Tuesday, 19 July 2011

It's time to take the Tobin tax seriously

by Neil McCulloch
from www.guardian.co.uk

14 June 2011

Campaigners for the introduction of the Tobin tax (or Robin Hood tax) should be buoyed by preliminary findings of a review I've been working on that suggests levying a small tax, maybe 0.005%, on banks' and traders' transactions could raise billions of dollars a year worldwide.

Many campaigners hope that revenue from such a tax could be used to fund global anti-poverty and climate change initiatives.

This week the full research report is launched in Brussels, where European politicians have been calling for action on this issue, ahead of the publication of the EU impact assessment of such a tax. There is already substantial support for a Tobin tax among European leaders, including Nicolas Sarkozy and Angela Merkel.

In 1978, the Nobel prize laureate in economics James Tobin proposed levying a small tax on all foreign exchange transactions to penalise short-term speculators but not long-term investors. Our research involved gathering as much of the existing evidence on such taxes as possible. Over the last 20 years theoretical models have attempted to explain how financial markets work and deduce what impact a Tobin tax could have on them.

But we did not just look at models – as we have recently discovered at great cost, real financial markets do not necessarily behave the way theoretical models say they should. There is also a wealth of real data from around the world on the impact of raising transaction costs in financial markets.
This substantial body of evidence contains good news for those campaigning for a Robin Hood tax (pdf).

These taxes are feasible. In fact, since Tobin's day they have become more so. Due to changes in the way transactions are settled, it is now much easier for countries to unilaterally introduce certain forms of transaction taxes. Indeed, lots of countries already have one in the form of stamp duty on share transactions, including the UK. It would also be possible to have a tax on transactions in your own currency, eg sterling or the euro, since central banks have control of the issuance of their own currencies.

A transaction tax would have to be applied to a broad range of areas to avoid market actors simply moving away from taxed financial instruments to untaxed ones, and tax rates themselves would have to vary depending on what instrument you are taxing.

But clearly a multilateral tax would help prevent the kind of tax avoidance we might see if it was introduced in just one country.

How much these taxes would collect depends entirely on what you tax and at what rate. But the numbers are big. We found that applying a 0.005% tax to foreign exchange markets alone might raise around $25bn per year worldwide. The revenue potential in the UK would be around $11bn (£7.6bn), roughly as much as the entire UK overseas aid budget. Applying a financial transaction tax (FTT) on other markets, for example derivatives and over the counter markets, would be more difficult but would raise much larger sums.

Some theoretical models suggest that transaction taxes reduce volatility, while most empirical evidence shows that higher transaction costs are actually associated with more rather than less volatility. But overall it appears that if these taxes were appropriately designed, they are no more likely to increase market volatility than reduce it. And there is little hard evidence to support the critics' assertion that such taxes, if well designed, will inevitably damage markets.

The pro-Tobin tax lobby claim it would be progressive, paid by the most wealthy institutions and individuals. This fits with a general mood that we would like to punish the banks for their role in the financial crisis.

Critics say the opposite is true, and that the cost would be passed on to end users in the form of higher borrowing costs. The facts suggest that wholesale traders would bear the initial cost of the tax but in the long run a significant proportion of the tax could end up being passed on to the owners of "capital".

However, given that most of us earn relatively little of our income on returns to capital (eg dividends on shares, rental income from houses, or profits from your own business), it would seem likely that a transaction tax would be more progressive than several other forms of taxation, such as VAT.

Given all of this evidence, it is surprising that a significant source of currently untapped revenue continues to be ignored by so many politicians. Commonly held assumptions that such taxes would be impossible to design and levy, and would create market distortions and damage economies are not backed up by the latest available evidence.

A Tobin tax is implementable, both at a European and national level. It isn't a panacea and won't "calm the markets", but it might make a useful contribution to public finances and to generating resources for tackling global problems such as climate change and poverty. With increasing political support for such a tax among EU leaders, it is time for policymakers and the financial sector to take these proposals far more seriously.


Anonymous said...

"However, given that most of us earn relatively little of our income on returns to capital (eg dividends on shares, rental income from houses, or profits from your own business"

Yea so when the transaction tax is added to the nightly borrowing of lenders from the interbank to balance the books and that cost is handed directly to mortgage owners I am sure the substantial rise in there mortgage payments wont be noticed.

0.005% tax on one thousand currency contracts held for the short period of 90 days amounts to a 20,000 tax upon the purchase, 40,000 per day when the position is rolled over and a further 20,000 when the position is closed.

To hold the position for 90 days now costs three million six hundred and eighty thousand pound in tax.

The UK has a stamp duty yet government data shows that over 75% of all UK financial transactions are exempt from the tax. Many large banking and investment firms are fully or partially exempt, and many London traders do their business on US or other exchanges to avoid the tax entirely.

A financial transaction tax will never be global,Switzerland, Singapore, Hong Kong, Bermuda, Dubai and a dozen other countries have stated that they won’t impose the broad FTT and would welcome the business from taxed jurisdictions.

Sweden enacted a Financial Trading Tax (FTT) in 1984. Futures trading volume fell 98%, options trading fell to zero, bond trading fell 70%, and most other markets’ trading volume fell by at least 50%. A large segment of the Swedish financial industry either left the country or went out of business. Total tax collections (both capital gains and related income taxes) fell so dramatically that those tax losses wiped out all the gains from the FTT.

The total FTT taxes collected were only 3% of what the Swedish Finance Ministry had originally projected and what was promoted as a way to raise billions in taxes to support social services ended up being a net loss to the Swedish Treasury. The FTT was repealed in 1991.

Such a tax pushes up the cost of doing business Massively and can not be sustained - this would simply be the end of London as a financial center.

Anonymous said...

"this would simply be the end of London as a financial center."

Oh how terrible, we wouldn't want to do anything to up set all those bankers would we?

Anonymous said...

"Oh how terrible, we wouldn't want to do anything to up set all those bankers would we?"

The arrogance of the British is astounding but hey when the investment arm of London has left for another financial center, the multi billion per day Forex exchange, the hedge funds the insurance funds the lot leaving in its wake tens of thousands of newly unemployed people and a lovely loss on tax revenue amounting to tens and tens of billions a year and they have to foot the bill perhaps then they will get a real taste of there significance.

There is so much productive industry left in the UK, more than enough to make up for it and the financial transaction tax will make a profit straight off the retail banks ( your money ) your mortgage your loans your pensions.

So while you sit back in glee at having upset the bankers and your to stupid to realize there in another country paying even less tax than they did here whilst you are having your funds raided with huge tax increases all so the eu can try and save the disaster that is the single currency...enjoy...

Anonymous said...

Those banks are welcome to leave if they wish to. It is arrogant for these banks to act as if they're not replaceable. With their leaving, other banks can and will come in and fill the spot they left. Do anybody honestly think that it's the end of the world when there's no bank left? I'd pay to see that happen. At the end of the day, it's gonna be business as usual.

The problem is not that there's not enough liquidity in the market. The problem is that there's too much. Capital react to short-term changes too much. There's huge pressure to perform better than everyone else, without any penalty for switching investment.