Tobin tax

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See also Bank tax.


HR 4191

To amend the Internal Revenue Code of 1986 to impose a tax on certain securities transactions to fund job creation and deficit reduction.

HR 4191 currently has 25 cosponsors (as of December 10, 2009).

Global discussion of financial transaction taxation

Most active global transactional banks

"... One of the big surprises in 2009 was the strength of fixed income, currency and commodity trading (FICC), and one of the bigger issues investors face in 2010 is sustainability of this sizeable revenue stream which is roughly 20% of revenues for the large banks/brokers (see Figure 1). In this report, we address our outlook for the FICC trading (including a primer on each of the 5 key businesses), detail which players are gaining/losing market share, and also review the key regulatory questions facing the industry.

And a topic very near and dear to our hear, which we will discuss more extensively once we finally post our much expected re-response to Goldman Sachs, focuses on the revenue relevance of flow trading for "franchise" names.

There is significant franchise value in bank trading platforms. Many investors argue that trading businesses have unpredictable, highly cyclical revenue streams that are padded with proprietary gains. We estimate flow trading businesses represent roughly 70% of industry FICC revenue, and while activity fluctuates, players with balanced trading platforms will see relatively dependable revenues from flow businesses. Fixed income trading will also benefit from secular growth trends of globalization, increasing cross-border capital flows, a faster "velocity" of money, and emergence of more sophisticated clients. Strong trading also makes the rest of the firm better, acting as a "connectivity hub" enabling distribution of a wider range of products/services to clients, upon which other businesses depend – e.g underwriting or corporate lending, or facilitates cross-sales of FX or rate hedges to large and middle-market banking clients.

In each of the business line sections we estimate the proportion of revenue derived from prop vs flows, review the secular growth drivers, and key swing factors (such as bid/ask spreads). Given its illiquid nature, commodities tend to have highest prop component, as dealers must act as principals acquiring and distributing large blocks of risk. Prop risk in rates and mortgage is a function of both natural positions – carry trades on inventories, or derivative exposures offsetting client positions, as well as some directional bets at the margin. In FX, where dealer profit margins are very thin, ironically the need to make proprietary trades increases, though deep liquidity reduces risks.

With less volatility and lower risk appetite for proprietary exposures versus prior years, we anticipate fewer proprietary profit opportunities in 2010 vs 2009. Note that we found that prop contributions were relatively high in 2009 due to ‘low hanging’ trades, such as agency mortgage dollar-rolls (explained in the mortgage section), basis-risk reversals, and credit spread tightening – however much of these mean-reversion type opportunities appear to be behind us.

Euro Parliament approves resolution to consider Tobin tax

Today, the European Parliament approved a resolution urging that the European Union "agree on a common position in the international framework of G20 meetings as regards the options as to how the financial sector should make a fair and substantial contribution towards paying for any burden which it has caused to the real economy or which is associated with government interventions to stabilise the banking system." Although the resolution encourages multilateral coordination, it also says that "the EU, in parallel to and consistent with the G20 work, should develop its own strategy with regard to the range of possible options for action," while also stressing that "any solution must imperatively avoid reducing EU competitiveness or hampering sustainable investment, innovation and growth, which benefit the real economy and society."

The resolution does not "advocate one method over another," and comes two weeks after the European Parliament Economic Affairs Committee specifically called for the consideration of a global tax. The resolution directs the European Commission, the European Union's executive arm, to develop a plan for the global transaction tax to present during the G20 meeting in June, including an "impact assessment of a global financial transaction tax, exploring its advantages as well as drawbacks."

Russia weighs cross-border 'Tobin' tax

"Russia is considering ways to discourage speculative currency traders from driving up the ruble exchange rate, including a tax on cross-border currency transactions, a central-bank official said Thursday. Such a plan would put Russia in line with other commodity-exporting economies including Brazil and Indonesia, which view inflows of speculative money as a threat to the profitability of their raw-materials exporters.

"We need to develop an effective way of controlling cross-border transactions, something similar to the Tobin tax," said First Deputy Central Bank Chairman Alexei Ulyukayev. Russia would enact such measures only after extensive discussions, Mr. Ulyukayev said at a conference on the ruble in Moscow.

Nobel Prize-winning economist James Tobin proposed a tax on foreign-currency transactions in order to reduce exchange-rate volatility after the 1971 collapse of the Bretton Woods exchange-rate system. Since then, Mr. Tobin's intent has been broadened in policy debate to include wider taxes on financial transactions of other types. The wider application of the tax was aired at a summit of the world's 20 leading economies earlier this month, when Russian Finance Minister Alexei Kudrin criticized British Prime Minister Gordon Brown for proposing that leading economies apply a global financial-transactions tax.

