Publication 550 (2017), Investment Income and Expenses
I can dismiss any suspicion of fraud thanks to their CySec licensing. Stiglitz said, the tax is "much more feasible today" than a few decades ago, when Tobin recanted. This is true even if they are not yet entered in your passbook.
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Tobin saw two solutions to this issue. The first was to move "toward a common currency, common monetary and fiscal policy, and economic integration. Tobin's method of "throwing sand in the wheels" was to suggest a tax on all spot conversions of one currency into another, proportional to the size of the transaction.
Keynes' concept stems from when he proposed that a transaction tax should be levied on dealings on Wall Street , where he argued that excessive speculation by uninformed financial traders increased volatility. For Keynes who was himself a speculator the key issue was the proportion of 'speculators' in the market, and his concern that, if left unchecked, these types of players would become too dominant.
The most common variations on Tobin's idea are a general currency transaction tax , a more general financial transaction tax and the most general Robin Hood tax on transactions only richer investors can afford to engage in. A key issue with Tobin's tax was "avoidance by change of product mix In this fashion, markets would innovate so as to avoid the tax Thus, the real issue is how to design a tax that takes account of all the methods and margins of substitution that investors have for changing their patterns of activity to avoid the tax.
Taking account of these considerations implies a Tobin tax that is bigger in scope, and pushes the design toward a generalized securities transaction tax that resembles the tax suggested by Pollin et al. There are four benefits to this. First, it is likely to generate significantly greater revenues. Second, it maintains a level playing field across financial markets so that no individual financial instrument is arbitrarily put at a competitive disadvantage versus another.
Third, it is likely to enhance domestic financial market stability by discouraging domestic asset speculation. Fourth, to the extent that advanced economies already put too many real resources into financial dealings, it would cut back on this resource use, freeing these resources for other productive uses [Fourth] such substitution is costly both in resource use, and because alternative instruments do not provide exactly the same services [thus] just as the market provides an incentive to avoid a Tobin tax, so too it automatically sets in motion forces that deter excessive avoidance.
Pollin, Palley and Baker  emphasize that transaction taxes "have clearly not prevented the efficient functioning of these markets. According to Paul Bernd Spahn in , "Analysis has shown that the Tobin tax as originally proposed is not viable and should be laid aside for good. In Soros' scheme, rich countries would pledge SDRs which are denominated as a basket of multiple 'hard' currencies for the purpose of providing international assistance. Soros was not necessarily dismissing the Tobin tax idea.
He stated, "I think there is a case for a Tobin tax It is true that it may discourage currency speculation but it would also reduce the liquidity of the marketplace. The term "Tobin tax" has sometimes been used interchangeably with a specific currency transaction tax CTT in the manner of Tobin's original idea, and other times it has been used interchangeably with the various different ideas of a more general financial transaction tax FTT.
In both cases, the various ideas proposed have included both national and multinational concepts. Examples of associating Tobin's tax with these:. The concept of a Tobin tax has experienced a resurgence in the discussion on reforming the international financial system. In addition to many legislative initiatives in favour of the Tobin tax in national parliaments, possible ways to introduce a Tobin-style currency transaction tax CTT are being scrutinised by the United Nations.
European Union leaders urged the International Monetary Fund on Friday to consider a global tax on financial transactions in spite of opposition from the US and doubts at the IMF itself. In a communiqué issued after a two-day summit, the EU's 27 national leaders stopped short of making a formal appeal for the introduction of a so-called "Tobin tax" but made clear they regarded it as a potentially useful revenue-raising instrument.
In , Tobin examined the global monetary system that remained after the Bretton Woods monetary system was abandoned. This examination was subsequently revisited by other analysts, such as Ellen Frank, who, in wrote: Frank then corroborates Tobin's comments on the problems this instability can create e.
They offer to dollarize or euroize , only to find themselves so short of dollars that they are forced to cut off growth. They raise interest rates to extraordinary levels to protect investors against currency losses, only to topple their economies and the source of investor profits.
IMF bailouts provide a brief respite for international investors but they are, even from the perspective of the wealthy, a short-term solution at best One of the main economic hypotheses raised in favor of financial transaction taxes is that such taxes reduce return volatility , leading to an increase of long-term investor utility or more predictable levels of exchange rates.
The impact of such a tax on volatility is of particular concern because the main justification given for this tax by Tobin was to improve the autonomy of macroeconomic policy by curbing international currency speculation and its destabilizing effect on national exchange rates. Most studies of the likely impact of the Tobin tax on financial markets volatility have been theoretical —researches conducted laboratory simulations or constructed economic models.
