TOBIN TAX - The TIME HAS COME
Merkel said she will promote Tobin tax at G20 meeting in Toronto on 26-27th of June. German Chancellor also appeared to be willing to introduce state rating agencies that will provide true and possibly unbiased rating estimates.
There's been some discussion of a Tobin tax, the idea of levying a tax on financial transactions such as currency, stock, and derivative trades. That would raise revenue and provide disincentives for the socially useless algorithmic trading that creates risk for all investors.
It is not part of the legislation. The House version of financial reform called for a $150 billion fund to be raised
OH NO.. not another FUND!!
For the more general category of "financial transaction taxes", see Financial transaction tax. For the more general category of "currency transaction taxes", see Currency transaction tax.
See also: Robin Hood tax, Financial transaction tax, and Currency transaction tax
A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another. 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, South East 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:
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, 0.5% 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 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.
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.
James Tobin.s purpose in developing his idea of a currency transaction tax 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 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 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 (, p. 104-105. 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. (, p. 104)
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. (, p. 105)
The 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 failed. 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 volatility 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 euroize, 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."
One of the main economic hypotheses raised in favor of financial transaction taxes is that such taxes reduce return volatility, 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:
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.
Historical attempts to reduce speculation via fixed exchange rates
Matthew Sinclair, Research Director of TaxPayers' Alliance, notes that
one reason why few have supported a Tobin tax is that worries about foreign exchange speculation have slowly subsided as more countries have moved towards floating exchange rates, which do more to limit the potential for exchange rate speculation than a Tobin tax possibly could. Attempts to fix rates such as . in the 1980s and 1990s . the European Exchange Rate Mechanism (ERM) meant that we got large and sudden movements in exchange rates when speculators sensed that a peg could not be maintained, rather than the more fluid shifts of today.
When James Tobin was interviewed by Der Spiegel 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.
It should be noted that 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 1/10th 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." 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., 1/100th 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-distruptive 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
to .throw some sand in the wheels. of speculative flows. For a currency transaction to be profitable [to the speculator], the change in value of the currency must be greater than the proposed tax. Since speculative currency trades occur on much smaller margins, the Tobin Tax would reduce or eliminate the profits and, logically, the incentive to speculate. The tax is designed to help stabilize exchange rates by reducing the volume of speculation. And it is set deliberately low so as not to have an adverse effect on trade in goods and services or long-term investments.
Is the tax easy to avoid?
Although economist James Tobin said his idea of a small tax on every foreign exchange transaction, in order to reduce financial sector volatility, was unfeasible in practice, Joseph Stiglitz said, on October 5, 2009, modern technology meant that was no longer the case. Joseph Stiglitz said, the tax is "much more feasible today" than a few decades ago, when Tobin recanted. 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."
In May 2010 a spectacular phenomenon happened. German public opinion had shifted to very wide-spread acceptance that a Tobin tax is indispensable. In german print media, TV and radio there was constant talk about the Finanztransaktionssteuer, yet the topic is muted in anglo-american media or seen as a german quirk.