Time for a Tobin tax

by John Quiggin on October 4, 2011

There’s been a lot of discussion about the need for concrete demands from the #AmericanAutumn #OccupyWallStreet protests.

I just want to toss up the wholly unoriginal idea of a tax on financial transactions, originally proposed by James Tobin (he focused on international transactions, but the distinction is no longer meaningul). I’ve seen a sign advocating this on one of the videos of the protest, but I think it deserves more attention, for a bunch of reasons

* It’s directed squarely at Wall Street

* It’s global in its orientation

* It doesn’t require complicated structural change, as would a return of Glass-Steagall

* There’s an existing global movement supporting it

* It’s on the elite policy table right now, with support from the EU

* It would potentially raise substantial revenue, while greatly reducing the volume of short-term financial transactions

Here’s a  a piece I wrote about not long ago in Politics and Society and an older article on the Tobin tax, and over the fold some notes I prepared for our Parliamentary Library a few years back

1. The issues of whether volatility is excessive and  of whether a tax is likely to reduce volatility are presented as separate, but in fact they are closely linked. Models  of specualtion that imply that current levels of volatility are justified by changes in fundamentals also imply that a small tax will have very little effect on volatility. Conversely most models of excess volatility imply that a tax would reduce volatility. Although no final econometric resolution is likely, it is certainly true that volatility is far in excess of the levels anticipated by supporters of financial deregulation. In my view, the evidence favours the excessive volatility hypothesis and therefore the view that a tax would reduce volatility.

2. At different times leading economists have proposed taxes on different classes of financial transactions. For example, Stiglitz proposed such a tax on domestic security markets and Tobin on international currency transactions. Because of the ease with which one type of transaction can be substituted for another (for example, international interest rate futures for international currency transactions), the most effective and least distorting tax regime would be one which applied at a low rate to all financial transactions.
3. The effective tax base for such a tax is the financial services sector. On the broadest definition this covers around 12 per cent of GDP, but the component concerned with large-scale financial transactions is smaller (perhaps 4 per cent of GDP). Household transactions are already tax through financial institutions duty etc. Exposing financial services to effective tax rates similar to those of the luxury manufactured goods sector (say an effective tax rate of 25 per cent) would imply a tax yield of around 1 per cent of GDP or up to $4 billion a year. This estimate appears to be broadly consistent with estimates of around $100 bn/year for the world as a whole derived from the volume of transactions, after reductions in the volume of speculative transactions are taken into account.

4. The desirability of making a rapidly expanding sector of the economy (in the view of a significant group of economists, over-expanded) bear a reasonable share of the tax burden is an important argument for considering tax measures of this kind. On theoretical grounds a unit transactions tax is to be preferred to alternatives such as the imposition of a GST-style tax on bank margins.

Note: I deleted a calculation that now looks problematic, and which I can’t immediately reconstruct. I’d now say that, depending on the design of the tax and its comprehensiveness, revenue between 0.1 per cent and 1 per cent of GDP looks a reasonable target. A number at the upper end would make a significant difference to budgetary problems. And of course a large part of the purpose is to discourage high volume, short-term financial transactions, so lower revenue isn’t a huge problem if it reflects shrinkage of the tax base.

{ 64 comments }

1

foosion 10.04.11 at 6:09 pm

A major issue is how to make sure traders don’t find a way around the tax, such as moving to exchanges that are not taxed. I can think of a few clever structures, those seeking to avoid the tax are very clever and have a lot of high end advisors.

2

Jesse Rothstein 10.04.11 at 6:26 pm

“Exposing financial services to effective tax rates similar to those of the luxury manufactured goods sector (say an effective tax rate of 25 per cent) would imply a tax yield of around 1 per cent of GDP or up to $4 billion a year. This estimate appears to be broadly consistent with estimates of around $100 bn/year for the world as a whole derived from the volume of transactions, after reductions in the volume of speculative transactions are taken into account.”

Something has gone wrong with the numbers here. 1% of GDP is somewhere on the order of $140 bn/year in the US, or $580 bn/year for the world, no?

3

jre 10.04.11 at 6:45 pm

Something has gone wrong with the numbers here.

My reaction as well. If this is not a typo, perhaps John needs to make his basis clear, e.g. is he referring to 1% of just the 4% represented by large-scale etc.?

4

Jeff R. 10.04.11 at 6:46 pm

You may be thinking too big here: the volumes may be such that an extremely small rate of taxation (in the tenths or hundredths of a percent, say) could bring in significant revenues while not being worth the while of the traders to circumvent…

5

hattip 10.04.11 at 6:54 pm

Except Wall St. did not “cause” this mess; the redistribution meddling in the real estate markets (mostly) by the Demcrat Party caused this. Also the tax is not just on Wall St. but all financial institutions. Now some innocent small bank in the midwest will get hit for it.

