Viable solution or impossible dream?
The case for and against a financial transaction tax
Welcome and Introductions
Jean SaldanhaPolicy and Advocacy Officer
CIDSE
Anni Podimata MEP
Philip Kermode Director of Direct Taxation, Tax Coordination,
Economic analysis and EvaluationDirectorate General for Taxation and Customs Union
(DG TAXUD)
Dr Neil McCulloch Research Fellow
Institute of Development Studies
Financial Transaction Taxes – a Systematic Review
Neil McCulloch
14 June 2011
Overview1. Why do a Systematic Review of Financial
Transaction Taxes?
2. Do FTTs reduce volatility? Theoretical approaches Evidence from similar taxes
3. Are FTTs feasible? Substitution Migration
4. How much money might a FTT raise?
5. What is the incidence of a FTT?
6. Conclusion
1. The Tobin (or Keynes) Tax?
“…an international uniform tax on all spot conversion of one currency into another, proportional to the size of
the transaction.”
“A Proposal for international monetary reform”, James Tobin, 1978.
“The introduction of a substantial government transfer tax on all
transactions might prove the most serviceable reform
available, with a view to mitigating the predominance of
speculation over enterprises in the United States.”
Keynes, J.M. The General Theory of Employment, Interest, and Money. New York, 1936
A fractious debate
“The Robin Hood Tax is justice. The banks can afford it. The systems are in place to collect it. It won't affect ordinary members of the public, their bank accounts or their savings. It's fair, it's timely, and it's possible”
Robin Hood Tax campaign
“…the Tobin tax is a bad idea, since it would greatly increase both the costs and volatility of foreign exchange dealing and throw a huge spanner into the workings of the global financial economic system.”
Prof. Charles Goodhart, LSE
A Systematic Review Protocol
Search protocol FTTs & Volatility,
feasibility, revenue, incidence
Specified electronic and non-electronic sources
Expert panel Authors who have
written on FTTs
Refining the results Almost 500 papers! Inclusion/Exclusion
criteria Topic, rigour, post 1996
Reduces to ~200 papers
Synthesize the results Draft sent for comment Finalise Review
2. Does a Tobin Tax reduce Volatility?Theoretical models balance two opposing effects of a Tobin Tax:
Reduction in volatility by reducing the number of speculators/ “noise” traders relative to “fundamentals” traders
Increase in volatility due to the reduction in the liquidity of the market as a result of the tax
The Effect of a Tobin Tax on Volatility: Simulation Results
AUTHOR(S) RESULTS
Hanke (2006) Increase or decrease depending on market size
Shi and Xu (2009) Increase or decrease depending on the effect on the number of noise traders
Westerhoff (2003) and Westerhoff and Dieci (2006)
Decrease
Ehrenstein (2002, 2005)
Decrease, as long as the tax rate is not too high to affect the liquidity
Mannaro et al. (2008) Decrease, but only in presence of noise traders in the market
Kaiser et al. (2007) Decrease
Bianconi et al. (2006) Decrease but depending on market size
Volatility and a FTTThe Swedish Experience
January 1, 1984 Introduction of a round-trip tax of 1% of the value of exchanged securities (i.e., taxes of 0.5% on both purchases and sales).
July 1, 1986: The tax was increased to 2% 1991, Removed.
The Stamp Duty in UK The stamp duty is a tax on “change” in ownership which must
be registered in UK.
Its rate changed over time: 1694: introduction August 1963: lowered from 2% to 1% May 1974: increased from 1% to 2% April 1984: lowered from 2% to 1% October 1986: reduced to 0,5%.
Saporta and Kan (1997) compare the performance of the UK stock market before and after the announcement of an increase or decrease of the Stamp duty.
They find no significant effect of UK Stamp duty imposition on volatility of equity prices.
Volatility: Conclusion In theory, a Tobin like tax could reduce volatility –
several theoretical models suggest that it should
However, most empirical studies find a positive relationship between transaction costs and volatility, both in equity and forex markets
However, these studies are heavily focused on intra-day volatility – this may not be the type of volatility that really matters
Certainly no clear evidence that increasing transaction costs via a tax would reduce volatility
3. Is the Tobin Tax feasible?“… a tax could not be practically enforceable given the multiple avenues for avoidance, and the consequently heavy regulatory and implementation costs such a tax would require.” (Ivan Lewis MP, Economic Secretary 2006)
The Tobin tax “could be implemented relatively easily and cheaply, using existing market infrastructure and networks” (Kapoor, 2006)
Country Stocks Corp Bonds Govt Bonds FuturesArgentina 0.60% 0.60% 0.60% 0.60%
Australia 0.3% 0.15% - -Austria 0.15% 0.15% - -Belgium 0.17 0.07% 0.07% -
Brazil 0.3% [0.38%] 0.3% [0.38%] 0.3% [0.38%] -
Chile 18% V 18% V - -
China 0.5% or 0.8% [0.1%] 0 -
Colomia 1.5% 1.5% 1.5% -Denmark [0.5%] [0.5%] - -
Ecuador [0.1%] [1.0%] - -
Finland 1.6% - - -
France 0.15% See note -Germany [0.5%] 0.4% 0.2% -Greece 0.6% 0.6% - -
Guatemala 3% 3% See note
Hong Kong 0.3% + $5 SF [0.1%] [0.1%] -
India 0.5% 0.5% - -Indonesia 0.14% +10%V* 0.03% 0.03% -Ireland 1.0% - - -
Country Stocks Corp Bonds Govt Bonds FuturesItaly [1.12%] - - -Japan [0.1%], [0.3%] [0.08%], [0.16%] - -Malaysia 0.5% 0.5% 0.015% [0.03%] 0.0005%Morocco 0.14% +7% V 7% V 7% V -Netherlands [0.12] [0.12] 0 -Pakistan 0.15% 0.15% - -Peru [0.1%], 0.08% + 18% V [0.1%], 0.08% + 18 V [0.1%], 0.08% -Philippines [0.5%] + 10% V - - -Portugal [0.08%] [0.04%] [0.008%] -Russia 0.08%† - 8% V - - -Singapore 0.05% + 3% V - - -South Korea 0.3% [0.45%] 0.3% [0.45%] - -Sweden [1%] - - -Switzerland 0.15% 0.15% 0.15% -Taiwan 0.3% [0.6%] 0.1% - 0.05%UK 0.5% - - -Venezuela 0.5% [1%] - - -Zimbabwe 0.45%V - - -