Some of these theoretical studies have concluded that a transaction tax could reduce volatility by crowding out speculators  or eliminating individual ' noise traders'  but that it 'would not have any impact on volatility in case of sufficiently deep global markets such as those in major currency pairs,  unlike in case of less liquid markets, such as those in stocks and especially options, where volatility would probably increase with reduced volumes.
In contrast, some papers find a positive effect of a transaction tax on market volatility. In most of the available empirical studies however, no statistically significant causal link has been found between an increase in transaction costs transaction taxes or government-controlled minimum brokerage commissions and a reduction in volatility—in fact a frequent unintended consequence observed by 'early adopters' after the imposition of a financial transactions tax see Werner,  has been an increase in the volatility of stock market returns, usually coinciding with significant declines in liquidity market volume and thus in taxable revenue Umlauf, For a recent evidence to the contrary, see, e.
As Liu and Zhu point out, [ When James Tobin was interviewed by Der Spiegel in , the tax rate he suggested was 0. Others have tried to be more precise or practical in their search for the Tobin tax rate. Tax rates of the magnitude of 0. They also address the practical effect of these rates on the volume of transactions which would be reduced.
Economists who fear to disturb the markets, either refuse the Tobin tax or at best suggest such a low rate that it becomes useless for curbing speculation or collecting revenues. According to Garber , competitive pressure on transaction costs spreads in currency markets has reduced these costs to fractions of a basis point. For example, the EUR. Accordingly, one of the modern Tobin tax versions, called the Sterling Stamp Duty , sponsored by certain UK charities, has a rate of 0.
Sterling Stamp Duty supporters argue that this tax rate would not adversely affect currency markets and could still raise large sums of money. The same rate of 0. A CTT tax rate designed with a pragmatic goal of raising revenue for various development projects, rather than to fulfill Tobin's original goals of "slowing the flow of capital across borders" and "preventing or managing exchange rate crises" , should avoid altering the existing "fundamental market behavior", and thus, according to Schmidt, must not exceed 0.
The mathematician Paul Wilmott has pointed out that while perhaps some trading ought to be discouraged, trading for the hedging of derivatives is generally considered a good thing in that it can reduce risk, and this should not be punished.
He estimates that any financial tax should be at most one basis point so as to have negligible effect on hedging. Assuming that all currency market participants incur the same maximum level of transaction costs the full cost of the bid-ask spread , as opposed to earning them in their capacity of market makers , and assuming that no untaxed substitutes exist for spot currency markets transactions such as currency futures and currency exchange-traded funds , Schmidt finds that a CTT rate of 0.
Although Tobin had said his own tax idea was unfeasible in practice, Joseph Stiglitz , former Senior Vice President and Chief Economist of the World Bank , said, on October 5, , that modern technology meant that was no longer the case. Stiglitz said, the tax is "much more feasible today" than a few decades ago, when Tobin recanted. However, on November 7, , at the G20 finance ministers summit in Scotland, Dominique Strauss-Khan , head of the International Monetary Fund , said "transactions are very difficult to measure and so it's very easy to avoid a transaction tax.
Nevertheless, in early December , economist Stephany Griffith-Jones agreed that the "greater centralisation and automisation of the exchanges and banks clearing and settlements systems In January, , feasibility of the tax was supported and clarified by researchers Rodney Schmidt, Stephan Schulmeister and Bruno Jetin  who noted "it is technically easy to collect a financial tax from exchanges Thus a tax can be collected at the few places where all trades are ultimately cleared or settled.
Based on digital technology, a new form of taxation, levied on bank transactions, was successfully used in Brazil from to and proved to be evasion-proof, more efficient and less costly than orthodox tax models. In his book, Bank transactions: There has been debate as to whether one single nation could unilaterally implement a "Tobin tax.
However, it would be much more efficient for a group of countries to take the initiative collectively.
The Ministry of Foreign Affairs of France has published a report, drafted by economists and lawyers, which shows how it is technically and legally possible for a group of countries, or a regional institution like the European Union to implement a Tobin Tax and more broadly a financial Transaction tax.
In the year , "eighty per cent of foreign-exchange trading [took] place in just seven cities. Agreement [to implement the tax] by [just three cities,] London, New York and Tokyo alone, would capture 58 per cent of speculative trading.
