attempts to reduce speculation via fixed exchange rates
Matthew Sinclair, Research Director of TaxPayers' AllianceTaxPayers' Alliance
The TaxPayers' Alliance is a British pressure group and taxpayers union formed in 2004 to campaign for a low tax society. The group had about 18,000 registered supporters as of 2008, and claimed to have 55,000 by September 2010....
, notes that
Is there an optimum Tobin tax rate?
When James Tobin was interviewed by Der SpiegelDer Spiegel
Der Spiegel is a German weekly news magazine published in Hamburg. It is one of Europe's largest publications of its kind, with a weekly circulation of more than one million.-Overview:...
in 2001, the tax rate he suggested was 0.5%. His use of the phrase "let's say" ("sagen wir") indicated that he was not, at that point, in an interview setting, trying to be precise. Others have tried to be more precise or practical in their search for the Tobin tax rate.
Tax rates of the magnitude of 0.1%-1% have been proposed by normative
Normative
Normative has specialized contextual meanings in several academic disciplines. Generically, it means relating to an ideal standard or model. In practice, it has strong connotations of relating to a typical standard or model ....
economists, without addressing how practicable these would be to implement. In positive economics
Positive economics
Positive economics is the branch of economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of economics theories...
studies however, where due reference was made to the prevailing market conditions, the resulting tax rates have been significantly lower.
According to Garber (1996), competitive pressure on transaction costs (spreads
Bid-offer spread
The bid–offer spread for securities is the difference between the prices quoted for an immediate sale and an immediate purchase...
) in currency markets has reduced these costs to fractions of a basis point
Basis point
A basis point is a unit equal to 1/100 of a percentage point or one part per ten thousand...
. For example the EUR.USD currency pair
Currency pair
A currency pair is the quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market. The currency that is used as the reference is called the counter currency or quote currency and the currency that is quoted in relation is called the base...
trades with spreads as tight as 1/10 of a basis point, i.e. with just a 0.00001 difference between the bid and offer
Bid-offer spread
The bid–offer spread for securities is the difference between the prices quoted for an immediate sale and an immediate purchase...
price, so "a tax on transactions in foreign exchange markets imposed unilaterally, 6/1000 of a basis point (or 0.00006%) is a realistic maximum magnitude." Similarly Shvedov (2004) concludes that "even making the unrealistic assumption that the rate of 0.00006% causes no reduction of trading volume, the tax on foreign currency exchange transactions would yield just $4.3 billion a year, despite an annual turnover in dozens of trillion dollars.
Accordingly, one of the modern Tobin tax versions, called the Sterling Stamp Duty, sponsored by certain UK charities, has a rate of 0.005% "in order to avoid market distortions", i.e., 1/100 of what Tobin himself envisaged in 2001. Sterling Stamp Duty supporters argue that this tax rate would not adversely affect currency markets and could still raise large sums of money.
The same rate of 0.005% was proposed for a currency transactions tax (CTT) in a report prepared by Rodney Schmidt for The North-South Institute (a Canadian NGO whose "research supports global efforts to [..] improve international financial systems and institutions"),. Schmidt (2007) used the observed negative relationship between bid-ask spreads
Bid-offer spread
The bid–offer spread for securities is the difference between the prices quoted for an immediate sale and an immediate purchase...
and transactions volume in foreign exchange markets to estimate the maximum "non-disruptive rate" of a currency transaction tax. A CTT tax rate designed with a pragmatic goal of raising revenue for various development projects, rather than to fulfill Tobin's original goals (of "slowing the flow of capital across borders" and "preventing or managing exchange rate crises"), should avoid altering the existing "fundamental market behavior", and thus, according to Schmidt, must not exceed 0.00005, i.e., the observed levels of currency transactions costs (bid-ask spreads).
Assuming that all currency market participants incur the same maximum level of transaction costs (the full cost of the bid-ask spread), as opposed to earning them in their capacity of market makers, and assuming that no untaxed substitutes exist for spot currency markets transactions (such as currency futures
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
and currency exchange traded funds), Schmidt (2007) finds that that a CTT rate of 0.00005 would be nearly volume-neutral, reducing foreign exchange transaction volumes by only 14%. Such volume-neutral CTT tax would raise relatively little revenue though, estimated at around $33 bn annually, i.e., an order of magnitude less than the "carbon tax
Carbon tax
A carbon tax is an environmental tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel and is released as carbon dioxide when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not...
[which] has by far the greatest revenue-raising potential, estimated at $130-750 bn annually." The author warns however that both these market-based revenue estimates "are necessarily speculative
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
", and he has more confidence in the revenue-raising potential of "The International Finance Facility
International Finance Facility
The International Finance Facility is a proposal by HM Treasury in conjunction with the Department for International Development of the United Kingdom. The IFF is designed to frontload aid to help meet the Millennium Development Goals...
(IFF) and International Finance Facility for Immunisation (IFFIm)."
In 2000, a representative of another "pro-Tobin tax" non-governmental organization
Non-governmental organization
A non-governmental organization is a legally constituted organization created by natural or legal persons that operates independently from any government. The term originated from the United Nations , and is normally used to refer to organizations that do not form part of the government and are...
stated that Tobin's idea was
Technical feasibility
Although Tobin had said his own tax idea was unfeasible in practice, Joseph Stiglitz, former Senior Vice President and Chief EconomistWorld Bank Chief Economist
The World Bank Chief Economist provides intellectual leadership and direction to the Bank’s overall development strategy and economic research agenda, at global, regional and country levels...
of the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
, said, on October 5, 2009, that modern technology meant that was no longer the case. Stiglitz said, the tax is "much more feasible today" than a few decades ago, when Tobin recanted.
However, on November 7, 2009, at the G20 finance ministers summit in Scotland, Dominique Strauss-Khan, head of the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
, said "transactions are very difficult to measure and so it's very easy to avoid a transaction tax."
Nevertheless in early December 2009, economist Stephany Griffith-Jones agreed that the "greater centralisation and automisation of the exchanges and banks clearing and settlements systems ... makes avoidance of payment more difficult and less desirable."
