Tobin tax
The Tobin tax or ITF (for Tax on Financial Transactions) is a type of tax on financial transactions that was proposed by the American economist James Tobin in his Janeway Lectures at Princeton University in 1971. This type of tax regained public attention when, in the 1990s, its application was proposed by the anti-globalization movement, especially the ATTAC organization, and again in the 2000s due to the economic crisis of 2008. James Tobin has considered that his name and his idea have been abused, given that originally the rate was only intended to curb the volatility of the international exchange markets. In his new formulation, it is proposed that its collection be used for social purposes or that it have the objective of controlling financial crises such as the European sovereign debt crisis. Since 2011, the demand for this tax has been relaunched, both from political and monetary authorities and from different discussions within the European Union, as well as from certain NGOs such as Oxfam, who renamed it the Robin Hood Tax.
In 2001, after the economic crises of the 1990s in Mexico, Russia, and Southeast Asia, James Tobin described the tax he devised in the early 1970s:
The tax on financial transactions was designed to cushion fluctuations in exchange rates. The idea is very simple: it would apply, in each change of one currency in another, a small tax - say 0.5% of the volume of the transaction-. This deters speculators as many investors invest their money in foreign currency very short-term so they would have to pay the tax many times. Without taxes what happens when money is withdrawn immediately is that countries should drastically increase interest so that their currency remains attractive to financial flows. But the high interest and constant fluctuation are disastrous for the national economy, as has been demonstrated by the financial crises of the 1990s in Mexico, Southeast Asia and Russia. With my proposal for tax on financial transactions, countries would regain some room for manoeuvre to defend the national economy and would therefore be a measure that would limit the excessive power of financial markets.
Concept and definition
Tobin's Conceptualization
James Tobin's goal in developing his idea of a currency transaction tax was to find a way to manage exchange rate volatility. In his view, & # 34; exchange rate exchanges transmit changes to international financial markets. National economies and national governments are not capable of adjusting the massive movements of funds in foreign exchange rates without great work and a high sacrifice of the national economic policy objectives in relation to employment, output and inflation".
Tobin found two solutions to this issue. The first was to move "toward a common currency, a common monetary and fiscal policy, and economic integration". The second was to move "towards greater financial segmentation between nations and currency areas, allowing countries to central banks and governments greater autonomy in their policies aimed at their specific economic institutions and objectives". Tobin's preferred solution was the former, but he did not find it politically viable so he advocated the second option: &# 34;I therefore recommend, with regret, the second, and my proposal is to introduce some kind of stick in the wheels of our excessively efficient international money markets".
Tobin's method of putting a "stick in the wheel" was to suggest a rate on all spot conversions of one currency into another currency, proportional to the size of the transaction. In this sense, he stated:
It would be an internationally agreed rate administered by each government in its own jurisdiction. Britain, for example, would be responsible for taxing all foreign exchange transactions in the European currency of banks and brokers based in London, even though the sterling pound did not participate. Tax collection would be appropriately satisfied with the International Monetary Fund (IMF) or the World Bank. The tax would apply to all purchases of financial instruments denominated in another currency, from currency and currency to asset titles. It should apply, I believe, to all payments in a currency of real goods, services and assets sold by a resident of another currency area. I do not intend to add even a minimum trade barrier. But I see no other way to prevent financial transactions from disguise themselves as trade.
In developing his idea, Tobin was influenced by John Maynard Keynes's earlier work on the general theory of financial transaction rates:
I am a disciple of Keynes, and he, in the famous chapter XII of the General theory of employment, interest and money, he had already prescribed the idea of a transaction rate, in order to align investors with their shares in a durable way. In 1971, I transferred this idea to the exchange markets.
Keynes's concept derives from his observation in 1936, when he proposed that a tax on financial transactions be imposed on Wall Street operations, where he argued that excessive speculation by uninformed financial traders market volatility increased.
Variations on the Tobin Tax Idea
The Spahn Tax
According to Paul Bernd Spahn in 1995, "analysis has shown that the Tobin tax as originally proposed is not feasible and should be dropped". Further, he added:
"...it is virtually impossible to distinguish between trading normal and trading speculative. If the rate is generally applied with high rates, it will negatively and severely affect financial operations, especially if derivatives are also taxed. A lower tax rate would reduce the negative impact on financial markets, but would not mitigate the speculation of a type of change that exceeded the tax margin."