This “tax” will be passed to the taxpayer, it is just anther tax, a tax used to fund more Marxist destruction of our country.

What should happen is that the Democrats like Franks Pelosi, the Clintons, and all the other Democrat (and Union) hustlers, crook and traitors should be in jail, and they can be joined by their bag men at Goldman Sachs, Citi and Morgan Stanley (all institutions chuck full of Democrat insiders). It is the creeping socialism of the last 20 years that is at fault, not capitalism, free markets or individual liberty, responsibly and endeavor. It is the various failed ideologies of collectivism that are at fault, the very failed ideologies coming from the mouths of these brats on “Occupy Wall St.” and their communist handlers.

What should happen is that you should stop being a useful idiot for Communist front group like “Occupy Wall St” and their Union thug supporters. What s called for is for people like you to grow up and stop being pushed around by communist agi-prop. This is an attempt by the hard Left to tear down the system, to yet again evade responsibility for their destructive totalitarian statism and to rip off the taxpayer in order to avoid actually having to work for a living. It is vile treason. Because you do not like your loot in life does not give you the right to destroy us all.

What you propose and what you endorse are both shameful, but the you are obviously beyond shame: You are a Marxist.

6

Shelley 10.04.11 at 7:01 pm

But it’s not sexy.

Sadly, I’m serious. Bumper-sticker mentality must be fought with bumper-sticker mentality.

7

John Quiggin 10.04.11 at 7:07 pm

I’ll need to recheck my numbers – next time I’ll do that before cutting and pasting!

8

Steve LaBonne 10.04.11 at 7:14 pm

What you propose and what you endorse are both shameful, but the you are obviously beyond shame: You are a Marxist.

Which, of course, would be a far worse thing than being a right-wing sheep (who has no idea what a Marxist is) uncritically parroting brain-dead propaganda.

9

Trey 10.04.11 at 7:21 pm

the Demcrat Party

I’m pretty sure this trope disqualifies you from participating (and not just for the obvious typo).

10

Greg Oliver 10.04.11 at 7:43 pm

Reduce short-term trading? Yes. Raise significant revenue? I doubt it. When Sweden implemented this in 1984 it raised 3% if the revenue they had projected.

Right now, the proposal seems to be about 0.05% (0.1% RT) on all derivatives trades. That would be $76 RT for one WTI crude oil contract. A tax this high would literally destroy almost all (at least 95%) of the liquidity in the market, making very wide spreads that would hurt retail traders. This tax might actually be feasible if it were more like 5% of that rate (0.05% or less RT). Then you would still have traders to tax.

But the advocates of this tax seem more concerned with scapegoating than anything else. They have contempt for the idea that someone can profit off of asset price fluctuations at the expense of another and fail to see the value created by having liquid markets. When they suggest it’s payback for the 2008 crash, they don’t care that traders on regulated exchanges had nothing to do with any of it. Are they responsible for reckless CDS purchases by AIG? For corrupt credit agencies? For loose money and non-existent mortgage regulations in the U.S.? For the over-leveraging of financial institutions in general? For the bailouts? Of course not, but this doesn’t seem to matter. That’s not how this debate is being characterized.

11

Tomboktu 10.04.11 at 7:49 pm

The European Commission has just proposed a directive to introduce a financial transaction tax, although with the directive reuiring unanimity in the Council, it is very unlikely to be passed.

Propsed legislation here (PDF): http://ec.europa.eu/taxation_customs/resources/documents/taxation/other_taxes/financial_sector/com%282011%29594_en.pdf

What may also interet is the outcome of the public consultation on the idea that the Commission ran earlier in the year (here, in a PDF): http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/financial_sector/summary_results_en.pdf

12

TA 10.04.11 at 8:08 pm

Something has gone wrong with the numbers here.

1% of Australia’s GDP in 2003 was about $4 billion.

These are “notes [Quiggin] prepared for [Australia's] Parliamentary Library a few years back”

13

Greg Oliver 10.04.11 at 8:08 pm

oops, i mean 0.005% or less RT ($3.80 or less on CL) to be a reasonable rate

14

roger 10.04.11 at 8:18 pm

I’ve always liked this idea. Surely, the Occupy Wall Street people should think about this.

15

Sam Clark 10.04.11 at 8:20 pm

Surely hattip at 5 is a parody? ‘[B]ecause you do not like your loot in life…’ is delightful (my emphasis).

16

Rob in CT 10.04.11 at 8:20 pm

Commies! Ahhhh!

