Tobin tax

A Tobin tax is the suggested tax or levy on all trade of currency across borders. Named after the economist James Tobin, the tax is intended to put a penalty on short-term speculation in currencies. Tobin suggested it in 1972.

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 Bretton Woods system. This action created the situation whereby the United States dollar became the sole backing of currencies and a reserve currency for the member states of the Bretton Woods system. In the face of increasing financial strain, the system collapsed in 1971.

In that context, in 1972, Tobin suggested a new system for international currency stability, and proposed that such a system include an international charge on foreign-exchange transactions. The original tax rate he proposed was 1%, which was subsequently lowered to between 0.1% and 0.25%, as we see in later quotes from Tobin in 2001:

In 2001, in another context, just after "the nineties' crises in Mexico, South East Asia and Russia,"^[1][2] which included the 1994 economic crisis in Mexico, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis, Tobin summarized his idea:

"The tax on foreign exchange transactions 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, 0.1% 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 If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, South East 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." ^[3][4]

Contents 1 Tobin tax projects around the world 1.1 Europe 1.2 Canada 1.3 Latin America 1.4 New Zealand 2 Original idea and global justice movement 3 Debate 3.1 Arguments supporting 3.2 Arguments opposing 3.3 Supporters (in chronological order) 3.4 Opposers (in chronological order) 4 See also 5 References 6 Further reading 7 External links

Tobin tax projects 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 Nations manage a Tobin tax would solve this problem and would give the U.N. 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.)

Europe

In Europe the Tobin tax idea was the subject of much discussion in the summer of 2001. On June 15, 2004, the Commission of Finance and Budget in the Belgian Federal Parliament approved a bill implementing the Spahn tax (a version of the Tobin tax proposed by Paul Bernd Spahn). According to the legislation, Belgium will introduce the Tobin tax once all countries of the eurozone introduce a similar law.^[5] 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. In September, 2009, French president Nicolas Sarkozy brought up the issue once again, suggesting it be adopted by the G20.[1]

In the UK, the proposed Tobin tax was initially spearheaded by development charity War on Want who campaigned for its introduction from 1998 and who set up the Tobin Tax Network in 2002. At that time, global trade on the foreign exchange markets was running at $1,500bn every day.^[6]. From the development lobby's point of view, the Tobin tax had the advantage of combining regulation of the international financial system with a means of raising money for development to counteract the falling aid budgets of most rich countries.

Whilst finding some support in countries such as France and Latin America, the Tobin tax proposal came under much criticism from economists and governments, especially those with a large international banking sector, who said it would be impossible to implement and would destabilise foreign exchange markets.

In 2005 the Tobin tax was developed into a modern proposal by the UK 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. The possibility of a currency transaction tax for the UK was investigated by City of London firm Intelligence Capital, who found that a tax on 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.^[7]

The Sterling Stamp Duty, as it became known would be set at a rate 200 times lower than Tobin had envisaged, so that it would not adversely affect currency markets and could still raise huge sums of money. The global currency market has since grown again 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.^[8] A sterling stamp duty set at 0.005% would therefore raise in the region of £2 billion a year.^[9] 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.^[10]

Adair Turner, chair of the United Kingdom Financial Services Authority, in August 2009 in an interview for Prospect magazine supported the idea of new global taxes on financial transactions, warning that a “swollen” financial sector paying excessive salaries has grown too big for society. Lord Turner’s suggestion that a Tobin tax should be considered for financial transactions is also likely to reverberate around the world.^{[11] [12]}

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. (www.bloomberg.com) The BBC reported that there was a negative response to the plan among the G20.^[13]

By December 11, 2009, European Union leaders expressed broad support for a Tobin tax in a communiqué sent to the International Monetary Fund. ^[14]

Canada

In Canada, the Tobin tax was revived largely through the efforts of Canadian activists in the 1990s, and on March 23, 1999 the Canadian House of Commons passed a resolution directing the government to "enact a tax on financial transactions in concert with the international community."^[15] 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. ^[16]

Latin America

In January, 2003, in Latin America, the Tobin tax was supported by the president of Brazil, Luiz Inácio Lula da Silva, and the president of Venezuela, Hugo Chávez.^[17]

In early November 2007, a regional Tobin tax was adopted by the Bank of the South, after an initiative of Presidents Chavez and Néstor Kirchner from Argentina.^[18]

New Zealand

In 1996, Don Brash, when he was the Governor of the Reserve Bank, stated that a Tobin tax in New Zealand would not have the desired effect of reducing the volume of international financial transactions or in reducing market volatility.^[19]

However, the Progressive Party and the Green Party supported a Tobin tax.