In July, , analyst Marion G. Wrobel examined the actual international experiences of various countries in implementing financial transaction taxes. In January , Sweden introduced a 0. In July the rate was doubled. In January , a considerably lower tax of 0. On a bond with a maturity of five years or more, the tax was 0. The revenues from taxes were disappointing; for example, revenues from the tax on fixed-income securities were initially expected to amount to 1, million Swedish kronor per year.
They did not amount to more than 80 million Swedish kronor in any year and the average was closer to 50 million. On the day that the tax was announced, share prices fell by 2. But there was leakage of information prior to the announcement, which might explain the 5.
These declines were in line with the capitalized value of future tax payments resulting from expected trades. It was further felt that the taxes on fixed-income securities only served to increase the cost of government borrowing, providing another argument against the tax. Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. On 15 April , the tax on fixed-income securities was abolished. In January the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely.
Once the taxes were eliminated, trading volumes returned and grew substantially in the s. The Swedish experience of a transaction tax was with purchase or sale of equity securities, fixed income securities and derivatives.
In global international currency trading, however, the situation could, some argue, look quite different. Wrobel's studies do not address the global economy as a whole, as James Tobin did when he spoke of "the nineties' crises in Mexico, South East Asia and Russia,"   which included the economic crisis in Mexico , the Asian Financial Crisis , and the Russian financial crisis. This was proposed domestically for the United States only. Schwabish examined the potential effects of introducing a stock transaction or "transfer" tax in a single city New York on employment not only in the securities industry, but also in the supporting industries.
A financial transactions tax would lead to job losses also in non-financial sectors of the economy through the so-called multiplier effect forwarding in a magnified form any taxes imposed on Wall Street employees through their reduced demand to their suppliers and supporting industries.
The author estimated the ratios of financial- to non-financial job losses of between It is also possible to estimate the impact of a reduction in stock market volume caused by taxing stock transactions on the rise in the overall unemployment rate.
The cost of currency hedges —and thus "certainty what importers and exporters' money is worth"—has nothing to do with volatility whatsoever, as this cost is exclusively determined by the interest rate differental between two currencies. Nevertheless, as Tobin said, "If Financial transaction tax rates of the magnitude of 0. In positive economics studies however, where due reference was paid to the prevailing market conditions, the resulting tax rates have been significantly lower.
For instance, Edwards concluded that if the transaction tax revenue from taxing the futures markets were to be maximized see Laffer curve , with the tax rate not leading to a prohibitively large increase in the marginal cost of market participants, the rate would have to be set so low that "a tax on futures markets will not achieve any important social objective and will not generate much revenue.
Opinions are divided between those who applaud that the Tobin tax could protect countries from spillovers of financial crises, and those who claim that the tax would also constrain the effectiveness of the global economic system, increase price volatility , widen bid-ask spreads for end users such as investors, savers and hedgers, and destroy liquidity. Lack of direct supporting evidence for stabilizing volatility-reducing properties of Tobin-style transaction taxes in econometric research is acknowledged by some of the Tobin tax supporters:.
Ten studies report a positive relationship between transaction taxes and short-term price volatility, five studies did not find any significant relationship. Schulmeister et al, , p. These Tobin tax proponents propose on indirect evidence in their favor, reinterpreting studies which do not deal directly with volatility, but instead with trading volume with volume being generally reduced by transaction taxes, though it constitutes their tax base, see: This allows these Tobin tax proponents to state that "some studies show implicitly that higher transaction costs might dampen price volatility.
This is so because these studies report that a reduction of trading activities is associated with lower price volatility. Some Tobin tax supporters argue that volatility is better defined as a "long-term overshooting of speculative prices"   than by standard statistical definitions e. The lack of empirical evidence to support or clearly refute the Tobin tax proponents' claim it will reduce "excess" volatility is due in part to a lack of an agreed definition of "excess" volatility that allows to be distinguished and formally measured.
The Tobin tax rests on the premise that speculators ought to be, as Tobin puts it, "dissuaded. On the other side of the debate were the leaders of Germany who, in May , planned to propose a worldwide ban on oil trading by speculators, blaming the oil price rises on manipulation by hedge funds. At that time India, with similar concerns, had already suspended futures trading of five commodities.
This [ proposed financial transaction tax ] legislation will force Wall Street to do their part and put people displaced by that crisis back to work. On January 21, , President Barack Obama endorsed the Volcker Rule which deals with proprietary trading of investment banks  and restricts banks from making certain speculative kinds of investments if they are not on behalf of their customers.
Federal Reserve Chairman Paul Volcker , President Obama's advisor, has argued that such speculative activity played a key role in the financial crisis of — Volcker endorsed only the UK's tax on bank bonuses, calling it "interesting", but was wary about imposing levies on financial market transactions, because he is "instinctively opposed" to any tax on financial transactions.
