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Home > Blogs > Anthony Harrington > Tobin tax? A fine idea for killing the goose…

Tobin tax? A fine idea for killing the goose…

Finance Blogger: Anthony Harrington Anthony Harrington

Also read the companion blog post on the Tobin tax/Robin Hood tax by Ian Fraser, and vote in our poll on the Robin Hood tax.

There is generally a problem with any idea that mobilizes a pre-existing pool of public emotion against a particular class of persons. The Tobin tax, as mooted by some senior politicians, aims to levy a small tax on all “unnecessary” and “speculative” short-term financial transactions. The losers, in this scenario, are presumed to be fat cat bankers who are thought to be making far too much money anyway, and the winners are the beneficiaries of any Tobin tax raised, who are always extremely worthy. This is a fairly loaded way of posing the debate and rather overlooks the many detailed arguments against imposing this kind of tax.

When Gordon Brown first mooted the idea of a financial tax it was not well received by the G20, but despite US Treasury Secretary Tim Geithner stating emphatically that it held no interest for the US, the idea rumbles on. After the last G20 Summit in November the International Monetary Fund was asked to take it on board and come up with a view.

As a result, the IMF has now called for comment. Not surprisingly, traders both large and small have dashed to the IMF’s comment site [PDF] and pointed out, often in some detail, why the idea stinks.

One class of investor that really detests the idea is the US small day-trader. They make money, when they do, by getting in and out of a number of intra-day trades. Here is a sample comment:

“I'm writing to tell [what] a catastrophe this tax would be. Intraday traders are important providers of liquidity, and therefore contribute to market efficiency. Given the frequency and the leverage of their trades, those would simply be killed by this tax, even [if it was] as low as 0.01% This tax is nothing more than a populist political trick, but with serious consequences for all us. Please, resist.”

Here is another comment (number 14 in the IMF’s comment catalogue) which provides a very clear account of how what looks like an “insignificant” tax of 0.005% per transaction would be likely to mushroom in the real world of bid-ask spreads:

“I believe that a financial transaction tax would be disastrous. Firstly, it is naive at best, and false and deliberately misleading at worst, to describe a tax rate of 0.05% or even 0.005% per transaction as small and 'harmless', as some falsely claim in an easy sell to the non-practitioner! For example, consider a 0.05% tax applied per transaction in a market where the bid-ask spread is currently 0.005%, such as Eurodollar interest rate futures traded on the Chicago Mercantile Exchange. Since market makers will be required to incorporate 0.05% into their entry and (closing) exit pricing levels the result would be a new bid-ask spread of 0.105%. It might be fairer to describe a 0.05% financial transaction tax as a 2000% tax rate since spreads will increase at least twenty-one-fold, even before you consider the adverse indirect impacts on spreads as a consequence of reduced competition between market makers (due to falling volumes and greater volatility). Secondly, you only need to look at the Swedish experience with financial transaction taxes from 1984-1990 to realize that the claims over the amounts of revenue that will be generated are 'pie in the sky' numbers.”

What the Swedes discovered, to no one’s great surprise, was that financial trading decamped en masse outwith the borders of Sweden. With Geithner already indicating that the US would not have any truck with a Tobin tax (though it has been mooted by US Congressman Peter DeFazio), its introduction by Europe would cause considerable joy on Wall Street. Of course, it is a safe bet that European politicians would never be dumb enough to introduce such a tax unilaterally (OK, the Swedes were dumb enough, but even they learned in the end…). The IMF’s comment sheet will continue to mount and it will be illuminating to hear the IMF’s reasoned response in due course…

Further reading for the Tobin tax

Tags: financial transactions , IMF , Robin Hood tax , Sweden , Tobin tax , trading
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  1. AnthonyHarrington says:
    Thu Feb 18 11:58:55 GMT 2010

    The original concept of the Tobin tax is in the process of morphing into something rich and strange. It is a pity that you did not specify which country you were referring to. More detail there would be very interesting. I did not quite see how the point relates to the rest of your blog, ie, the bit about the new breed of entrepreneur... I assume it wasn't supposed to be related and you were off on a point of your own.
  2. kaylap says:
    Wed Feb 17 08:12:03 GMT 2010

    A Tobin tax, suggested by Nobel Laureate economist James Tobin, is a concept initially associated with a tax on all spot conversions of one currency into another. The tax is intended to put a penalty on short-term financial round-trip excursions into another currency. Because of this tax, our government somehow collects enough money as budget for our country. The recession has wiped out a lot of industries, and because of this, many have lost their jobs - and it has led to a new breed of entrepreneur for the new economy. Rather than scrounging for the littlest work that was available, there has been a 2.5% increase in the self employed. That's fewer people lining up for interviews, fewer payday loans sought for a suit for interviews, and more people taking their income stream into their own hands. Every person has a skill they can market, and a specialized market they can fill.

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