In January, 2010, feasibility of the tax was supported and clarified by researchers Rodney Schmidt, Stephan Schulmeister and Bruno Jetin who noted “it is technically easy to collect a financial tax from exchanges ... transactions taxes can be collected by the central counterparty
Central Counterparty Clearing
Central Counterparty Clearing is a process by which financial transactions in equities are cleared by a single counterparty. Please see Clearing for general information about clearing...
at the point of the trade, or automatically in the clearing or settlement process
Clearing (finance)
In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction....
." (All large-value financial transactions go through three steps. First dealers agree to a trade; then the dealers’ banks match the two sides of the trade through an electronic central clearing system; and finally, the two individual financial instruments are transferred simultaneously to a central settlement system. Thus a tax can be collected at the few places where all trades are ultimately cleared or settled.)
When presented with the problem of speculators shifting operations to offshore
Offshore financial centre
An offshore financial centre , though not precisely defined, is usually a small, low-tax jurisdiction specializing in providing corporate and commercial services to non-resident offshore companies, and for the investment of offshore funds....
tax havens, a representative of a “pro Tobin tax” NGO argued as follows:
Based on digital technology, a new form of taxation, levied on bank transactions, was successfully used in Brazil from 1993 to 2007 and proved to be evasion-proof, more efficient and less costly than orthodox tax models. In his book, Bank transactions: pathway to the single tax ideal, Marcos Cintra carries out a qualitative and quantitative in-depth comparison of the efficiency, equity and compliance costs of a bank transactions tax relative to orthodox tax systems, and opens new perspectives for the use of modern banking technology in tax reform across the world.
How many nations are needed to make it feasible?
There has been debate as to whether one single nation could unilaterally implement a "Tobin tax." Speaking to this question, Schmidt states,"It is possible for a single country to apply a securities transaction tax unilaterally without significant capital flight to exchanges in other jurisdictions. There are many examples of such taxes already in existence. Britain levies a "Stamp Duty", a 0.5% tax on purchases of shares of UK companies whether the transaction occurs in the UK or overseas. Such specific financial transaction taxes exist in Austria, Greece, Luxembourg, Poland, Portugal, Spain, Switzerland, Hong Kong, China and Singapore. The state of New York levies a stamp duty on trades taking place on both the New York Stock Exchange and on NASDAQ."
In the year 2000, "eighty per cent of foreign-exchange trading [took] place in just seven cities. Agreement [to implement the tax] by [just three cities,] London, New York and Tokyo alone, would capture 58 per cent of speculative trading."
Evaluating the Tobin tax as a general Financial Transaction Tax (FTT)
Sweden's experience in implementing Tobin taxes in the form of general financial transaction taxes
In July, 2006, analyst Marion G. Wrobel examined the actual international experiences of various countries in implementing financial transaction taxes. Wrobel's paper highlighted the Swedish experience with financial transaction taxes. In January 1984, Sweden introduced a 0.5% tax on the purchase or sale of an equity security. Thus a round trip (purchase and sale) transaction resulted in a 1% tax. In July 1986 the rate was doubled. In January 1989, a considerably lower tax of 0.002% on fixed-income securities was introduced for a security with a maturity of 90 days or less. On a bond with a maturity of five years or more, the tax was 0.003%.The revenues from taxes were disappointing; for example, revenues from the tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kronor per year. They did not amount to more than 80 million Swedish kronor in any year and the average was closer to 50 million. In addition, as taxable trading volumes fell, so did revenues from capital gains taxes, entirely offsetting revenues from the equity transactions tax that had grown to 4,000 million Swedish kronor by 1988.
On the day that the tax was announced, share prices fell by 2.2%. But there was leakage of information prior to the announcement, which might explain the 5.35% price decline in the 30 days prior to the announcement. When the tax was doubled, prices again fell by another 1%. These declines were in line with the capitalized value of future tax payments resulting from expected trades. It was further felt that the taxes on fixed-income securities only served to increase the cost of government borrowing, providing another argument against the tax.
Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991 the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.
Tobin tax proponents reaction to the Swedish experience
The Swedish experience of a transaction tax was with purchase or sale of equity securities, fixed income securities and derivatives. In global international currency trading, however, the situation could, some argue, look quite different. In 2000, Round argued as follows:Wrobel's studies do not address the global economy as a whole, as James Tobin did when he spoke of "the nineties' crises
Liquidity crisis
In 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...
in Mexico, South East Asia and Russia," which included the 1994 economic crisis in Mexico
1994 economic crisis in Mexico
The 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....
, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis.
Who would gain and who would lose if the Tobin tax (FTT) were implemented?
Views of ABAC (APEC Business Advisory Council) expressed in open letter to IMF
The APEC Business Advisory Council, the business representatives' body in APEC, which is the forum for facilitating economic growth, cooperation, trade and investment in the Asia-Pacific region, expressed its views in a letter to the IMF on 15 February 2010. The APEC Business Advisory Council stated:In addition, ABAC expressed further concerns in the letter:-
- Key to the APEC agenda is reduction of transaction costs. The proposal is directly counterproductive to this goal.
- It would have a very significant negative impact on real economic recovery, as these additional costs are likely to further reduce financing of business activities at a time when markets remain fragile and prospects for the global economy are still uncertain.
- Industries and consumers as a whole would be unfairly penalized.
- It would further weaken financial markets and reduce the liquidity, particularly in the case of illiquid assets.
- Effective implementation would be virtually impossible, especially as opportunities for cross-border arbitrage arise from decisions of certain jurisdictions not to adopt the tax or to exempt particular activities.
- There is no global consensus why a tax is needed and what the revenue would be used for, and therefore no understanding how much is needed. Any consequential tax would need to be supported by clear consensus for its application.
Note - APEC's 21 Member Economies are Australia, Brunei Darussalam, Canada, Chile, People's Republic of China, Hong Kong, China, Indonesia, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, The Republic of the Philippines, The Russian Federation, Singapore, Chinese Taipei, Thailand, United States of America, Viet Nam.