In Brazil, Thursday was the effective date of the government's new tax on Brazilian stocks traded as American depositary receipts. Brazilian Finance Minister Guido Mantega has said the 1.5% tax on ADRs is part of a bigger effort to stem appreciation of the real, which has gained 36% against the dollar so far this year.

Last month, Brazil imposed a 2% tax on foreign portfolio investments into fixed-income and equity accounts. South Korea announced on Thursday several measures aimed at helping local firms better manage foreign-exchange risks and reducing imbalances that have made its market susceptible to bouts of volatility.

To slow the ruble's appreciation, the Russian central bank bought about $21 billion of foreign currency in October and the first half of November, while lowering the country's refinancing rate by 3.5 percentage points this year to an all-time low of 9.5%. The measures have done little to stop the ruble, which has risen by 10% against the dollar since September.

An Indonesian central banker said this month that the country would consider similar controls. Taiwan in November banned foreign funds from investing in time deposits in an effort to deter currency speculation.

In September, Russian Prime Minister Vladimir Putin, hoping to encourage investment, said the country wouldn't reintroduce capital controls, which were abandoned in 2006. Officials and economists have warned that such tools come with their own dangers. "Measures designed to limit risk are necessary, but there is no need to go overboard, because then you risk distorting the pricing mechanism," said Konstantin Korishchenko, the head of Micex, the country's largest stock exchange, speaking at the same conference.

It isn't likely that any country would unilaterally introduce a Tobin tax, because financial transactions would simply migrate to another tax jurisdiction, said Rory MacFarquhar, chief economist at Goldman Sachs in Moscow.

Still, Russia's central bank "does have the tools to make it more expensive for banks to borrow abroad, which might well be a good idea over the longer term." On Wednesday, the central bank's chairman, Sergei Ignatyev, discussed several "soft" strategies for dealing with speculative capital, including limiting foreign borrowing by state-owned companies

Capital is unlikely to stop flowing into Russia anytime soon, as investor concerns about oil prices and Kremlin policy dissipate, said Chris Weafer, Uralsib chief strategist. "Russia is now in a favorable position, and funds are moving to increase their exposure to a more substantial overweight," he said.

The steps announced Thursday by South Korea's Financial Services Commission follow a draft plan in September and mark an effort to reduce the risk of swings in currency rates driven by South Korean firms hedging foreign cash flows and managing foreign liabilities. The FSC aims to have the rules take effect early next year.

South Korea's markets were among the hardest hit in Asia during the recent global financial turmoil. Movements in the foreign-exchange market were made larger by hedging activity by South Korean exporters and banks trying to manage foreign debt obligations. The Korean regulator will limit the size of forward transactions that South Korean companies can enter in the foreign-exchange market to a total value of no more than 125% of the revenue they are hedging.

Exporters, mainly shipbuilders, have sold large amounts of dollars in the forward market to hedge foreign orders, putting upward pressure on the won. Asset-management companies also will be required to provide various options to hedge foreign-exchange exposure on overseas investment-fund products they sell.

Financial institutions will be required to hold more than 2% of their foreign-currency assets in liquid assets carrying an investment rating of single-A or higher. There is no such requirement now. In addition, the regulator aims to reduce banks' dependence on short-term funding by requiring them to increase the proportion of their long-term foreign-currency borrowing to long-term lending to more than 90% from the current 80%. That ratio will be raised to above 100% in the first half of next year, the FSC said.

Canada opposes financial tax

Canada has confirmed it is opposed to efforts to impose a new global tax on financial services in the world’s major economies, according to a government document obtained by Bloomberg News.

Prime Minister Stephen Harper’s government, which will host a summit of Group of 20 leaders in June, instead is urging countries to adopt sound regulatory practices like Canada’s, according to an internal document distributed today to lawmakers from the governing Conservative Party.

Japan Vice Finance Minister endorses Tobin tax

Ben McLannahan of the Financial Times' Lex commentary team talks with Bloomberg's Erik Schatzker about Japanese Vice Finance Minister Naoki Minezaki's support for a levy on financial transactions called the Tobin Tax to curb market volatility that could threaten economic growth.

Non profits create "Robin Hood tax" campaign

It could be a plot from one of his feelgood movies. Against a snowy London backdrop, something perennially ignored and unloved finds the attention it craves against all odds. Only this time, director Richard Curtis is hoping to sprinkle his stardust on an arcane bank tax rather than a lovelorn English fop.