Original idea and global justice movement

On August 15, 1971, Richard Nixon announced that the US dollar would no longer convert to gold, effectively ending the Bretton Woods system. Tobin suggested a new system for international currency stability, and proposed that such a system include an international charge on foreign-exchange transactions.

The idea lay dormant for more than 20 years and was revived by the advent of the South East Asia economic crisis in the late 1990s. In 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 Der Spiegel on 2001, James Tobin distanced himself from the global justice movement [2][3] and continued to state the validity of his proposal,

"I have absolutely nothing in common with those anti-globalisation rebels. Of course I am pleased; but the loudest applause is coming from the wrong side. Look, I am an economist and, like most economists, I support free trade. Furthermore, I am in favour of the International Monetary Fund, the World Bank, the World Trade Organisation. They've hijacked my name ... The tax on foreign exchange transactions 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, 0.1% 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 rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, South East 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." (See ^[20] or.^[21])

Tobin observed that, while his original proposal had only the goal of put 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, and allow governments, and therefore citizens, to reclaim part of the democratic space conceded to the financial markets.

Debate

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 volatility, widen bid-ask spreads for end users such as investors, savers and hedgers, and destroy liquidity.

Arguments supporting

On November 7, 2009, at the G20 finance ministers summit in Scotland, the head of the IMF, Dominique Strauss-Khan, said, "transactions are very difficult to measure and so it's very easy to avoid a transaction tax,"^[22] However, in the year 2000, "eighty per cent of foreign-exchange trading [took] place in just seven cities. Agreement by [just three cities,] London, New York and Tokyo alone, would capture 58 per cent of speculative trading."^[23]

When presented with the problem of speculators shifting operations to offshore tax havens, a representative of the organization Halifax Initiative,^[24] argued as follows: "Agreement between nations could help avoid the relocation threat, particularly if the tax were charged at the site where dealers or banks are physically located or at the sites where payments are settled or ‘netted’. The relocation of Chase Manhattan Bank to an offshore site would be expensive, risky and highly unlikely – particularly to avoid a small tax. Globally, the move towards a centralized trading system means transactions are being tracked by fewer and fewer institutions. Hiding trades is becoming increasingly difficult. Transfers to tax havens like the Cayman Islands could be penalized at double the agreed rate or more. Citizens of participating countries would also be taxed regardless of where the transaction was carried out."^[25]

Arguments opposing

The original tax rate James Tobin proposed was 1%, which was subsequently lowered to between 0.1% and 0.25%.

It should be noted that tax rates of this magnitude have been proposed by normative economists, without addressing the practicability of these socially desirable levels of taxation. In positive economics studies however, where due reference was made to the prevailing market conditions, the resulting tax rates have been significantly lower.

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 1/10th 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.^[26] 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.^[27]

Similarly, 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."^[28]

Research Analyst Marion G. Wrobel examined the international experience with financial transaction taxes in a paper prepared for the Canadian Government in July 2006.^[29] Wrobel 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 kroner per year. They did not amount to more than 80 million Swedish kroner in any year and the average was closer to 50 million.^[30] 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 kroner by 1988. ^[31]

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.

On December 21, 2009, Irene Aldridge took a main street approach towards her opposition of the tax. She stated that a volume decrease of 10% would equate to a job loss of 10 000 securities professionals. She continues to argue that this will have a main street disadvantage by providing the following,

"100 financial security jobs are estimated to support 27 to 37 jobs in the retail sector, 72 to 91 jobs in the business services sector (think staples and copy machines), 79 to 112 jobs in the services sector (like dentists, nurses and gas station operators), and 5 to 12 restaurant and pub workers. Even the smallest FTT that reduces transaction volume by as little as 10% will, according to Dr. Schwabish, result in the loss of over 30,000 jobs just in NYC"^[32]

This in addition to the reduced return on investment for individuals, the higher spreads and volatility in the market, and possible increased banking fees, which will need to be increased in order for banks to cover the higher risk associated with holding stocks will all have detrimental effects on main street.^[33]

Supporters (in chronological order)

In the year 1999 and 2000, the Canadian Parliament and the Finnish Government supported the Tobin tax.^[34]

On September 19, 2001, unexpected, though qualified, support for the Tobin tax has come from the multi-billionaire speculator George Soros, who stated that, while the tax goes against his personal interests, he thinks that its introduction could have positive effects on the world economy. However, he advocates a variation to the Tobin tax: Special Drawing Rights or SDRs that the rich countries would pledge for the purpose of providing international assistance.^[35]

In September 2006, George Monbiot argues in favour of a Tobin Tax, in his book Heat: How to Stop the Planet Burning.^[36]

In early November 2009, at the G20 finance ministers summit in Scotland, the British Prime Minister Gordon Brown raised the idea of a tax on financial transactions, but did not go into specific details. At the same summit, the US Treasury Secretary Timothy Geithner advised the US does not support the Tobin Tax. ^{[14] [37]}