Views of the ITUC/APLN (Asia-Pacific Labour Network) expressed in their statement to the 2010 APEC Economic Leaders Meeting
The International Trade Union Confederation/Asia-Pacific Labour Network (ITUC/APLN), the informal trade union body of the Asia-Pacific, supported the Tobin Tax in their Statement to the 2010 APEC Economic Leaders Meeting. The representatives of APEC's national trade unions centers also met with the Japanese Prime Minister, Naoto Kan, the host Leader of APEC for 2010, and called for the Prime Minister's support on the Tobin Tax.The ITUC/APLN stated:
The ITUC shares its support for Tobin Tax with the Trade Union Advisory Council (TUAC), the official OECD trade union body, in a research on the feasibility, strengths and weaknesses of a potential Tobin Tax. ITUC, APLN and TUAC refer to Tobin Tax as the Financial Transactions Tax.
Would 'regular investors like you and me' lose?
An economist speaking out against the common belief that investment banks would bear the burden of a Tobin tax is Simon Johnson, Professor of Economics at the MIT and a former Chief Economist at the IMF, who in a BBC Radio 4 interview discussing banking system reforms presented his views on the Tobin taxEvan Davis, BBC Radio 4:
Prof. Simon Johnson
Simon Johnson (economist)
Simon Johnson is a British American economist. He is the 'Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He has held a wide variety of academic and policy-related positions, including...
:
Let Wall Street Pay for the Restoration of Main Street Bill
In 2009, U.S. Representative
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
Peter DeFazio
Peter DeFazio
Peter Anthony DeFazio is the U.S. Representative for , serving since 1987. He is a member of the Democratic Party. The district includes Eugene, Springfield, Roseburg and part of Corvallis. As Oregon's most senior member of Congress, he is the dean of Oregon's House of Representatives delegation...
of Oregon
Oregon
Oregon is a state in the Pacific Northwest region of the United States. It is located on the Pacific coast, with Washington to the north, California to the south, Nevada on the southeast and Idaho to the east. The Columbia and Snake rivers delineate much of Oregon's northern and eastern...
proposed a financial transaction tax in his "Let Wall Street Pay for the Restoration of Main Street Bill
Let Wall Street Pay for the Restoration of Main Street Bill
The proposed bill "Let Wall Street Pay for the Restoration of Main Street Bill" is officially contained in the United States House of Representatives bill entitled "H.R. 4191: Let Wall Street Pay for the Restoration of Main Street Act of 2009"...
". (This was proposed domestically for the United States only.)
Would there be net job losses if a FTT tax was introduced?
Schwabish (2005) examined the potential effects of introducing a stock transaction (or "transfer") tax in a single city (New York) on employment not only in the securities industry, but also in the supporting industries. A financial transactions tax would lead to job losses also in non-financial sectors of the economy through the so called multiplier effect forwarding in a magnified form any taxes imposed on Wall Street employees through their reduced demand to their suppliers and supporting industries. The author estimated the ratios of financial- to non-financial job losses of between 10:1 to 10:4, that is "a 10 percent decrease in securities industry employment would depress employment in the retail, services, and restaurant sectors by more than 1 percent; in the business services sector by about 4 percent; and in total private jobs by about 1 percent."It is also possible to estimate the impact of a reduction in stock market volume caused by taxing stock transactions on the rise in the overall unemployment rate. For every 10 percent decline in stock market volume, elasticities estimated by Schwabish implied that a stock transaction ("transfer") tax could cost New York City between 30,000 and 42,000 private-sector jobs, and if the stock market volume reductions reached levels observed by Umlauf (1993) in Sweden after a stock FTT was introduced there ("By 1990, more than 50% of all Swedish trading had moved to London") then according to Schwabish (2005), following an introduction of a FTT tax, there would be 150,000-210,000 private-sector jobs losses in the New York alone.
In 2000, Round argued as follows:
The cost of currency hedges
Forward contract
In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a...
—and thus "certainty what importers and exporters' money is worth"—has nothing to do with volatility whatsoever, as this cost is exclusively determined by the interest rate differental between two currencies. Nevertheless, as Tobin said, "If ... [currency] is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive."
Is there an optimum tax rate?
Financial transaction tax rates of the magnitude of 0.1%-1% have been proposed by normativeNormative
Normative has specialized contextual meanings in several academic disciplines. Generically, it means relating to an ideal standard or model. In practice, it has strong connotations of relating to a typical standard or model ....
economists, without addressing the practicability of implementing a tax at these levels. In positive economics
Positive economics
Positive economics is the branch of economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of economics theories...
studies however, where due reference was paid to the prevailing market conditions, the resulting tax rates have been significantly lower.
For instance, Edwards (1993) concluded that if the transaction tax revenue from taxing the futures
Futures exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...
markets were to be maximized (see Laffer curve
Laffer curve
In economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity . The curve is constructed by thought experiment...
), with the tax rate not leading to a prohibitively large increase in the marginal cost
Marginal cost
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...
of market participants, the rate would have to be set so low that "a tax on futures markets will not achieve any important social objective and will not generate much revenue."
Political opinion
Opinions are divided between those who applaud that the Tobin tax could protect countries from spillovers of financial crises, and those who claim that the tax would also constrain the effectiveness of the global economic system, increase price volatilityVolatility (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...
, widen bid-ask spreads
Bid-offer spread
The bid–offer spread for securities is the difference between the prices quoted for an immediate sale and an immediate purchase...
for end users such as investors, savers and hedgers, and destroy liquidity.
Tobin tax proponents response to empirical evidence on volatility
Lack of direct supporting evidence for stabilizing (volatility-reducing) properties of Tobin-style transaction taxes in econometric research is acknowledged by some of the Tobin tax supporters:These Tobin tax proponents have to therefore rely on indirect evidence in their favor, reinterpreting studies which do not deal directly with volatility, but instead with trading volume
Volume
Volume is the quantity of three-dimensional space enclosed by some closed boundary, for example, the space that a substance or shape occupies or contains....
(with volume being generally reduced by transaction taxes, though it constitutes their tax base, see: negative feedback
Negative feedback
Negative feedback occurs when the output of a system acts to oppose changes to the input of the system, with the result that the changes are attenuated. If the overall feedback of the system is negative, then the system will tend to be stable.- Overview :...
loop). This allows these Tobin tax proponents to state that "some studies show (implicitly) that higher transaction costs might dampen price volatility. This is so because these studies report that a reduction of trading activities is associated with lower price volatility." So if a study finds that reducing trading volume or trading frequency reduces volatility, these Tobin tax supporters combine it with the observation that Tobin-style taxes are volume-reducing, and thus should also indirectly reduce volatility ("this finding implies a negative relationship between [..] transaction tax [..] and volatility, because higher transaction costs will 'ceteris paribus' always dampen trading activities)." (Schulmeister et al., 2008, p. 18).