It’s amazing, really. My fairly conservative British father (now 85) loves to recall that when he first came to the States in the 60s, he found the best way to shut an American up (or at least badly fluster them) was to say “oh, now you’re talking like a communist.” People were so scared of being labelled commies that it shut them up, even if they were not, in fact, talking like a communist. He still finds this terribly amusing.

Some things apparently don’t change. Commies everywhere! Under your beds! They’re gonna steal your precious bodily fluids.

17

Uncle Kvetch 10.04.11 at 8:28 pm

Surely hattip at 5 is a parody? ‘[B]ecause you do not like your loot in life…’ is delightful (my emphasis).

I doubt it. By the standards of the typical comment thread on the website of any given American newspaper, hattip is a model of restraint and decorum.

18

Henri Vieuxtemps 10.04.11 at 8:31 pm

It seems alright, but kind of minor, insignificant. If it’s all as corrupt as it appears: they sell shit for gold, and manipulate prices to the order of magnitude (as with oil prices a few years ago), what do they care about .5% tax?

19

mpowell 10.04.11 at 8:34 pm

When you say an effective tax rate of 25%, I have to assume that you mean an actual tax rate on transactions much lower than this. There is no way it’s reasonable for me to take a 25% haircut as I move my savings in equities into cash accounts at retirement.

Whatever rate you propose (say 0.5%), the volume of financial transactions will have quite a bit of an effect on the final effective rate. Can you really predict the final effective rate given that this tax is intended to reduce speculative trading and will thus impact the volume of financial transactions from where they are today?

20

Trevor Austin 10.04.11 at 8:37 pm

Re Shelley at 6:

Your slogan is, “If Wall Streeters want to gamble, they have to pay the rake.”

If they’re arguing about whether they’re just gambling, you’re winning.

21

mpowell 10.04.11 at 8:37 pm

By the way, I think a lot of financial types will care quite a bit about a 0.5% tax. I guess people don’t understand how these people make money. It’s by taking huge sums of money, leveraged massively up, and then executing swaps with tiny ~ 0.1% margins. A 0.5% tax kills any trade that doesn’t yield a 50 basis points advantage, which would be pretty large at this point.

22

Henri Vieuxtemps 10.04.11 at 8:46 pm

If you bundle some worthless subprime mortgages and sell them as AAA rated security, while simultaneously shorting it, your advantage is probably 50 million points.

23

Hogan 10.04.11 at 9:25 pm

This “tax” will be passed to the taxpayer, it is just anther tax,

A tax that is a tax, AND paid by taxpayers? Dear God, what has this country come to?

24

lgm 10.04.11 at 9:37 pm

Korea has a .3% (thirty basis points) tax on the seller of a stock. There is no tax on derivatives such as index futures and options so that’s where the gambling, volume, and volatility go. Probably that would happen in New York too. Already high frequency traders focus more on indices and futures than on individual “names”.

The tax law would have to outlaw implicit de-facto sales strategies such as the “return swap” (in which one party pays the other the return on a stock over a given time period). Then lawyers would start arguing over which contracts or instruments constitute implicit sales.

25

Idonthaveacoolname 10.04.11 at 9:49 pm

@hattip : if a little knowledge is a dangerous thing you should be reported to the authorities as a threat to public safety.

26

Bruce Wilder 10.04.11 at 9:57 pm

Also, a prohibition on usury, and fixed rates on FDIC-insured deposits.

“It doesn’t require complicated structural change . . .” are words for someone’s tombstone, I think. I fear re-instituting a complex structure may be a sine qua non of effective reform, and selling any reform on the basis that it avoids effective reform is how neo-liberalism is born. From such a seed, a field of noxious weeds blooms. Prohibiting the universal bank is a key requirement in many respects (and prohibiting the universal bank entails re-instituting a complex structure: the integrity of a network system depends on the opposing strategic interests of players, and universal banking fatally undermines that strategic opposition. It is a factor in regulatory capture, and not just of the government’s regulatory arms, but also the ratings agencies, house appraisers, title insurance, financial reporting and accounting standards, Fannie and Freddie, etc. Big is Bad; complex may be good and necessary.

27

KCinDC 10.04.11 at 9:58 pm

It’s good that there’s an existing global movement, but the surest way to ensure the proposal will go nowhere in the United States is to brand it as the Robin Hood Tax. Sadly there are plenty of Americans like “hattip”, but there are even more who, while being far more amenable to reason, aren’t keen on the idea of robbing from the rich to give to the poor.

28

Steve LaBonne 10.04.11 at 11:32 pm

A 0.5% tax kills any trade that doesn’t yield a 50 basis points advantage, which would be pretty large at this point.

And I think the tax should indeed be geared toward simply shutting down the casino, with revenue generation being decidedly a secondary consideration. As long as we’re talking about things that politically aren’t going to happen, shoring up federal revenue is better accomplished by simply reverting to (at least) the Clinton income tax rates.