In late November, 2009 Paul Krugman, New York Times columnist and professor of Economics and International Affairs at Princeton University, argued that a Tobin Tax would have ameliorated the financial crisis of 2007–2009. He wrote, "...bad investments aren’t the whole story of the crisis. What turned those bad investments into catastrophe was the financial system’s excessive reliance on short-term money....a financial transactions tax, by discouraging reliance on ultra-short-run financing, would have made such a run much less likely. So contrary to what the skeptics say, such a tax would have helped prevent the current crisis — and could help us avoid a future replay." Krugman wrote that it is "an idea whose time has come."^[38]

In early December, 2009, economist Stephany Griffith-Jones also advocated a very low but "internationally co-ordinated tax on financial transactions, often described as a Tobin tax."^[39]

Opposers (in chronological order)

On August 1, 1994, an IMF Working Paper No. 95/77 Financial Transactions Taxes by Shome,Parthasrathi and Stotsky, Janet Gale found that "the economic effects of financial transactions taxes on capital markets are seen to be pervasive. They may impose significant efficiency costs by impairing the smooth functioning of financial markets, increasing the cost of capital, and distorting the structure of capital financing. Their effects on the volatility of capital flows, either in domestic or international financial markets, are uncertain, as are their distributional and revenue effects."^[40]

In 1995, Spahn, P. Bernd opposed a Tobin Tax in a Working Paper International Financial Flows and Transactions Taxes: Survey and Options, concluding "...the original Tobin tax is not viable. First, it is virtually impossible to distinguish between normal liquidity trading and speculative noise trading. If the tax is generally applied at high rates, it will severely impair financial operations and create international liquidity problems, especially if derivatives are taxed as well."^[41]

In 2001, the IMF conducted considerable research that opposes a transaction tax. In 2001 findings by Habermeier, Karl Friedrich and Kirilenko, Andrei state that "...transaction taxes or such equivalents as capital controls can have negative effects on price discovery, volatility, and liquidity and lead to a reduction in the informational efficiency of markets."^[42]

In 2006, Lanne,Markku and Vesala,Timo of University of Helsinki write in the Bank of Finland Research Discussion Paper No. 11/2006 The Effect of a Transaction Tax on Exchange Rate Volatility(2006) that "a transaction tax is likely to amplify, not dampen, volatility in foreign exchange markets."^[43]

In early November, 2009, the Lex column of Financial Times opposes the Tobin tax, in Tobin or not Tobin it writes "The Tobin tax should remain a curiosity of economic history."^[44]

In early November, 2009, the US Treasury Secretary Timothy Geithner advised the US does not support the Tobin Tax. ^{[14] [45]}

In November, 2009, Matthew Sinclair, Research Director of The TaxPayers' Alliance, wrote an article in the London newspaper City AM A Tobin Tax would destroy London without making the world safer ^[46]

On December 21, 2009, Irene Aldridge took a main street approach towards her opposition of the tax.^[47]

See also

• ATTAC
• Alter-globalization
• Central banks - which issue currency
• Currencies
• Financial markets
• Fluctuation in exchange rates
• Financial crisis of 2007–2009
• Foreign exchange market
• Foreign exchange controls
• Global Justice Movement
• Jubilee 2000
• Liquidity crisis
• Money Market
• Paul Bernd Spahn
• Speculation
• Speculation in foreign exchange markets
• 1990s work of War on Want
• 1994 economic crisis in Mexico
• 1997 Asian Financial Crisis
• 1998 Russian financial crisis

References

Further reading

• Kaiser, Johannes; Chmura, Thorsten; Pitz, Thomas (July 2007), The Tobin Tax - A Game-Theoretical and an Experimental Approach, Social Science Electronic Publishing, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=936924 

• Patomäki, Heikki (August 2001), Democratising Globalisation: The Leverage of the Tobin Tax, Zed Books, ISBN 978-1856498715 

• Haq, Mahbub ul; Kaul, Inge; Grunberg, Isabelle (August 1996), The Tobin Tax: Coping with Financial Volatility, Oxford University Press, ISBN 978-0195111804 

External links

• ATTAC
• Disarming the markets, editorial by Ignacio Ramonet, Le Monde Diplomatique 1997
• Tobin Tax Initiative
• War on Want
• The Guardian editorializes against the Tobin tax
• Currency Transaction Taxes - analysis from Global Policy Forum
• English version of James Tobin interview on Der Spiegel on Jubilee 2000 web site
• Stamp Out Poverty
• ATTAC France's view on Tobin's interview (English version)
• Tobin tax initiatives
• BBC 7 November 2009 Lukewarm reaction to UK tax plan