There is yet another reason why some proponents of the Tobin tax maintain that it can reduce volatility, despite prevailing empirical evidence to the contrary. This is possible, because some Tobin tax supporters created a concept of a separate, custom-defined volatility. Rather than adopting one of the standard statistical definitions (e.g., conditional variance
Conditional variance
In probability theory and statistics, a conditional variance is the variance of a conditional probability distribution. Particularly in econometrics, the conditional variance is also known as the scedastic function or skedastic function...
of returns, see Engle, 1982 ) leading economists favoring the Tobin tax prefer to define volatility as a "long-term overshooting of speculative prices" (see Tobin, 1978 and Eichengreen, Tobin and Wyplosz, 1995 ). Evidence about this special type of volatility is missing and this is why some of the proponents, instead of conducting their own tests, prefer to blame financial econometric researchers for not addressing their special needs:
Thus the beneficial impact of transaction taxes on the "Tobin volatility" can co-exist as a valid economic theory even without direct supporting evidence from the statistical volatility research, simply because of the special volatility definition, which allows all economists defending the Tobin tax to escape Popperian falsifiability
Falsifiability
Falsifiability or refutability of an assertion, hypothesis or theory is the logical possibility that it can be contradicted by an observation or the outcome of a physical experiment...
.
Another shortcoming of all of the empirical volatility studies pointed out by some of the Tobin tax proponents is the lack of distinction between "basic" and "excessive" volatility, which "might have contributed to the contradictory and, hence, inconclusive results of these studies" (Schulmeister et al., 2008, p. 11-12). Unfortunately, no tests have been conducted so far, which would be able to operationalize "excessive" volatility assumed to exist by the Tobin tax theory (see Schulmeister et al., 2008, p. 11), therefore the acceptance of the Tobin-style transactions tax as a fiscal or monetary policy instrument requires clear understanding that basic theoretical phenomena underlying this tax, such as "excessive" volatility, still remain untested.
Should speculators be encouraged, penalized or dissuaded?
The Tobin tax rests on the premise that speculators ought to be, as Tobin puts it, "dissuaded." This premise itself is a matter of debate: See main debate at main article on "speculationSpeculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
"..
Matthew Sinclair, Research Director of TaxPayers' Alliance
TaxPayers' Alliance
The TaxPayers' Alliance is a British pressure group and taxpayers union formed in 2004 to campaign for a low tax society. The group had about 18,000 registered supporters as of 2008, and claimed to have 55,000 by September 2010....
, argues that "The whole idea of a Tobin tax is based on the flawed view that trading – or speculation – is a bad thing. The truth is that it isn’t: it helps the process of price discovery, makes markets work better, enhances liquidity, ensures that resources are priced correctly and generally helps oil the cogs of the global economy."
On the other side of the debate were the leaders of Germany who, in May 2008, planned to propose a worldwide ban on oil trading by speculators, blaming the 2008 oil price rises on manipulation by hedge funds. At that time India, with similar concerns, had already suspended futures trading of five commodities.
On December 3, 2009, US Congressman Peter DeFazio
Peter DeFazio
Peter Anthony DeFazio is the U.S. Representative for , serving since 1987. He is a member of the Democratic Party. The district includes Eugene, Springfield, Roseburg and part of Corvallis. As Oregon's most senior member of Congress, he is the dean of Oregon's House of Representatives delegation...
stated, "The American taxpayers bailed out Wall Street during a crisis brought on by reckless speculation in the financial markets, ... This [ proposed financial transaction tax ] legislation will force Wall Street to do their part and put people displaced by that crisis back to work."
On January 21, 2010, President Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
endorsed the Volcker Rule
Volcker Rule
The Volcker Rule is a specific section of the Dodd–Frank Wall Street Reform and Consumer Protection Act originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that...
which deals with proprietary trading of investment banks and restricts banks from making certain speculative kinds of investments if they are not on behalf of their customers. Former U.S. Federal Reserve Chairman Paul Volcker
Paul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...
, President Obama's advisor, has argued that such speculative activity
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
played a key role in the financial crisis of 2007–2010.
Volcker endorsed only the UK's tax on bank bonuses, calling it "interesting", but was wary about imposing levies on financial market transactions, because he is "instinctively opposed" to any tax on financial transactions.
Questions of volatility
In February 2010, Tim Harford, writing in the Undercover Economist column of the Financial TimesFinancial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
, commented directly on the claims of Keynes and Tobin that 'taxes on financial transactions would reduce financial volatility'. Harford wrote:-
Comparing Currency Transaction Taxes (CTT) and Financial Transaction Taxes (FTT)
Research evidence
In 2003, researchers like Aliber et al. proposed that empirical evidence on the observed effects of the already introduced and abolished stockStock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
transaction taxes and a hypothetical CTT (Tobin) can probably be treated interchangeably. They did not find any evidence on the differential effects of introducing or removing, stock transactions taxes or a hypothetical currency (Tobin) tax on any subset of markets or all markets.
Researchers have used models belonging to the GARCH family to describe both the volatility behavior of stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
returns and the volatility behavior of foreign exchange rates. This is used as evidence that the similarity between currencies and stocks in the context of a tax designed to curb volatility such as a CTT (or FTT in general) can be inferred from the almost identical (statistically indistinguishable) behavior of the volatilities of equity and exchange rate returns.
