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.
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.