Britain's most successful comedy writer is aiming to tap into the public's fury at how bankers are scooping huge bonuses while the rest of us suffer pay freezes by spearheading the launch of a campaign demanding the introduction of a "Robin Hood tax" on financial institutions.

Harnessing YouTube, Facebook and celebrity endorsements, Curtis has taken what was once regarded as a naive pipedream to tax a slice of every financial trade and given it a makeover. The Tobin Tax, named after the American economist who first suggested the idea, is now rebranded the Robin Hood tax.

Curtis's involvement will recall how the Four Weddings and a Funeral writer marshalled both the Drop the Debt and Make Poverty History campaigns in the run-up to the Gleneagles G8 meeting in 2005.

The man responsible for a string of top grossing films, from Four Weddings and a Funeral to Love Actually, has been crucial in cementing agreement between groups as diverse as Barnardos, the RSPB, the Salvation Army and the TUC. He also attended meetings with senior Labour and Conservative figures along with campaigners to lobby for its introduction.

Curtis has also roped in his long-time collaborator Bill Nighy to star in a short film where he plays a senior banking executive who grows increasingly uncomfortable when quizzed about whether such a tax could work and how much it would raise. The film, directed by Curtis, is being premiered on and YouTube. Bono's development group, the One campaign, has also lent its weight and is expected to unveil a host of new supporters in coming months.

The powerful new coalition of domestic and overseas charities, unions and church groups argue that a Robin Hood tax could generate $700bn (?450bn) worldwide. The tax would see 0.05% levied on each bank trade ranging from shares to foreign exchange and derivatives, creating a cash pile to be spent on measures to combat domestic and international poverty as well as fight climate change.

A slick advertising campaign by Empire Design features slogans such as: "This is the first tax you'll be in favour of" and "Small change for the banks, huge changes for the world".

"As a result of the financial crisis there are suggestions there's no money to fight climate change, there's talk about cuts to schools and there's concern where the money will come from to meet the Millennium Development goals," Curtis said. "There is money in the banking system. There has been a huge expansion in banking activities. And yet we may all have to pay more VAT on everything we buy.

"I understand it is complicated and contentious and there are other ideas on the table, but what we are trying to create is an instinctive link between fixing banks and the huge challenges facing people on this planet. Do we drop promises on child poverty or do we tax the British public? Or do we work with banks to find a solution?"

The tax has long been demanded by campaigners but brushed aside by politicians and bankers as an impossible dream. Buoyed by the support of the UN, Gordon Brown last year became the first global leader to publicly call for its introduction as a way for banks to compensate society for causing the global financial crisis.

The campaign has already lived up to its outlaw image. In the early hours of Tuesday morning, the question "Do you want to be part of the world's biggest bank job?" was projected onto the Bank of England. From tomorrow, campaigners will ask Facebook networkers to don green Robin Hood style facemasks as a show of support.

For and against


The main argument in favour of a financial transaction tax is that it would raise a large sum of money painlessly, and would help to limit the sort of speculative attacks being seen on vulnerable countries such as Greece and Spain. Because turnover in the global financial markets is so enormous, even a tax levied at 0.05% on every trade could raise $400bn (?255bn) a year ? enough to double foreign aid, provide $100bn a year for poor countries to adapt to climate change, and leave $100bn over for rich countries to reduce their deficits. Politically, a Tobin tax has become more attractive as governments have woken up to public anger at the banks deemed responsible for the crisis, and to the budgetary cost of clearing up the mess. Those in favour say it is only fair the banks should pay.


There are three main arguments against a Tobin tax. The first is that it would only work if all the major economies adopted it, something that is unlikely given longstanding opposition from the US. The second is that a transaction tax would impede the efficient working of markets and add to business costs, which would be passed on to consumers. Finally, there is the question of whether a tax at such a low rate would be effective in deterring speculation ? the economist James Tobin always thought a far higher tax would be needed to throw "sand in the wheels" of finance.

Experts' view

Joseph Stiglitz, professor of economics at Columbia University: "A tax structure that does not reward short-term, very speculative gains would be good. If you were investing for a year or five years or 10 years it would be a small tax but if you were holding it for just one minute it becomes a very high tax. The important question is implementability. It's designed to tackle high frequency activity for which it is hard to find any societal benefit. The only question is, can it be effectively implemented? Will it be circumvented? There's a growing consensus it can be implemented, if not perfectly, effectively enough to make a difference."