Practical considerations
Hanke et al. state, "The economic consequences of introducing a [currency-only] Tobin Tax are [...] completely unknown, as such a tax has not been introduced on any real foreign exchange market so far". At the same time, even in the case of stock transaction taxes, where some empirical evidence is available, researchers warn that "it is hazardous to generalize limited evidence when debating important policy issues such as the transaction taxes".According to Stephan Schulmeister, Margit Schratzenstaller, and Oliver Picek (2008), from the practical viewpoint it is no longer possible to introduce a non-currency transactions tax (even if foreign exchange transactions were formally exempt) since the advent of currency derivatives
Foreign exchange derivative
A 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:...
and currency exchange traded funds. All of these would have to be taxed together under a "non-currency" financial transactions tax (such as under certain proposals] in the U.S. in 2009 which, although not intending to tax currencies directly, would still do so due to taxation of currency futures and currency exchange traded funds). Because these three groups of instruments are nearly perfect substitutes, if at least one of these groups were to be exempt, it would likely attract most market volume from the taxed alternatives.
According to Stephan Schulmeister, Margit Schratzenstaller, and Oliver Picek (2008), restricting the financial transactions tax to foreign exchange only (as envisaged originally by Tobin) would not be desirable. Any "general FTT seems...more attractive than a specific transaction tax" (such as a currency-only Tobin tax), because it could reduce tax avoidance (i.e., substitution of similar untaxed instruments), could significantly increase the tax base and could be implemented more easily on organized exchanges than in a dealership market like the global foreign exchange market. (See also the discussion of tax avoidance as it relates to a currency transaction tax.)
On October 5, 2009, Joseph Stiglitz said that any new tax should be levied on all asset classes – not merely foreign exchange, and would be based on the gross value of the assets, thereby helping to discourage the creation of asset bubbles.
Original idea and alter-globalization movement
Tobin's more specific concept of a "currency transaction taxCurrency transaction tax
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 taxes paid by consumers....
" from 1972 lay dormant for more than 20 years but was revived by the advent of the 1997 Asian Financial Crisis. In December, 1997 Ignacio Ramonet
Ignacio Ramonet
Ignacio Ramonet is a Spanish journalist and writer.He was the editor-in-chief of Le Monde diplomatique from 1991 until March 2008....
, editor of Le Monde Diplomatique
Le Monde diplomatique
Le Monde diplomatique is a monthly newspaper offering analysis and opinion on politics, culture, and current affairs. It was first created mainly for a diplomatic audience as its name implies...
, renewed the debate around the Tobin tax with an editorial titled "Disarming the markets". Ramonet proposed to create an association for the introduction of this tax, which was named ATTAC (Association for the Taxation of financial Transactions for the Aid of Citizens). The tax then became an issue of the global justice movement
Global Justice Movement
The Global Justice Movement is a network or constellation of globalized social movements opposing what is often known as the “corporate globalization” and promoting equal distribution of economic resources.-Movement of movements:...
or alter-globalization
Alter-globalization
Alter-globalization is the name of a social movement that supports global cooperation and interaction, but which opposes the negative effects of economic globalization, feeling that it often works to the detriment of, or does not...
movement and a matter of discussion not only in academic institutions but even in streets and in parliaments in the UK, France, and around the world.
In an interview given to the Italian independent radio network Radio Popolare
Radio Popolare
Radio Popolare is an independent radio station based in Milan, Italy. It was founded in 1976 in Milan. Radio Popolare is one of the oldest listener-supported radio stations in Italy. Rp is known for its progressive and liberal political orientation...
in July 2001 James Tobin distanced himself from the global justice movement
Global Justice Movement
The Global Justice Movement is a network or constellation of globalized social movements opposing what is often known as the “corporate globalization” and promoting equal distribution of economic resources.-Movement of movements:...
. «There are agencies and groups in Europe that have used the Tobin Tax as an issue of broader campaigns, for reasons that go far beyond my proposal. My proposal was made into a sort of milestone for an antiglobalization program». James Tobin's interview with Radio Popolare
Radio Popolare
Radio Popolare is an independent radio station based in Milan, Italy. It was founded in 1976 in Milan. Radio Popolare is one of the oldest listener-supported radio stations in Italy. Rp is known for its progressive and liberal political orientation...
was quoted by the Italian foreign minister at the time, former director-general of the World Trade Organisation Renato Ruggiero
Renato Ruggiero
Renato Ruggiero is an Italian politician. He has been director-general of the World Trade Organisation and was briefly the Italian Foreign Minister in 2001.-Biography:...
, during a Parliamentary debate on the eve of the G8 2001 summit in Genoa.
Afterwards James Tobin distanced himself from the global justice movement
Global Justice Movement
The Global Justice Movement is a network or constellation of globalized social movements opposing what is often known as the “corporate globalization” and promoting equal distribution of economic resources.-Movement of movements:...
also in an interview given to Der Spiegel
Der Spiegel
Der Spiegel is a German weekly news magazine published in Hamburg. It is one of Europe's largest publications of its kind, with a weekly circulation of more than one million.-Overview:...
in 2001, and continued to state the validity of his proposal,
Tobin observed that, while his original proposal had only the goal of "putting a brake on the foreign exchange trafficking", the antiglobalization movement had stressed "the income from the taxes with which they want to finance their projects to improve the world". He declared himself not contrary to this use of the tax's income, but stressed that it was not the important aspect of the tax.
ATTAC and other organizations have recognized that while they still consider Tobin's original aim as paramount, they think the tax could produce funds for development needs in the South (such as the Millennium Development Goals
Millennium Development Goals
The Millennium Development Goals are eight international development goals that all 193 United Nations member states and at least 23 international organizations have agreed to achieve by the year 2015...
), and allow governments, and therefore citizens, to reclaim part of the democratic space conceded to the financial markets.
In March, 2002, London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
Professor Willem Buiter, who studied under James Tobin, wrote a glowing obituary for the man, but also remarked that, "This [Tobin Tax] ... was in recent years adopted by some of the most determined enemies of trade liberalisation, globalisation and the open society." Buiter added, "The proposal to use the Tobin tax as a means of raising revenues for development assistance was rejected by Tobin, and he forcefully repudiated the anti-globalisation mantra of the Seattle crowd." In September 2009, Buiter also wrote in the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
, "Tobin was a genius ... but the Tobin tax was probably his one daft idea".
In those same "years" that Buiter spoke of, the Tobin tax was also "adopted" or supported in varying degrees by the people who were not, as he put it, "enemies of trade liberalisation." Among them were several supporters from 1990 to 1999, including Larry Summers and several from 2000 to 2004, including lukewarm support from George Soros.