Spahn suggested an alternative, which would include
"...a type structure in two sections formed by a rate on low financial transactions, plus a surcharge to prohibitive rates on "repetition." The latter would be latent during normal financial activity, and would be activated only in case of speculative attacks. The mechanism that allows the identification of trading outside the normal world financial markets would refer to a "peg crawling"with a proper band for the exchange rate. The exchange rate would move freely within this band without taxing transactions. Only transactions made to a exchange rate beyond that permitted range would be subject to taxation. This would automatically induce stabilizing behaviour from market participants."
Special Drawing Rights
On September 19, 2001, investor George Soros advanced the proposal for Special Drawing Rights (SDRs) that rich countries would commit to in order to provide international assistance, without necessarily dismissing the idea of the Tobin tax. He stated: "I think that's the case for a Tobin rate... [but] it's not at all clear that a Tobin rate would reduce volatility in foreign exchange markets." It is true that it would discourage currency speculation but it would also reduce market liquidity".
Scope of Tobin's concept
The term "Tobin tax" it has often been used interchangeably both to refer to a foreign exchange transaction tax (TTD) in the sense of Tobin's original idea, and to refer to different forms of a more general financial transaction tax (TTF).. In both cases, the different ideas proposed have included both national and multinational concepts.
An example of this association with a specific tax on currency transactions is shown in this example from 2001:
"The concept of a Tobin rate has experienced a resurgence in discussions aimed at reforming the international financial system. In addition to different national legislative initiatives for a Tobin rate in national parliaments, other avenues for introducing a Tobin rate on foreign exchange transactions (TTD) are being considered by the United Nations."
An example of its association with a tax on financial transactions in general is shown in this other example from 2009:
"The leaders of the European Union have urged the International Monetary Fund (IMF) on Friday to consider a global rate on financial transactions against the opposition to this idea of the US and the IMF itself. In a statement issued after a two-day meeting, the 27 U.S. leaders did not come to launch a formal appeal for the introduction of the so-called "Table Tobin" but clearly expressed that they saw it as a potentially useful tool to increase income.
Original idea and proposal of the anti-globalization movement
Tobin's specific concept of a "tax on foreign exchange transactions" of 1972 remained dormant for more than 20 years, but came back to life with the arrival of the Asian financial crisis of 1997. In December 1997, Ignacio Ramonet, editor of Le Monde Diplomatique, recovered the debate around the Tobin tax with an editorial titled "Disarming the markets". Ramonet proposed the creation of an association for the introduction of this tax, which was called ATTAC (Association for the Taxation of Financial Transactions for Aid to Citizens). The tax then became a key issue of the global justification or anti-globalization movement and a subject of discussion not only among academic institutions but even in the streets and parliaments of 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 anti-globalization movement. «There are agencies and groups in Europe that have used the Tobin tax as an element for broader campaigns, for reasons that go beyond my proposal. My proposal was carried out, it has been turned into a kind of key piece of the anti-globalization program». James Tobin's interview with Radio Popolare was quoted by the Italian Foreign Minister at the time and by former WTO director Renato Ruggiero during a parliamentary debate after the G8 meeting in Genoa. James Tobin later distanced himself from anti-globalization movement, and went on to affirm the validity of his proposal:
I have absolutely nothing in common with those anti-globalization rebels. Of course I am grateful, but the greatest applause comes from the wrong place. Look, I'm an economist, and as most economists support free trade. Beyond that, I am in favour of the International Monetary Fund, the World Bank, the World Trade Organization. They have hijacked my name. [...] the rate on foreign currency transactions was designed to reduce and weather exchange rate fluctuations.
Tobin noted that while his original proposal was only intended to "put a brake on the traffic in foreign currency," the anti-globalization movement has placed an emphasis on "the income of foreign exchange with which they want to finance their projects to improve the world". The economist did not declare himself against the use of the tax collection, but he called attention to the fact that this was not the most important aspect of the rate.