29

beowulf 10.04.11 at 11:44 pm

“Exposing financial services to effective tax rates similar to those of the luxury manufactured goods sector (say an effective tax rate of 25 per cent) would imply a tax yield of around 1 per cent of GDP or up to $4 billion a year.”
You do realize that the financial transaction base is far broader than GDP?
DTCC is also a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC’s Depository Trust Company (DTC) provides custody and asset servicing for 3.5 million securities issues, mostly stocks and bonds, from the United States and 110 other countries and territories, valued at $40 trillion, more than any other depository in the world.
In 2007, DTCC settled the vast majority of securities transactions in the United States, more than $1.86 quadrillion in value. DTCC has operating facilities in New York City, and at multiple locations in and outside the U.S.

http://www.correntewire.com/occupy_wall_street_is_too_vague_here_are_two_specific_places_to_camp_out

DeFazio-Harkin bill last Congress was scored at bringing in at least $150 billion a year.
The legislation assesses a small securities transaction tax on Wall Street. A securities transaction tax is applied to:
Stock transactions (tax rate will be 1/4 of 1 percent–0.25%),
Futures contracts to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price (tax rate will be 0.02%)
Swaps between two firms on certain benefits of one party’s financial instrument for those of the other party’s financial instrument (tax rate will be 0.02%)
Credit default swaps where a contract is swapped through a series of payments in exchange for a payoff if a credit instrument (typically a bond or loan) goes into default (fails to pay) (tax rate will be 0.02%)
And options, which are contracts between a buyer and a seller that gives the buyer the right, but not the obligation, to buy or to sell a particular asset on or before the option’s expiration time, at an agreed price (at the rate of the underlying asset)

http://www.defazio.house.gov/index.php?option=com_content&view=article&id=531:defazio-introduces-legislation-invoking-wall-street-transaction-tax&catid=60

30

Andrew F. 10.04.11 at 11:54 pm

How well did this work out for Sweden?

31

John Quiggin 10.05.11 at 1:47 am

@27 I have suggested to the Robin Hood tax people that this isn’t the optimal name, especially as it is equally applicable any redistribute tax.

32

polyorchnid octopunch 10.05.11 at 1:47 am

I’m with Bruce at 26. Glass-Steagall (or whatever the new version would be called) is absolutely necessary. The alternative is to take a look at how we regulate the banks here in Canada… which is largely a case of having far more stringent leveraging rules, and being willing to fine banks more than the profits they made off of a dodgy transaction.

I know, I know… that’s not the case right now, but that’s mostly because we have a clown car for a cabinet that seems bent on reproducing the Clinton-Bush disaster in our economy.

Bringing back usury laws is also a must, imho. I find Smith compelling in his argument about usury laws… once you acknowledge that all wealth comes from making things, what is the inevitable result of allowing people to make more money off usury than off manufacturing? I think a quick look at what’s happened to the US manufacturing base since 1979 (when usury laws were basically overturned via the USSC) pretty much tells the tale.

33

GU 10.05.11 at 2:02 am

See Shackelford, Shaviro, and Slemrod, “Taxation and the Financial Sector,” National Tax Journal 63:781 (2010) for a skeptical take on the financial transactions tax (and also a very interesting discussion of other “tax Wall Street” options).

34

Steve LaBonne 10.05.11 at 2:36 am

How well did this work out for Sweden?

That is indeed the obvious rejoinder to calls for a Tobin tax and I would very much like to hear Prof. Quiggin’s response. (It’s also the reason why I don’t think such a tax should be counted on for much revenue.)

35

nnyhav 10.05.11 at 2:55 am

‘I just want to toss up the wholly unoriginal idea of a tax on financial transactions, originally proposed by James Tobin (he focused on international transactions, but the distinction is no longer meaningul).”

Tobin focused on currency exchange, spot markets. The distinction is glaring. (For one, with derivatives, counterparty persistence. Also note that EU proposal specifically excludes spot FX.) (Whether or not spot equity markets are equivalent to FX in this context, for other asset classes the intimacy of leverage and liquidity makes for messy side effects.)

cf Rogoff’s demurral

36

TheEuropean 10.05.11 at 5:54 am

I think it is pretty clear that the financial sector is under-taxed and that this creates the wrong incentives. However, I strongly recommend to read the IMF’s report on financial sector taxation. The FTT creates huge political and economic risks, and I think that insisting on that tax will prevent any financial sector taxation from being implemented. As an alternative, the IMF suggested to create a financial activities tax (FAT) that would aim at financial institutions (instead at transactions). That proposal looks far more likely to be enacted across the G-20, EU or whatever IO could deal with the issue. American leadership is desperately needed here..