Ann Pettifor, fellow, New Economics Foundation: "The proposed currency transaction tax (CTT) represents the tiniest grain of sand in the wheels of global, mobile capital, and places very little restraint on the movement of international capital. For that reason CTT will be welcomed, ultimately, by international financial institutions. The proposal lacks a framework of democratic, accountable governance for the disbursement of funds collected under a CTT scheme. NGOs and treasuries are debating whether funds should go, for example, to national treasuries; to the Global Fund to fight Aids, TB and Malaria, or to the UN for mitigation and adaption to climate change. Until disbursement and distribution of CTT revenues are accounted for in a democratic, fair, and transparent way, the CTT will be vulnerable to attack."

David Kern, chief economist at the British Chambers of Commerce: "It may have potential. I'm not sure it's the most appropriate thing. I think the main argument against it is that it's most unlikely to be implemented globally. If a tax could be applied it would have beneficial effects ? My reservation is that for the UK to engage in this unilaterally would be a very dangerous thing to do because it would destroy the country's financial sector. People and businesses would migrate to other places. If the US and big European countries implemented it as well then it would not harm our financial sector as much."

Tobin tax gains transatlantic support

"John Maynard Keynes proposed a tax on financial transactions in the middle of the Great Depression, and another economist, James Tobin, revived the idea in the 1970s as a way to counter currency market speculation. Neither effort gained much acceptance. Now, a growing number of economists and politicians argue that it’s time for a levy on trading stocks, bonds, currencies and derivatives.

U.K. Prime Minister Gordon Brown said on Nov. 7 that a transaction tax might compensate for the billions of dollars that the public has spent on bank bailouts. Government officials in France, Germany and Austria have voiced their backing. U.S. Treasury Secretary Timothy Geithner answered Brown a day later, saying the tax was not something the U.S. would support. House Speaker Nancy Pelosi, on the other hand, says the idea has “substantial currency” among congressional Democrats.

Even if political consensus on a transaction tax is lacking -- and Brown and Pelosi both say it would need to be implemented everywhere or not at all -- the idea is attracting supporters worldwide.

“It’s akin to a gambling tax on socially negative activities,” says Andrew Sheng, a former chairman of the Hong Kong Securities and Futures Commission who now advises Chinese bank regulators.

Trades that created big risks to the financial system, with the fewest benefits to the economy, might be taxed out of existence, Sheng says. That’s because the tax would boost the cost of complex financial products, such as collateralized-debt obligations, that have several layers of transactions -- and slim profit margins, he says.

$76 Billion

The funds raised would be substantial: With stock and currency markets ringing up about $900 trillion in turnover each year and derivatives another $625 trillion, a tax of 0.005 percent might raise $76 billion annually, Sheng estimates.

Allan Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh, says such a tax would harm markets. Traders who provide liquidity might be pushed out.

“Most trading is for efficiency,” says Meltzer, author of a comprehensive history of the U.S. Federal Reserve. “Why reduce the trading and make the markets less accessible?”

Proponents offer the transaction tax as a next step in crafting an appropriate policy response to the financial meltdown, complementing efforts such as boosting bank capital and increasing transparency.

Adair Turner, chairman of the U.K.’s Financial Services Authority, put the transaction tax back into the public eye. He dismayed London bankers by arguing in a Sept. 22 speech that they should focus more on socially useful services and less on speculation, profit and fat paychecks.


While Turner had few backers initially, support for the idea has been building. An opinion poll, published by the Guardian newspaper last week, said 53 percent of voters in the U.K. back the idea, with only 28 percent opposing it. Also last week, the head of the International Monetary Fund, who was initially skeptical of the concept, said his organization would study the feasibility of it in curbing financial excess.

“This is an interesting issue,” IMF Managing Director Dominique Strauss-Kahn said in a conference in London. “The financial sector should contribute to the cost of the rescue and to limiting recourse to public financing in the event of a future crisis.”

A month earlier he had dismissed it as a “very simplistic” idea that would be difficult to implement...."

"Campaigners are battling to build a transatlantic coalition to back proposals for a "Tobin tax" as a US congressman prepares to table a bill that would use such a levy on financial transactions to pay for banking bailouts.

Peter DeFazio, a Democrat representative from Oregon, is expected to table proposals later this week to levy a tax on all financial transactions – excluding those connected to pension schemes, health and education savings.

The proceeds would be used to pay back the costs of the financial sector rescue package and to create jobs in the US economy, where one in 10 of the workforce are now unemployed.

DeFazio opposed the $700bn troubled asset relief programme – known as Tarp – introduced by George Bush's treasury secretary, Hank Paulson, that has been used to stabilise the US financial system.

The idea of a "Tobin tax" on City trading has gained new currency since it was proposed by Gordon Brown as a potential solution to the problem of how to make sure banks met the hefty costs of bailing out the financial sector.