Tobin tax proposals and implementations around the world
It was originally assumed that the Tobin tax would require multilateral implementation, since one country acting alone would find it very difficult to implement this tax. Many people have therefore argued that it would be best implemented by an international institution. It has been proposed that having the United NationsUnited Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...
manage a Tobin tax would solve this problem and would give the UN a large source of funding independent from donations by participating states. However, there have also been initiatives of national dimension about the tax. (This is in addition to the many countries that have foreign exchange controls
Foreign exchange controls
Foreign 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:...
.)
Whilst finding some support in countries with strong left-wing political movements such as France and Latin America
Latin 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...
, the Tobin tax proposal came under much criticism from economists and governments, especially those with liberal markets and a large international banking sector, who said it would be impossible to implement and would destabilise foreign exchange markets.
Most of the actual implementation of Tobin taxes, whether in the form of a specific currency transaction tax
Currency transaction tax
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 taxes paid by consumers....
, or a more general financial transaction tax
Financial transaction tax
A 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...
, has occurred at a national level. In July, 2006, analyst Marion G. Wrobel examined the international experiences of various countries with financial transaction taxes.
Sweden's experience with financial transaction taxes
Wrobel's paper highlighted the Swedish experience with financial transaction taxes. In January 1984, Sweden introduced a 0.5% tax on the purchase or sale of an equity security. Thus a round trip (purchase and sale) transaction resulted in a 1% tax. In July 1986 the rate was doubled. In January 1989, a considerably lower tax of 0.002% on fixed-income securities was introduced for a security with a maturity of 90 days or less. On a bond with a maturity of five years or more, the tax was 0.003%.The revenues from taxes were disappointing; for example, revenues from the tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kronor per year. They did not amount to more than 80 million Swedish kronor in any year and the average was closer to 50 million. In addition, as taxable trading volumes fell, so did revenues from capital gains taxes, entirely offsetting revenues from the equity transactions tax that had grown to 4,000 million Swedish kronor by 1988.
On the day that the tax was announced, share prices fell by 2.2%. But there was leakage of information prior to the announcement, which might explain the 5.35% price decline in the 30 days prior to the announcement. When the tax was doubled, prices again fell by another 1%. These declines were in line with the capitalized value of future tax payments resulting from expected trades. It was further felt that the taxes on fixed-income securities only served to increase the cost of government borrowing, providing another argument against the tax.
Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991 the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.
Tobin tax proponents reaction to the Swedish experience
The Swedish experience of a transaction tax was with purchase or sale of equity securities, fixed income securities and derivatives. In global international currency trading, however, the situation could, some argue, look quite different. In 2000, Round argued as follows:Wrobel's studies do not address the global economy as a whole, as James Tobin did when he spoke of "the nineties' crises
Liquidity crisis
In 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...
in Mexico, South East Asia and Russia," which included the 1994 economic crisis in Mexico
1994 economic crisis in Mexico
The 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....
, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis.
United Kingdom experience with stock transaction tax (Stamp Duty)
An existing example of a Financial Transaction TaxFinancial transaction tax
A 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...
(FTT) is Stamp Duty Reserve Tax (SDRT) and stamp duty
Stamp duty
Stamp duty is a tax that is levied on documents. Historically, this included the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions. A physical stamp had to be attached to or impressed upon the document to denote that stamp duty...
. Stamp duty was introduced as an ad valorem tax on share purchases in 1808, preceding by over 150 years the Tobin tax on currency transactions. Changes were made in 1963. In 1963 the rate of the UK Stamp Duty was 2%, subsequently fluctuating between 1% and 2%, until a process of its gradual reduction started in 1984, when the rate was halved, first from 2% to 1%, and then once again in 1986 from 1% to the current level of 0.5%.
The changes in Stamp Duty rates in 1974, 1984, and 1986 provided researchers with "natural experiments", allowing them to measure the impact of transaction taxes on market volume, volatility, returns, and valuations of UK companies listed on the London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
. Jackson and O'Donnel (1985), using UK quarterly data, found that the 1% cut in the Stamp Duty in April 1984 from 2% to 1% lead to a "dramatic 70% increase in equity turnover" . Analyzing all three Stamp Duty rate changes, Saporta and Kan (1997) found that the announcements of tax rate increases (decreases) were followed by negative (positive) returns, but even though these results were statistically significant, they were likely to be influenced by other factors, because the announcements were made on Budget Days. Bond et al. (2005) confirmed the findings of previous studies, noting also that the impact of the announced tax rate cuts was more beneficial (increasing market value more significantly) in case of larger firms, which had higher turnover, and were therefore more affected by the transaction tax than stocks of smaller companies, less frequently traded.
Because the UK tax code provides exemptions from the Stamp Duty Reserve Tax for all financial intermediaries, including market makers, investment banks and other members of the LSE, and due to the strong growth of the contracts for difference (CFD) industry, which provides UK investors with untaxed substitutes for LSE stocks, according to the Oxera (2007) report, more than 70% percent of the total UK stock market volume, including the entire institutional volume remained (in 2005) exempt from the Stamp Duty, in contrast to the common perception of this tax as a "tax on bank transactions" or a "tax on speculation". On the other hand, as much as 40% of the Stamp Duty revenues come from taxing foreign residents, because the tax is "chargeable whether the transaction takes place in the UK or overseas, and whether either party is resident in the UK or not."
Sterling Stamp Duty - a currency transactions tax proposed for pound sterling
In 2005 the Tobin tax was developed into a modern proposal by the United Kingdom NGO Stamp Out Poverty. It simplified the two-tier tax in favour of a mechanism designed solely as a means for raising development revenue. The currency market by this time had grown to $2,000 billion a day. To investigate the feasibility of such a tax they hired the City of LondonCity of London
The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
firm Intelligence Capital, who found that a tax on Pound sterling
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
wherever it was traded in the world, as opposed to a tax on all currencies traded in the UK, was indeed feasible and could be unilaterally implemented by the UK government.
