Tobin Tax: good idea?

[El Koeno]

The article is a bit vague, but it seems the Tobin Tax isn't considered out of bounds anymore:

G20 agrees to look at currency deal tax to aid poor

World leaders have opened the door to a tax on currency transactions that could help developing nations to recover from debt. A last-minute commitment slipped into the communiqué from the G20 summit in Pittsburgh pledged to look at the levy after pressure from Germany and France.

The Independent on Sunday reported last week that Britain was stalling on the proposal, despite figures showing that sub-Saharan Africa is £40bn in the red because of the world crash.

The Treasury was opposed to the move, but its inclusion in the G20 document means that all countries are committed to it being on the table.

The G20 leaders' statement said: "We ask the IMF to prepare a report for our next meeting with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system."

German Chancellor Angela Merkel and French President Nicolas Sarkozy lobbied heavily for the tax. The levy – known as the "Tobin tax" – is calculated to raise between £18bn and £30bn. It has been backed by the FSA chairman, Lord Turner.

Max Lawson, Oxfam's senior policy adviser, said: "The G20 promised to prevent reckless 'banking as usual' but they also have a responsibility to help its victims. Leaders today opened the door for a tax on currency transactions, an obvious way for bankers to pay to clear up the mess they created."

Link

Will this tax fix finance? Or is it still an unrealistic idea? I'd really like to know your opinions.

 

[El Koeno]

Not sure if bumping your own thread is ethically justifiable, but it seems OT posters have an opinion on just about everything, but not a Tobin Tax? It seems to me that it's a better way of dealing with the problems in the financial sector than talk about bonuses. But the thing is, I hardly know a thing about this tax (and its effects), and I was hoping someone around here did.

 

[MagisterCultuum]

I don't like the idea of an international body (be it the UN, WTO, or G20) setting any taxes or of our tax money being given away to other countries while we are in such debt, but a tax to discourage risky and ethically dubious financial transactions could be good.

 

[Integral]

Nah, you can bump your own thread occasionally.

I don't really have much of a well-formed opinion on Tobin taxes. Basically, the idea is to place a relatively small tax (say, 0.25%) on international currency transactions. This adds friction to the international currency market and should reduce speculative currency flows. It should also reduce the volatility of exchange-rate fluctuations and thus approximate the exchange-rate system under Bretton Woods, to some degree.

The downside is fairly obvious; a decline in liquidity in cross-country financial flows. It is uncertain whether this drop in liquidity would be noticeable or, indeed, harmful to the world economy.

 

[El Koeno]

Nah, you can bump your own thread occasionally.

I don't really have much of a well-formed opinion on Tobin taxes. Basically, the idea is to place a relatively small tax (say, 0.25%) on international currency transactions. This adds friction to the international currency market and should reduce speculative currency flows. It should also reduce the volatility of exchange-rate fluctuations and thus approximate the exchange-rate system under Bretton Woods, to some degree.

The downside is fairly obvious; a decline in liquidity in cross-country financial flows. It is uncertain whether this drop in liquidity would be noticeable or, indeed, harmful to the world economy.

But I guess some financial flows might be too liquid. I mean, many institutions buy stuff and sell it the same day. And they do it often, so the small returns they get on each trade add up to a sizable profit. This does not seem to be very productive, and the resources involved (computers, talent for the creation of models etc.) are quite substantial. So that would be good, I guess.

Also, an international tax body wouldn't be all bad. The UN requires quite a bit of funding I'd say, why not use this tax to fund it?

 

[Cutlass]

I thought the OP was of interest, but didn't respond because I was hoping some other people would first. As Integral pointed out, both the upside and the downside are fairly easy to point out, at least in theory. As for which is the more important factor, I don't know enough to say. My tendency is to think that in this case the upside of the Tobin tax would probably outweigh the downside. And that is because speculation that distorts sound economic outcomes really is out of control in financial markets these days.

 

[MeteorPunch]

1. Set up the World Bank and IMF to put poor countries into debt, which goes into the hands of the wealthy bankers.

2. Tax the rest of the world in order to pay this debt.

 

[Slaughter]

Taxes never fixed anything.

 

[civ_king]

1. Set up the World Band and IMF to put poor countries into debt, which goes into the hands of the wealthy bankers.

2. Tax the rest of the world in order to pay this debt.

World Band? do they sing about the good of enslaving poor countries with debt?

 

[Cutlass]

Taxes never fixed anything.

They've reduces smoking.

 

[MeteorPunch]

World Band? do they sing about the good of enslaving poor countries with debt?

Yeah they're amazing!

fixed.

 

[JerichoHill]

Taxes never fixed anything.

That is incorrect. Taxes have been used successfully to correct for negative externalities.

 

[Bill3000]

They're also good at annoying libertarians, which is a good fix in my book~

 

[Mise]

The problem with many of these ideas is that the level set is either too low to make a difference, or so high that it prevents genuinely valuable transactions from taking place. There's the rub, as they say.

 

[El Koeno]

I thought the OP was of interest, but didn't respond because I was hoping some other people would first. As Integral pointed out, both the upside and the downside are fairly easy to point out, at least in theory. As for which is the more important factor, I don't know enough to say. My tendency is to think that in this case the upside of the Tobin tax would probably outweigh the downside. And that is because speculation that distorts sound economic outcomes really is out of control in financial markets these days.

Interesting. I think that's the thing with this tax. It's never been tried, so people - posters at forums, or decision makers - don't know how it would work and are thus afraid of seriously proposing one. I think that's why it does not get the attention executive compensation gets. A shame really.

The problem with many of these ideas is that the level set is either too low to make a difference, or so high that it prevents genuinely valuable transactions from taking place. There's the rub, as they say.

Well, a tiny tax would put a stop to the practices in which banks etc. use automatized trading to gain a small return at no risk. This sort of trading does not create value (for anyone but the bankers), and can be considered a waste of resources.

 

[Mise]

Yeah, but if the tax is at 0.000001% (which is obviously too low) then the banks will make a profit of $99,999,999 instead of $100,000,000, which won't really do much. The higher you raise the tax, the more it prevents those useless transactions you described -- but the more it simultaneously prevents the useful transfers of capital integral mentioned. It may be that there's an obvious number to put as the tax rate, that perhaps prevents 99% of useless trades, but only stops 1% of useful transfers of capital, but it's not obvious that such a number exists.

 

[El Koeno]

But is that an argument not to impose such a tax. You could make this case for any fiscal measure. How do we know VAT, or carbon taxes are "just right". All we know is that by imposing the tax, we're probably doing better than by not imposing it.

 

[Mise]

It's a problem that needs to be overcome.

 

[Integral]

But is that an argument not to impose such a tax. You could make this case for any fiscal measure. How do we know VAT, or carbon taxes are "just right". All we know is that by imposing the tax, we're probably doing better than by not imposing it.

Well, we know that sales taxes are not 'just right' by design; a distortion-minimizing bundle of sales taxes would be expensive to enforce, horrifically regressive in the absence of a robust transfer mechanism, and cause an equity loss that would more than outweigh the efficiency gain.

But that's a topic for another day...

--

So to make an efficiency argument for a Tobin tax, you need to make three claims:

1) Supply and demand for productive international capital flows are relatively [wiki]inelastic[/wiki], so the tax will not unduly discourage these kinds of flows;

2) Supply and demand for speculative capital flows are highly elastic, so even a small tax will greatly reduce the volume of such transactions,

3) There are external costs to speculative capital flows, which a Tobin tax would correct (the [wiki]Pigovian tax[/wiki] angle).