(Even in tax-loving Europe, there is no chance of getting a FTT-agreement outside the Eurozone. On the other hand, the UK would be willing to agree to an EU-wide FAT.)

http://www.imf.org/external/np/seminars/eng/2010/paris/pdf/090110.pdf

37

maidhc 10.05.11 at 7:26 am

How well does it work in Korea?

When Glass-Steagall first came in, didn’t it require structural changes too? Why is it structural changes were possible back then, but not now?

38

ajay 10.05.11 at 9:02 am

A tax this high would literally destroy almost all (at least 95%) of the liquidity in the market, making very wide spreads that would hurt retail traders.

This isn’t really an argument unless you can explain also why it’s a good thing for society to have a highly liquid market that allows retail traders to make a lot of money.
A crackdown on gun stores in Arizona would destroy liquidity in the selling-guns-to-Mexican-drug-gangs market, and would therefore really harm gun store owners, but that doesn’t necessarily mean that it’s not a good idea.
If there is a good correlation between “volume of financial transactions going on” and “economic growth” then fine. But I am not sure that that correlation exists. Growing sophistication and size of financial markets has not gone hand in hand with faster economic growth in the US or Europe; the CDS market didn’t really exist ten years ago, and yet its existence has not meant a decade of prosperity.

39

Alex 10.05.11 at 9:27 am

I found it necessary to respond to this more fully at AFOE.

40

Tim Worstall 10.05.11 at 9:32 am

Hmm. A few problems with the FTT (or Robin Hood).

1) Taxing spot FX in the European Union is illegal. That’s why the EU proposal doesn’t suggesting taxing spot FX. This free movement of capital thing, you see? So, if others apply an FTT which does apply to spot FX and the EU doesn’t, see all spot FX move to the EU (see Eurobond markets in London for an historical example). If spot FX not taxed anywhere, rather large hole in the tax net. If you wish to get rid of the provisions that make taxing spot FX illegal, please rewrite the EU Treaty. Good luck with that.

2) Diamond and Mirrlees. Don’t tax intermediate transactions if you can achieve the same end by taxing final consumption.

3) Incidence. The various reports, EU, OECD, IMF, G-20, all end up saying pretty much the same thing. In the long run incidence will likely be on workers’ wages as the cost of capital to companies rises. Not all that much of a surprise as when the UK’s Stamp Duty on shares was analysed it was the workers’ wages plus pension fund returns that bore the incidence of the tax.

4) Size of incidence. It’s entirely possible that the burden bourne will be higher than the revenue raised (Stiglitz and Atkinson 1980?). Incidence of corporate taxation can be over 100%.

5) The EU report itself states that the tax will not raise revenue. Yes, there will be revenue from the tax itself. It will also shrink the economy by 1.7 % (on a conservative basis, this is only including the cost of higher capital to large corporates) meaning that revenue from other taxes will fall by more than the new revenue from this tax.

So, a new tax that actually shrinks revenue, one where the incidence is to lower wages, not to “tax the banks” and the only saving grace is that maybe, perhaps, we’ve excessive volatility in prices which this would curb. That last being something that is highly arguable (as in, lots and lots of people disagree with JQ here).

It’s not an absolutely overwhelming case for this new tax, is it?

41

glenn 10.05.11 at 9:41 am

About Sweden – my understanding is that as the country was the only one to implement it, the trading just moved juristiction. I like the idea of this, but for it to be effective, it’ll pretty much have to be global.

42

glenn 10.05.11 at 9:55 am

…and about being ‘effective,’ as a huge percentage of daily trading is by dark pools who win by trading in massive volumes intra-day for mere basis points (.01), a tiny tax will kill much of that, hurt the brokers dealers, while really not effective mom and pop buying JNJ and KO. That being said, it’s a pea-shooter against a Wall Street Juggernaut. Glass Steagal needs to be restored; deposits should not be mixed with self-dealing and trading. The GS and MS of the world sould go back to being partnerships, where only their capital – and not ours – is at risk.

43

John Quiggin 10.05.11 at 10:08 am

Tim, maybe you can explain how a transaction tax of, say, 0.1 per cent is going to have the impact on the cost of capital to large corporates you claim. On, say, a 5-year bond, which is a fairly standard way of raising long-term capital, the implied increase is 0.02 percentage points. The whole point is that this is not a tax on capital inputs.

Of course, if you did an analysis which took as its starting point the efficient capital markets hypothesis, you would conclude that all of the multi-trillion derivative trade we observe exists solely to reduce the risk-adjusted cost of capital. That would have been a standard assumption in 2007. Do you want to defend it now?