The Sterling Stamp Duty, as it became known, was to be set at a rate 200 times lower than Tobin had envisaged in 2001, which “pro Tobin tax” supporters claim wouldn't have affected currency markets and could still raise large sums of money. The global currency market grew to $3,200 billion a day in 2007, or £400,000 billion per annum with the trade in sterling, the fourth most traded currency in the world, worth £34,000 billion a year. A sterling stamp duty set at 0.005% as some claim would have raised in the region of £2 billion a year in 2007. The All Party Parliamentary Group for Debt, Aid and Trade published a report in November 2007 into financing for development in which it recommended that the UK government undertake rigorous research into the implementation of a 0.005% stamp duty on all sterling foreign exchange transactions, to provide additional revenue to help bridge the funding gap required to pay for the Millennium Development Goals
Millennium Development Goals
The Millennium Development Goals are eight international development goals that all 193 United Nations member states and at least 23 international organizations have agreed to achieve by the year 2015...
.
Multinational proposals
In 1996 the United Nations Development Programme sponsored a comprehensive feasibility and cost-benefit study of the Tobin tax:Haq, Mahbub ul; Kaul, Inge; Grunberg, Isabelle (August 1996). The Tobin Tax: Coping with Financial Volatility. Oxford University Press. ISBN 978-0-19-511180-4.
European idea for a 'first Euro tax'
In late 2001, a Tobin tax amendment was adopted by the French National AssemblyFrench National Assembly
The French National Assembly is the lower house of the bicameral Parliament of France under the Fifth Republic. The upper house is the Senate ....
. However, it was overturned by March 2002 by the French Senate
French Senate
The Senate is the upper house of the Parliament of France, presided over by a president.The Senate enjoys less prominence than the lower house, the directly elected National Assembly; debates in the Senate tend to be less tense and generally enjoy less media coverage.-History:France's first...
.
On June 15, 2004, the Commission of Finance and Budget in the Belgian Federal Parliament approved a bill implementing a 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:...
. According to the legislation, Belgium will introduce the Tobin tax 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
Wolfgang Schüssel
Wolfgang Schüssel is an Austrian People's Party politician. He was Chancellor of Austria for two consecutive terms from February 2000 to January 2007...
called for a European Union Tobin tax to base the communities' financial structure on more stable and independent grounds. However, the proposal was rejected by the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
.
On November 23, 2009, the President of the European Council
President of the European Council
The President of the European Council is a principal representative of the European Union on the world stage, and the person presiding over and driving forward the work of the European Council...
, Herman Van Rompuy
Herman Van Rompuy
Herman Achille Van Rompuy is the first long-term and full-time President of the European Council...
, after attending a meeting of the Bilderberg Group
Bilderberg Group
The Bilderberg Group, Bilderberg conference, or Bilderberg Club is an annual, unofficial, invitation-only conference of approximately 120 to 140 guests from North America and Western Europe, most of whom are people of influence. About one-third are from government and politics, and two-thirds from...
argued for a European version of the Tobin tax. This tax would go beyond just financial transactions: "all shopping and petrol would be taxed.".
Countering him was his sister, Christine Van Rompuy, who said, "any new taxes would directly affect the poor".
On June 29, 2011, the European Commission called for Tobin-style taxes on the EU's financial sector to generate direct revenue starting from 2014. At the same time it suggested to reduce existing levies coming from the 27 member states.
Support in some G20 nations
The first nation in the G20 group to formally accept the Tobin tax was Canada. On March 23, 1999, the Canadian House of CommonsCanadian House of Commons
The House of Commons of Canada is a component of the Parliament of Canada, along with the Sovereign and the Senate. The House of Commons is a democratically elected body, consisting of 308 members known as Members of Parliament...
passed a resolution directing the government to "enact a tax on financial transactions in concert with the international community." However, ten years later, in November 2009, at the G20 finance ministers summit in Scotland, the representatives of the minority government
Minority governments in Canada
During the history of Canadian politics, eleven minority governments have been elected at the federal level. There have also been two minority governments resulting from governments being replaced between elections, for a total of thirteen federal minority governments in twelve separate minority...
of Canada spoke publicly on the world stage in opposition to that Canadian House of Commons
Canadian House of Commons
The House of Commons of Canada is a component of the Parliament of Canada, along with the Sovereign and the Senate. The House of Commons is a democratically elected body, consisting of 308 members known as Members of Parliament...
resolution.
In September 2009, French president Nicolas Sarkozy
Nicolas Sarkozy
Nicolas Sarkozy is the 23rd and current President of the French Republic and ex officio Co-Prince of Andorra. He assumed the office on 16 May 2007 after defeating the Socialist Party candidate Ségolène Royal 10 days earlier....
brought up the issue of a Tobin tax once again, suggesting it be adopted by the G20.
On November 7, 2009, prime minister Gordon Brown said that G-20 should consider a tax on speculation, although did not specify that it should be on currency trading alone. The BBC reported that there was a negative response to the plan among the G20.
By December 11, 2009, European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
leaders expressed broad support for a Tobin tax in a communiqué sent to the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
. On that day, the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
reported the following:
For supporters of a Tobin tax, there is a wide range of opinion on who should administer a global Tobin tax and what the revenue should be used for. There are some who think that it should take the form of an insurance: In early November 2009, at the G20 finance ministers summit in Scotland, the British Prime Minister "Mr. Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...
and Nicolas Sarkozy
Nicolas Sarkozy
Nicolas Sarkozy is the 23rd and current President of the French Republic and ex officio Co-Prince of Andorra. He assumed the office on 16 May 2007 after defeating the Socialist Party candidate Ségolène Royal 10 days earlier....
, France’s president, suggested that revenues from the Tobin tax could be devoted to the world’s fight against climate change, especially in developing countries. They suggested that funding could come from “a global financial transactions tax." However British officials later argued the main point of a financial transactions tax would be provide insurance for the global taxpayer against a future banking crisis."
The feasibility of gradual implementation of the FTT, beginning with a few EU nations
John Dillon contends that it is not necessary to have unanimous agreement on the feasibility of an international FTT before moving forward. He proposes that it could be introduced gradually, beginning probably in Europe where support is strongest. The first stage might involve a levy on financial instruments within a few countries. Stephan Schulmeister of the Austrian Institute for Economic Re-search has suggested that initially Britain and Germany could implement a tax on a range of financial instruments since about 97% of all transactions on European Union exchanges occur in these two countriesThis scenario is possible, given the events in May and June, 2010:
- On June 27, 2010 at the 2010 G-20 Toronto summit2010 G-20 Toronto summitThe 2010 G-20 Toronto summit was the fourth meeting of the G-20 heads of government, in discussion of the global financial system and the world economy, which took place at the Metro Toronto Convention Centre in Toronto, Ontario, Canada, during June 26–27, 2010...