ATTAC and other organizations have acknowledged that while they still regard Tobin's original idea as paramount, they believe the tax could generate funds for development needs in the South (such as the Millennium Development Goals), and allow governments, and therefore citizens, reclaim part of the democratic space granted to financial markets.
In March 2002, Professor Willem Buiter of the London School of Economics, who studied under James Tobin, wrote a glowing obituary of the man, which also remarked that 'this [Tobin tax]... has been in recent years embraced by some of the most determined enemies of trade liberalization, globalization and the open society". Buiter added that "the proposal to use the Tobin tax as a means of raising revenue for development assistance was rejected by Tobin, and he forcibly repudiated the anti-globalization mantra of the Seattle mob." In September 2009, Buiter also wrote in the Financial Times that "Tobin was a genius... but the Tobin tax was probably his most ridiculous idea."
Tobin tax proposals and implementations around the world
It was originally assumed that the Tobin tax would require international implementation, since it would be very difficult for a country acting alone to implement the tax. Since then, many have argued that it would be better to implement it by an international institution. It has been proposed that the United Nations manage the Tobin tax, resolving this issue and at the same time giving the UN an important source of funds independent of donations from member states. However, there have also been initiatives suggesting the possibility of giving the rate a national dimension.
Although it found some support in countries with major left-wing political movements such as France and Latin America, the Tobin tax proposal came under significant criticism from both economists and governments, especially those with liberal markets and a significant international banking sector, who claimed that it would be impossible to implement the rate because it would destabilize foreign currency markets.
Most of the practical implementations of the Tobin tax, either in the form of a specific currency transaction tax or a more general financial transaction tax, have taken place at the national level. In July 2006, analyst Marion G. Wrobel examined the international experiences of various countries with taxes on financial transactions.
Experience in Sweden with taxes on financial transactions
Wrobel's work drew attention to Sweden's experience with different rates on financial transactions. In January 1984, Sweden introduced a 0.5% rate on the purchase or sale of a capital asset. So a round-trip transaction (buy and sell) would result in a 1% tax. In July 1986 the type was folded. In January 1989, a considerably lower rate of 0.002% on fixed income assets was introduced for all securities with a maturity of 90 days or less. For bonds with a maturity of five years or more, the rate was 0.003%.
The collection of these taxes was not good. For example, revenue from the fee on fixed income securities was initially expected to be SEK 1.5 billion per year. In reality, they did not exceed SEK 80 million in any year and the average was close to SEK 50 million. In addition, as taxable trading volumes fell, capital gains tax collections also fell, eliminating the tax entirely. positive tax collection effect on capital transactions.
The day the rate was announced, stock prices fell 2.2%. But there was a leak of information before the announcement, which would explain the 5.35% drop in price during the 30 days prior to the announcement. When the rate was doubled, prices fell again another 1%. These falls were in line with the capitalized value of future tax payments expected from operations. Thus, it was perceived that the rates on fixed-income securities only served to increase the cost of public borrowing, giving another argument against the rate.
Even though the rate on fixed income securities was much lower than on equity, the impact on market trading was more dramatic. During the first week of the tax, bond trading volume fell 85%, even though the five-year bond rate was only 0.003%. Futures trading volume fell 98% and the options market disappeared. On April 15, 1990, the tax on fixed income assets was abolished. In January 1991, the rates of the other rates were cut in half and at the end of that year they were completely abolished. Once the fees were removed, trading volumes returned and grew substantially throughout the 1990s.[citation needed]
The UK experience with the Stamp Duty
One type of financial transaction tax (FTT) is the Stamp Duty Reserve Tax (SDRT) and the stamp duty. The stamp duty was introduced as an ad valorem tax on the purchase of shares in 1808, preceding the Tobin tax on foreign exchange transactions by nearly 150 years. Changes were introduced in 1963. That year, the UK Stamp Duty was 2%, fluctuating between 1% and 2% thereafter, until a process of gradual reduction began in 1984, when the rate was halved, first from 2% to 1%, and again in 1986 from 1% to the current level of 0.5%.