44

ajay 10.05.11 at 10:21 am

Glass Steagal needs to be restored; deposits should not be mixed with self-dealing and trading. The GS and MS of the world sould go back to being partnerships, where only their capital – and not ours – is at risk.

Just to clarify, these are two separate suggestions – both have a lot to be said for them, but they don’t have to come together. And I’d argue there is less of a problem with GS gambling with my capital – ie if I am a GS shareholder – than there is with BOA gambling with my savings – ie if I have a BOA account. If I’m a shareholder, I know the risk.

45

Tim Worstall 10.05.11 at 10:39 am

IFS report here.

http://www.ifs.org.uk/wps/wp0411.pdf

Yes, they do assume EMH but whether the weak, which you agree with, the semi- or strong which you don’t I’m not sure.

IMF report.

http://www.imf.org/external/pubs/ft/wp/2011/wp1154.pdf

“Theoretical models generally confirm that higher transactions costs, including those imposed
by transaction taxes, are associated with lower asset prices (Kupiecs, 1996; McCrae, 2002).
Investors who must pay higher costs to acquire or dispose of a security require a higher
return from holding it, and thus bid the price down. The valuation premium placed on
liquidity can be large: Illiquid, privately held companies are valued at 20–25 percent less
than comparable publicly traded firms (Block, 2007). Higher transaction costs therefore raise
the cost of capital for entities emitting taxed securities.”

Seems convincing to me. Report looking at effect of transactions tax says it raises the cost of capital. Later report looking at possible effects of transactions tax says it might raise the cost of capital.

46

ajay 10.05.11 at 10:57 am

Is high cost of capital actually a serious problem now, given the amount of money that governments have pumped into the capital markets through QE programmes?

47

homunq 10.05.11 at 11:10 am

The “raise the cost of capital” argument is plausible to me, but also stinks of going Galt. That is to say, if this tax were broad-based enough, capital would not have another choice, and so would not bid down the price significantly. Also, privately-held firms have a transaction cost that is much, much higher than a fraction-of-a-percent tax; so through that lens, a 25% premium actually sounds quite small.

48

Cahal 10.05.11 at 2:22 pm

I think an FTT is a bad idea and the energy spent campaigning for it would be far better used campaigning for an LVT.

Evidence (which I am unable to find at the moment) suggests that:

- It actually increases volatility.
- It is passed on over the medium term.
- It raises far, far less than forecasts due to trade reductions.

Conversely, an LVT falls entirely on rent and so cannot be passed on; it also spurs production.

49

Tim Worstall 10.05.11 at 4:08 pm

@48. From the IDS (Institute of Development Studies) report on it.

http://www.ids.ac.uk/files/dmfile/rr68.pdf

“1 What is the impact of FTTs on volatility?
Summary: Although some theoretical models suggest that FTTs reduce volatility,
most empirical evidence shows that higher transaction costs are actually
associated with more, rather than less, volatility.”

“For example,
Bessembinder and Rath (2002) analyse stocks moving from the NASDAQ stock
market to the New York Stock Exchange (NYSE).They find strong evidence that
the newly NYSE-listed stocks reduce both trading costs and the volatility of daily
returns. Similarly, Hau (2006) studies French stocks, finding that a 20 per cent
increase in transaction costs generates an increase in volatility of about 30 per cent.
Studies of foreign exchange markets also suggest that higher transaction costs
are associated with greater volatility. For example, Aliber, Chowdhry and Yan
(2003) look at transaction costs, volatility and trading volume in foreign exchange
markets. They find that an increase of 0.02 per cent in transaction costs leads to
an increase of volatility of 0.5 percentage points.”

With you on the LVT too.

50

John Quiggin 10.05.11 at 4:31 pm

The IMF report, concludes, correctly, that the impact of a transactions tax on the cost of medium term investments is very small. And it notes lots of other desirable effects such as a contraction of the financial sector and the release of skilled labor to other sectors.

The authors would prefer what they see as more efficient alternatives. I’ve got no problem with that, but it what is needed more than anything is political pressure to do something on the tax front to reduce the wealth and influence of the financial sector. The Tobin tax is the frontrunner as a political demand.

That said, I’m all for taxing land value, but it seems more utopian than the Tobin tax in political terms and a distraction from the need to shift the tax burden to the 1 per cent.

51

nnyhav 10.05.11 at 4:57 pm

“Tim, maybe you can explain how a transaction tax of, say, 0.1 per cent is going to have the impact on the cost of capital to large corporates you claim. On, say, a 5-year bond, which is a fairly standard way of raising long-term capital, the implied increase is 0.02 percentage points. The whole point is that this is not a tax on capital inputs.”

