Tobin tax

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A Tobin tax is the suggested tax 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. The proposed tax rate would be low, between 0.1% to 0.25%.

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. Professor Tobin later received a Nobel Prize in Economics in 1981.

The idea lay dormant for more than 20 years. 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 has then become an issue of the antiglobalization movement and a matter of discussion not only behind academic institutions but even in the streets and in parliaments around the world, such as the UK and France.

1 Tobin Tax projects in the world
2 Original idea and antiglobalization movement
3 Debate on the tax and critics
4 Scientific evidence on the effectiveness of a Tobin Tax
5 See also
6 Further reading
7 External links

[edit] Tobin Tax projects in the world

Since one country acting alone would find it very difficult to implement this tax, many argue 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 been initiatives of national dimension about the tax.

The Tobin tax idea was the subject of much discussion in Europe 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.

In Canada, it was revived largely through the efforts of Canadian activists in the 1990s, and in March 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."

In the Americas, the Tobin tax has been supported by the president of Brazil, Luiz Inácio Lula da Silva, and the president of Venezuela, Hugo Chávez; President Chávez announcing his own interest in a Tobin tax in January 2003, (BBC News).

[edit] Original idea and antiglobalization movement

In an interview given to Der Spiegel on 2001, James Tobin distanced himself from the antiglobalization movement and continued to state the validity of his proposal, although some opponents of the Tax claimed the contrary.^{[citation needed]}

"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."

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.

[edit] Debate on the tax and critics

Opinions are divided between those who believe that the Tobin tax would improve the economy of countries that are damaged by financial speculation and defenders of pro-globalization goals who believe that it would constrain globalization in ways which conflict with the policy of economic institutions like the World Trade Organization and the World Bank and would therefore need to be rejected. Other people argue that the tax would promote globalization but limit its negative effects.

Unexpected, though qualified, support for the Tobin tax has come from the multimillionaire 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. [1]

The "City Notebook" column in the British broadsheet The Guardian, August 30, 2001, put the case against such a tax in straightforward terms. It said that currency speculators are "an exceptionally useful lot, working day-in, day-out, risking their own wealth to supply a thing called liquidity. Without liquidity, markets dry up, prices become volatile and goods become difficult to shift." If a Tobin tax were in place, the editorial continued, that useful work would not be as well accomplished. "The net result is that everyone involved — producer, trader, buyer — becomes poorer, not richer", wrote The Guardian.

[edit] Scientific evidence on the effectiveness of a Tobin Tax

Most financial economists have always contested Tobin’s assertion that higher transaction costs decrease price volatility: real estate markets, for example, are characterized by high transaction costs and simultaneously by high price volatility. Scientific evidence on the issue was originally scarce, but the last 10 years of academic finance research on the issue have provided strong evidence that Tobin’s stabilization hypothesis is false. Numerous event studies used regulatory changes in the market structure to establish that higher transaction costs imply higher price volatility and are therefore destabilizing (see Ronen and Weaver (2001), Bessembinder (2001), Bessembinder and Rath (2002)). The most recent evidence is provided in Hau, The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse, in the Journal of European Economic Association (June 2006):

"Panel regressions controlling for market-wide volatility effects show at high levels of statistical significance that the hourly range volatility of individual stocks increases by more than 30% for a 20% exogenous increase in transaction costs due to tick size variations in the French trading system. In the light of this evidence, higher transaction costs in general, and security transaction taxes in particular, should be considered as volatility increasing."

For an updated survey of the academic literature see, also, Hau (2006).

[edit] See also

[edit] Further reading

Kaiser, Johannes, Thorsten Chmura, and Thomas Pitz (2006): The Tobin Tax - A Game-Theoretical and an Experimental Approach

Harald Hau (2006), The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse, Journal of European Economic Association (June 2006).