Three challenges to implementation
1. At what point in the system to levy the tax?
2. What instruments to tax?
3. How do you avoid migration to untaxed locations?
At what point in the system to levy the tax? There are thousands of dealers and intermediaries across many
countries …but the same is true of retailers in countries who still manage to
charge sales tax/VAT
However one might be able to levy at settlement The Continuous Linked Settlement Bank (CLS Bank) settles 55%
of global foreign exchange transactions (rest through High Value Domestic Settlement systems of individual countries)
More than 60% of all sterling and euro transactions are settled in the CLS system. The majority of the remainder processed through the UK’s CHAPS and the ECB’s TARGET System for their respective currencies.
A single clearing system, SWIFT and its affiliates, is used for all large-value financial transactions, allowing tracking of transactions
What instruments to tax? Foreign exchange spot? Forwards?
Futures? Options? Swaps? All derivatives?
They have dramatically different costs so you would have to tax at different rates (RHT propose
0.005% for forex and for bond and derivative markets; and 0.5% for equity)
Financial markets are extremely innovative!
This imposes a cost on tax authorities keeping up with avoidance
How do you avoid migration to untaxed locations?
Migration risk is real Almost 60% of the trading volume of the 11 most actively
traded Swedish shares migrated to London because of the Swedish tax!)
Long-run effects are larger than short-run effects Shifts in institutional capacity and expertise take time.
But
Avoidance is harder than it used to be New centres have higher settlement risk (HERSTATT
Risk) They must follow Basel III rules and comply with money
laundering regulations which is expensive
Bottom line on ImplementationIdeally
Get everyone in the world to agree! Impose penalties on non-compliant states
In practice “only” need agreement of 6 big players (UK, US,
Euro, Switzerland, Hong Kong, Singapore) In theory could even go it alone.
if you tax immobile resources …and the big players complied then can still raise revenue
“The FTT should not be dismissed on grounds of administrative practicality” (IMF, 2010)
4. How much money will a Tobin Tax raise?It depends on one’s assumptions about:
Tax rate Reductions in trade Avoidance Scope of application
MARKETWorld ($ bn)
UK ($bn)Business
days (average)
TAX RATE
%
Transaction Cost (pre-tax average)
%
FISCAL EVASION
(average) %
ELASTICITY OF
VOLUME (average)
TOTAL ANNUAL
REVENUE World ($ bn )
TOTAL ANNUAL
REVENUEUK
($ bn )
Equity market
456 18 250 0.116 1.163 20 0.58 100 4.0
Derivative 4933 1335 250 0.004 0.039 20 1.5 33 8.9
Forex 2914 1269 250 0.005 0.047 20 0.606 26 11.1
OTC 2544 1094 250 0.076 0.761 20 1.5 336 144.3
Total With OTCTax rate 10% TC
495 168.4
Without OTCTax rate 10% TC
159 24.1
Revenue % of GDP
With OTCTax rate 10% TC
0.85% 7.71%
Without OTCTax rate 10% TC
0.27% 1.10%
Meta analysis of revenueConstructing revenue estimates by taking median estimates of key parameters
Who pays the bill?
Bid-ask spreads
•Firms needing access to foreign exchange
Returns on
equity
•Pension funds and other long-run investments
Interest rate
s
•Government and corporate bond borrowing
Banks
•Profits of banks and other financial firms?
5. Conclusions The objective of a Tobin Tax is a good one – financial
markets are excessively volatile, so there could be strong gains from greater stability
The evidence that a Tobin Tax would reduce volatility is weak – if anything it might increase it
Implementing a Tobin Tax would be difficult … but certainly not impossible
A Tobin Tax would raise significant revenue
A significant share of the cost would likely be passed to owners of capital … but this is still more progressive than many other forms of tax e.g. VAT
The Systematic Review can be obtained from:http://www.ids.ac.uk/go/idsproject/assessing-the-tobin-tax
http://www.ntd.co.uk/idsbookshop/details.asp?id=1180
Panel discussion: Can we make a FTT work?
Who would end up paying a FTT?Rodney Schmidt, Chief Operating Officer and Director of Research, North-South Institute Is a FTT feasible?Ian Harrison, Managing Director, Association for Financial Markets in Europe Should the money be used for development?Michele Maynard, Policy and Advocacy Officer, Pan African Climate Justice Alliance Max Lawson, Head of Development Finance and Public Services, Oxfam GB
Closing Remarks
Jean SaldanhaPolicy & Advocacy Officer
CIDSE