In February , Tim Harford, writing in the Undercover Economist column of the Financial Times , commented directly on the claims of Keynes and Tobin that 'taxes on financial transactions would reduce financial volatility'.
In , researchers like Aliber et al. Researchers have used models belonging to the GARCH family    to describe both the volatility behavior of stock market returns and the volatility behavior of foreign exchange rates. This is used as evidence that the similarity between currencies and stocks in the context of a tax designed to curb volatility such as a CTT or FTT in general can be inferred from the almost identical statistically indistinguishable behavior of the volatilities of equity and exchange rate returns.
According to Stephan Schulmeister, Margit Schratzenstaller, and Oliver Picek , from the practical viewpoint it is no longer possible to introduce a non-currency transactions tax even if foreign exchange transactions were formally exempt since the advent of currency derivatives and currency exchange-traded funds.
All of these would have to be taxed together under a "non-currency" financial transactions tax such as under certain proposals in the U. Because these three groups of instruments are nearly perfect substitutes, if at least one of these groups were to be exempt, it would likely attract most market volume from the taxed alternatives.
According to Stephan Schulmeister, Margit Schratzenstaller, and Oliver Picek , restricting the financial transactions tax to foreign exchange only as envisaged originally by Tobin would not be desirable.
On October 5, , Joseph Stiglitz said that any new tax should be levied on all asset classes — not merely foreign exchange, and would be based on the gross value of the assets, thereby helping to discourage the creation of asset bubbles. Tobin's more specific concept of a " currency transaction tax " from lay dormant for more than 20 years but was revived by the advent of the Asian Financial Crisis.
In December, Ignacio Ramonet , editor of Le Monde Diplomatique , renewed the debate around the Tobin tax with an editorial titled "Disarming the markets".
The tax then became an issue of the global justice movement or alter-globalization movement and a matter of discussion not only in academic institutions but even in streets and in parliaments in the UK, France, and around the world. In an interview  given to the Italian independent radio network Radio Popolare in July James Tobin distanced himself from the global justice movement. James Tobin's interview with Radio Popolare was quoted by the Italian foreign minister at the time, former director-general of the World Trade Organisation Renato Ruggiero , during a Parliamentary debate on the eve of the G8 summit in Genoa.
Afterwards James Tobin distanced himself from the global justice movement. Tobin observed that, while his original proposal had only the goal of "putting 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 such as the Millennium Development Goals ,  and allow governments, and therefore citizens, to reclaim part of the democratic space conceded to the financial markets.
In those same "years" that Buiter spoke of, the Tobin tax was also "adopted" or supported in varying degrees by the people who were not, as he put it, "enemies of trade liberalisation. It was originally assumed that the Tobin tax would require multilateral implementation, since one country acting alone would find it very difficult to implement this tax.
Many people have therefore argued that 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 UN a large source of funding independent from donations by participating states.
However, there have also been initiatives of national dimension about the tax. This is in addition to the many countries that have foreign exchange controls. Whilst finding some support in countries with strong left-wing political movements such as France and Latin America , the Tobin tax proposal came under much criticism from economists and governments, especially those with liberal markets and a large international banking sector, who said it would be impossible to implement and would destabilise foreign exchange markets.
Most of the actual implementation of Tobin taxes, whether in the form of a specific currency transaction tax , or a more general financial transaction tax , has occurred at a national level.
Wrobel examined the international experiences of various countries with financial transaction taxes. The tax would only impact financial transactions between financial institutions charging 0. If implemented the tax must be paid in the European country where the financial operator is established.
This "R plus I" residence plus issuance solution means the EU-FTT would cover all transactions that involve a single European firm, no matter if these transactions are carried out in the EU or elsewhere in the world.
Being faced with stiff resistance from some non-eurozone EU countries, particularly United Kingdom and Sweden, a group of eleven states began pursuing the idea of utilizing enhanced co-operation to implement the tax in states which wish to participate. The proposal supported by the eleven EU member states , was approved in the European Parliament in December ,  and by the Council of the European Union in January Wrobel's paper highlighted the Swedish experience with financial transaction taxes.
Once the taxes were eliminated, trading volumes returned and grew substantially in the s and s. Changes were made in The changes in Stamp Duty rates in , , and provided researchers with "natural experiments", allowing them to measure the impact of transaction taxes on market volume, volatility, returns, and valuations of UK companies listed on the London Stock Exchange.
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