, the G20 leaders declared that a "global tax" was no longer "on the table," but that individual countries will be able to decide whether to implement a levy against financial institutions to recoup billions of dollars in taxpayer-funded bailouts.
- Nevertheless Britain, France and Germany had already agreed before the summit to impose a "bank tax." On May 20, 2010, German officials were understood to favour a 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...
over a financial activities tax.
Two simultaneous taxes considered in the European Union
On June 28, 2010, the European Union's executive said it will study whether the European Union should go alone in imposing a tax on financial transactions
Financial transaction tax
A 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...
after G20 leaders failed to agree on the issue.
The financial transactions tax would be separate from a bank levy, or a resolution levy, which some governments are also proposing to impose on banks to insure them against the costs of any future bailouts. EU leaders instructed their finance ministers, in May, 2010, to work out by the end of October 2010, details for the banking levy, but any financial transaction tax remains much more controversial.
Latin America - Bank of the South
In early November 2007, a regional Tobin tax was adopted by the Bank of the South, after an initiative of Presidents Hugo ChavezHugo 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...
.
UN Global Tax
According to Stephen Spratt, "the revenues raised could be used for ... international development objectives ... such as meeting the Millennium Development GoalsMillennium Development Goals
The Millennium Development Goals are eight international development goals that all 193 United Nations member states and at least 23 international organizations have agreed to achieve by the year 2015...
." These are eight international development
International development
International development or global development is a concept that lacks a universally accepted definition, but it is most used in a holistic and multi-disciplinary context of human development — the development of greater quality of life for humans...
goals that 192 United Nations member states
United Nations member states
There are 193 United Nations member states, and each of them is a member of the United Nations General Assembly.The criteria for admission of new members are set out in the United Nations Charter, Chapter II, Article 4, as follows:...
and at least 23 international organizations have agreed (in 2000) to achieve by the year 2015. They include reducing extreme poverty
Extreme poverty
Extreme poverty, as defined in 1996 by Joseph Wresinski, the founder of ATD Fourth World, is:"The lack of basic security connotes the absence of one or more factors enabling individuals and families to assume basic responsibilities and to enjoy fundamental rights. The situation may become...
, reducing child mortality
Child mortality
Child mortality, also known as under-5 mortality, refers to the death of infants and children under the age of five. In 2010, 7.6 million children under five died , down from 8.1 million in 2009, 8.8 million in 2008, and 12.4 million in 1990. About half of child deaths occur in Africa....
rates, fighting disease epidemics such as AIDS
AIDS
Acquired immune deficiency syndrome or acquired immunodeficiency syndrome is a disease of the human immune system caused by the human immunodeficiency virus...
, and developing a global partnership for development.
In 2000, a representative of a “pro Tobin tax” NGO proposed the following:
At the UN September 2001 World Conference against Racism, when the issue of compensation for colonialism and slavery arose in the agenda, Fidel Castro
Fidel Castro
Fidel Alejandro Castro Ruz is a Cuban revolutionary and politician, having held the position of Prime Minister of Cuba from 1959 to 1976, and then President from 1976 to 2008. He also served as the First Secretary of the Communist Party of Cuba from the party's foundation in 1961 until 2011...
, the President of Cuba
Cuba
The Republic of Cuba is an island nation in the Caribbean. The nation of Cuba consists of the main island of Cuba, the Isla de la Juventud, and several archipelagos. Havana is the largest city in Cuba and the country's capital. Santiago de Cuba is the second largest city...
, advocated the Tobin Tax to address that issue. (According to Cliff Kincaid, Castro advocated it "specifically in order to generate U.S. financial reparations to the rest of the world," however a closer reading of Castro's speech shows that he never did mention "the rest of the world" as being recipients of revenue.) Castro cited Holocaust reparations as a previously established precedent for the concept of reparation
Reparation (legal)
In jurisprudence, reparation is replenishment of a previously inflicted loss by the criminal to the victim. Monetary restitution is a common form of reparation...
s.
Castro also suggested that the United Nations be the administrator of this tax, stating the following:
On March 6, 2006, US Congressman Ron Paul
Ron Paul
Ronald Ernest "Ron" Paul is an American physician, author and United States Congressman who is seeking to be the Republican Party candidate in the 2012 presidential election. Paul represents Texas's 14th congressional district, which covers an area south and southwest of Houston that includes...
stated the following:
See also
- Currency transaction taxCurrency transaction taxA 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 taxes paid by consumers....
- 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...
- 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...
- 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:...
- 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....
- 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...
External links
- Bank of Portugal report on the defense of the Portuguese Escudo in the European exchange rate mechanism
- BBC 7 November 2009 Lukewarm reaction to UK tax plan
- "Bibliography - Best Sources on Financing Alternatives, and Tobin Taxes" (includes economists on both sides of the issue of economic feasibility) from website of Tobin Tax Initiative
- Currency Transaction Taxes - Library of links to legislation, proposals, reports, articles and archives - from Global Policy Forum
- Debating the Tobin Tax, New Rules for Global Finance, 2003
- Disarming the markets, editorial by Ignacio Ramonet, Le Monde Diplomatique 1997
- http://web.archive.org/web/20050306201839/http://www.jubilee2000uk.org/worldnews/lamerica/james_tobin_030901_english.htmEnglish version of James Tobin interview on Der Spiegel on Jubilee 2000Jubilee 2000Jubilee 2000 was an international coalition movement in over 40 countries that called for cancellation of third world debt by the year 2000. This movement coincided with the Great Jubilee, the celebration of the year 2000 in the Catholic Church...
web site] - Federal reserve bank of San Francisco article on the failed attack on the Hong Kong dollar
- IMF report (2004) on emerging market currency crises
- The Guardian editorializes against the Tobin tax