John, maybe you can explain how the transaction tax won’t distort the after-market for, say, a 5-year bond, when price discovery in trading depends heavily upon availability of short-term repurchase agreements which the proposed FTT would treat over time as multiple taxable events and so extend financing durations beyond the response horizons needed for managing inventories of such securities. And how this effect would not affect primary issuance (which as I understand it would not be taxable anyway).

The whole point is that every transaction is not created equal, nor contribute equally to liquidity (good and bad), and applying system-wide frictions may be attractive in principle but devilish to implement (and the devils it’s intended for are the ones best equipped to find a way to profit from the resulting dislocations).

52

Barry 10.05.11 at 5:34 pm

“John, maybe you can explain how the transaction tax won’t distort the after-market for, say, a 5-year bond, when price discovery in trading depends heavily upon availability of short-term repurchase agreements which the proposed FTT would treat over time as multiple taxable events and so extend financing durations beyond the response horizons needed for managing inventories of such securities. And how this effect would not affect primary issuance (which as I understand it would not be taxable anyway).”

There’s a huge assumption that tamping down repeated trading a bit is not a good thing; at this point the burden of proof is on the people against it.

53

Tangurena 10.05.11 at 5:38 pm

With stock traders buying and selling stocks in sub-one-second timeframes, this sort of tax would cripple the business model of high frequency trading. But then since HFT is also driving wild swings in stock prices that have nothing to do with the “value” of the underlying stock, I don’t see this as a bad thing at all.

Of course, the cronies of wall street are going to go crazy trying to kill off any sort of tobin tax, and probably use the same tactics used to temporarily kill off estate taxes. Don’t worry, just before election time in 2012, we’ll have yet another financial crisis that involves a quick bailout of wall street yet again, timed carefully so that no one in congress (nor the media) will have any time to ask any sort of questions. Just like last time.

54

Tim Wilkinson 10.05.11 at 6:01 pm

TBH I don’t see why we should stop at a Tobin tax. While its distinctive shape, and to a lesser extent flavour, make it somewhat iconic, and if there were prison camps for air cabin crew (another proposal worth considering, btw) it would probaby be used as currency in them, it still seems rather arbitrary to pick only on that.

In fact, I think singling it out would raise issues regarding universalisation and the rule of law. Though I suppose that could formally be circumvented by referring to triangular cross section. A really probing court challege might see through such a ploy, of course.

But in any case, surely it would make sense from a revenue perspective to extend the ambit of such a levy to cover Ferrero Rocher, Lindt bunnies and ducklings, and luxury chocolates too. And those marbled praline seafood things. Definitely tax them – tax them out of existence altogether. They are not objectively all that horrible; that’s the problem in a way: given a box of them I always eat too many and end up feeling a bit queasy.

55

Kaleberg 10.05.11 at 9:20 pm

It shouldn’t be a tax. It should be a user fee. If neither party wants any direct or indirect government enforcement with regards to the transaction, then they should be able to avoid paying the fee, but if one party should renege, then it would be tough nuggies. If they want access to the court system, bail outs, protection of the assets from theft or fraud, the use of government issued money or what have you, then they should pay for it. If it’s just a poker game with cardboard chips, then it should run tax free until someone takes government issued money off the table.

56

jre 10.05.11 at 10:06 pm

It is true that I do not like my loot in life. How well you know me!

But I was also under the strong impression that this gave me the right to destroy us all — and, until this timely correction, had made plans to do just that.

The timer was at 0:00:28 and counting down, in fact.

Whew! Dodged a bullet with that one. Thanks, hattip!

57

Tim Worstall 10.06.11 at 8:41 am

“a distraction from the need to shift the tax burden to the 1 per cent.”

Which is rather the Mirrlees, Diamond point, isn’t it?

If you want to tax the top 1%, go tax the top 1%. Don’t have a transactions tax on intermediate inputs which will cascade through the economy to who knows what effect?

As an analogy, I assume that there’s a good reason why sales taxes are levied only on the last, retail, step, and are not charged on every intermediate transaction through the entire production process. That VATs are netted, so that the tax applies only to value added at each stage, is not charged on total value at each stage?

We deliberately construct such tax systems so as to *not* tax the total value at each intermediate stage.

As to taxing the top 1%: why not abolish the entirely misleading corporation tax (the general public think companies pay it, the one actor in the scenario that every economist agrees does not) and stick the dividend and capital gains taxes up to whatever level of income tax is thought appropriate.

That would at least sort out that entirely misleading stuff from Buffett about his own tax rates.

58

Myles 10.06.11 at 9:18 am

That would at least sort out that entirely misleading stuff from Buffett about his own tax rates.

Warren Buffett is a full-on wanker, so I am not surprised. The fact that he’s basically a management consultant with money rather than any kind of actual investor (look at his failure of a Goldman Sachs investment) generally escapes notice. And unsurprisingly for a management consultant, he engages in vast amounts of wankery.