Changes in stamp tax rates in 1974, 1984, and 1986 provided researchers with "natural experiments," allowing them to measure the impact of the transaction rate on volumes traded in the market, in the volatility, in the returns and in the valuations of the values of the London Stock Exchange. Jackson and O'Donnel (1985), using quarterly UK data, found that a 1% reduction in Stamp Duty in April 1984 from 2% to 1% led to a "dramatic 70% increase in securities volume". Analyzing the three changes in Stamp Duty rates, Saporta and Kan (1997) found that rate rate increase (or decrease) were followed by negative (or positive) returns, but even though these results were statistically significant, they could be influenced by other factors, given that the announcements were made on "budget day& #34;. Bond et al. (2005) confirmed the findings of the previous studies, also pointing out that the impact of the announcement of the rate cut was more beneficial (increasing the market value more significantly) in the case of larger companies, which had higher volumes., and were therefore more affected by the transaction fee than securities of smaller companies and, therefore, less frequently traded.
International proposals
In 1996, the United Nations Development Program sponsored a comprehensive study on the feasibility and cost benefit analysis of the Tobin tax.
European proposal for the "Euro first rate"
At the end of 2001, a type of Tobin tax was adopted by the National Assembly of France. However, she was deposed in March 2002 by the French Senate.
On June 15, 2004, the Finance and Budget Committee of the Federal Parliament of Belgium passed a law implementing a Spahn tax. Under this regulation, Belgium would introduce a Tobin tax once all eurozone countries introduce a similar law. In July 2005, former Austrian Chancellor Wolfgang Schüssel called for the approval of a European Union Tobin tax that bases the financial structure of communities on a more stable and independent basis. 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 in favor of a European version of the Tobin tax. This tax would apply beyond the pure financial transactions: "all purchases and oil would be taxed"..
On June 29, 2011, the European Commission called to apply rates similar to the Tobin tax to the European financial system to generate direct income from 2014. At the same time, it suggested the reduction of the existing taxes of the 27 states members. On September 28, 2011, the European Commission approved a draft directive in order to establish a tax on most financial transactions carried out in the European Union. The initiative came from the Commission with the support of Germany, France and Spain, among others, and the express rejection of London.
As a result of the euro crisis, the creation of a tax on financial transactions has been considered, which could reduce the volatility of the markets, reduce merely speculative investments and generate profits of around 55,000 million euros per year, also allowing the reduction of contributions of countries to the European Union.
On October 9, 2012, 11 countries of the European Union (Germany, France, Portugal, Greece, Slovenia, Belgium, Austria, Spain, Italy, Estonia and Slovakia) agreed to move forward with the creation of a TTF through a reinforced cooperation to avoid the veto of countries like the United Kingdom. The Brussels proposal would tax the purchase of shares and bonds with 0.1% and those of derivatives with 0.01%. If it were implemented throughout the European Union, it would generate income of 55,000 million Euros. The proposal should be discussed at the meeting of Economy Ministers on November 12.
Support in some G20 states
The first G20 country to formally accept the Tobin tax was Canada. On March 23, 1999, Canada's House of Commons passed a resolution urging its government to "launch a tax on financial transactions in concert with the international community." However, ten years later, in November 2009, during the G20 finance ministers meeting in Scotland, the representative of Canada's minority government he spoke out against the resolution of his House of Commons.
In September 2009, French President Nicolas Sarkozy raised the issue of the Tobin tax again, suggesting its adoption by the G20. On November 7, 2009, British Prime Minister Gordon Brown stated that the G20 should consider a tax on speculation, although he did not specify whether this should only be on currency trading. The BBC reported that there was a negative response from the G20. On December 11, 2009, the leaders of the European Union expressed broad support for a Tobin tax in a statement sent to the International Monetary Fund.
The feasibility of gradually implementing a TTF, starting with a few European states
John Dillon argues that it is not necessary to have unanimous agreement on the feasibility of an international TTF before moving forward. He proposes its gradual introduction, surely beginning in Europe where support for it is greatest. The first step could include a tax on financial instruments in a few countries. Stephan Schulmeister of the Austrian Institute for Economic Re-search has suggested that Britain and Germany could initially implement the tax on a broad set of financial instruments given that 97% of all foreign exchange transactions in the Union Europe takes place in these two countries.