59

Doug Shaw 10.06.11 at 10:10 am

The tax appears small at 0.1% but a typical fund’s buys and sells might amount to c. 3 times the value of the fund each year. So that 0.1% per transaction would quickly become 0.3% of tax per annum. Many funds only seek to beat a benchmark by 0.5% per annum and so, in a world of FTT, all that effort goes to paying the tax first, rather than adding value to the investors in the fund. Effectively, many such funds become unviable.

Secondly, who pays the tax? Not bankers, nor fund managers nor some faceless institution but the owner of the fund! And these owners are already hard pressed EU savers and pensioners. They’ve suffered enough. Those who support this tax are cutting off their nose to spite their face.

60

glenn 10.06.11 at 10:48 am

Myles, your definiation of wanker differs from most (most people find him intelligent, wise, and shrewd, among other qualities), and I’d say your definition of investor differs from everyone. He’s lost money in some investments – I guess your definition of investor is one that never loses a cent, so misers are investors in your view – but his long term track-record is pretty much second to none. He is clearly an investor and a businessman, and wildly successful at both, better than you are at character assassination.

61

Cahal 10.06.11 at 11:29 am

@ Quiggin

I’d support a short term FTT to raise revenue for stimulus and close the deficits the financial sector created – that’s exactly what they did after the great depression. But over time it’s a red herring as far as taxing the rich and reforming finance goes.

‘That said, I’m all for taxing land value, but it seems more utopian than the Tobin tax in political terms and a distraction from the need to shift the tax burden to the 1 per cent.’

I think you vastly understimate quite how much of the 1%’s wealth is from land.

62

Tim Wilkinson 10.06.11 at 8:29 pm

Miscellany:

* I’d like to clarify that I don’t really think that there is any merit whatsoever in the idea of prison camps for air cabin crew. In fact I admire their recent stand against BA’s dirty tricks machine, and decry the propaganda dismissing as ‘perks’ travel benefits which are an essential part of their employment contract.

* there are even more who, while being far more amenable to reason, aren’t keen on the idea of robbing from the rich to give to the poor. – a certain D Davies seems to have suggested recently that that’s almost exactly how it must be framed. More constructively, has anyone got any ideas for alternatives? Accelerated Trickle-Down? Who could object to that?

* Myles, your definition of wanker differs from most – to be fair, I think this is probably primarily a defensive move though.

* Tim Worstall @57 seems to have been hanging around with the under 25s recently? if his use of question marks? apparently to transcribe what used to be called the antipodean rising inflection? is anything to go by, yeah?

* Is the aim changing behaviour or raising revenue? The two goals are more or less directly opposed (which is why heavy taxation of inelastic-demand, low-income smokers is dubious), though a tradeoff can of course be made. Some of the stuff these Wall Street/City types get up to just doesn’t need to be done, does it, and causes instability, bubbles, other problems. All that stuff can just be permanently banned, while we have our magic wands out. For the rest, there may be some merit in raising transaction costs (as cian et al suggest on the other thread) to try and discourage speculative trades.

63

Ken 10.06.11 at 9:53 pm

I’m having trouble reconciling the idea that a fee of 0.1% is an undue burden, with the existing “2 and 20″ fee structure of hedge funds – or brokerage fees, for that matter. Can someone explain this to me?

64

bh 10.06.11 at 10:24 pm

Ken Rogoff has a fairly terrible attempt to shoot down the idea here:

http://www.project-syndicate.org/commentary/rogoff85/English

It’s like a checklist of this-is-why-people-hate-economists ticks. We have:

–Concerns about fairness and social justice referred to as “emotional” appeals. And would you believe that things are, in fact, A Bit More Complicated? They are!

–Belittling of opponents as technical ignoramuses. The tax is favored “by NGOs.” Who have Joseph Stiglitz and Paul Krugman as co-signers, but you know, just ignore them and focus on the hippies. The obligatory to-be-sure paragraph does mention Keynes and Tobin, but only to assert that we’re A Bit More Sophisticated now. Never mind whose work has actually shed light on the current crisis.

–Dismissal of experiences from outside the US and Europe. Sure, a transaction tax was implemented successfully in Brazil, but who wants to live there, amiright?

–Prices-as-information, always. (The tax would diminish that information, you see.) Never mind that implies converging on an equilibrium that never arrives.

–Unsupported, but supremely confident, assertions about the nefarious effect of taxes on behavior.

–Dumb mind-reading about the Real Intentions of the people behind the tax, similar to Greg Oliver’s bit about ‘scapegoating’ above.

If these are the best arguments against a Tobin Tax (yeah, that “Robin Hood” name’s gotta go), I’m feeling better than ever about supporting it.

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