But campaign groups that have long championed the idea, including Oxfam and Stamp Out Poverty, would like to see some of the proceeds devoted to international causes, such as meeting the UN's Millennium Development Goals to tackle poverty, and helping poor countries adapt to climate change.

Tim Geithner, Paulson's successor as treasury boss, expressed scepticism about the idea after Brown's speech in Edinburgh, but DeFazio's bill will provoke a fresh debate in the US on the principle of transaction taxes.

Analysts believe there is little political support on Capitol Hill for devoting the funds raised to projects outside the US. But support for the idea in emerging economies, such as China, is likely to depend on a promise that not all the proceeds will be retained in the world's major financial centres, such as the US and UK, where most transactions take place.

Finance ministers from the G20 countries have asked the International Monetary Fund to produce a report by next April setting out in detail the practicalities of a financial transaction tax, as well as alternative options for raising more funds from the world's financial sector.

Britain is keen to win international backing for the proposal, and securing the support of the US – the world's biggest financial centre – will be essential.

Emerging economies, including Brazil, are keen to find ways of controlling boom-bust capital flows, and hope a transaction tax could help dampen the destabilising effect of sharp swings in "hot money" flowing in and out of economies.

Brazil has already imposed a 2% tax on currency transactions, to try and prevent its currency, the real, from appreciating too rapidly over the coming months."

France backs idea of international tax

"French Economy Minister Christine Lagarde on Monday backed the idea of a tax on financial transactions proposed by British Prime Minister Gordon Brown.

“I persist in thinking we should explore this idea and examine how realistic and how feasible it is and do this on an international basis,” she told reporters after a meeting with finance ministers from other euro-zone countries.

Brown proposed levying a tax on financial transactions to fund future bank bailouts at a meeting of finance ministers from the Group of 20 nations at the weekend but the idea was rejected by other countries including the United States.

Lagarde said Brown’s suggestion should not be dismissed out of hand although she left open the form that such a tax might take.

She said it could be incorporated into related proposals being examined by the International Monetary Fund which include the option of making banks pay insurance fees to fund any future rescues.

“There are a certain number of ideas that Gordon Brown raised. Will his proposals be combined with the proposals that were commissioned from the International Monetary Fund and which the European Commission began looking at recently? We’ll see.”

“But good ideas always have to travel some way before they become reality. I think that’s exactly the process we’re in now,” she said.

The IMF is expected to present concrete proposals for the tax next April to finance ministers from the G20, for review before submitting to G20 leaders in June."

G-20 splits on Tobin, says banks may pay for bailouts

"Group of 20 governments signaled banks will be forced to cover a greater cost of future bailouts even as they split over whether that should be achieved by taxing financial trading.

After spending more than $500 billion in taxpayer’s money to save banks from Royal Bank of Scotland Group Plc to Citigroup Inc., officials meeting in St. Andrews, Scotland this weekend debated how the financial industry can be forced to pay for future rescues. The specifics sparked division, with U.K. Prime Minister Gordon Brown’s call to consider a so-called Tobin tax immediately opposed by U.S. Treasury Secretary Timothy Geithner. “It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us,” Brown told finance ministers and central bankers at their Nov. 7 talks. Geithner said “we want to make sure that we don’t put the taxpayer in a position of having to absorb the costs of a crisis in future.”

G-20 officials are narrowing their focus on reining in excessive risk-taking after uniting earlier this year to fight the worst financial crisis since the Great Depression. While the U.S. pushback means a transaction tax is unlikely to occur, the mere discussion of it may be enough to unsettle markets.

Lower Profits

Banks’ earnings will inevitably come under pressure as governments agree on other proposals to force banks to fend for themselves in a crisis, says Charles Dumas, chairman of Lombard Street Research in London.

“The banking industry is only just starting to realize they won’t be able to go back to business as usual,” said Dumas. “The natural thing to do is go for some kind of insurance premium and higher capital requirements. It probably will reduce profitability, and it should reduce profitability.”

The G-20, which met at the end of a week in which Royal Bank of Scotland became the most expensive bailout ever, plans to discuss how banks can “contribute to paying for burdens” arising from state rescues at its next summit.

The push comes amid voters’ anger that banks rescued by taxpayers are returning to profit even as unemployment rises around the world. The U.S. jobless rate rose to a 26-year high in October just as the Centre for Economics & Business Research Ltd. forecasts bankers’ bonuses will rise 50 percent this year.

Tax Split

“We cannot afford having some individuals taking risks without having the pressure on them,” International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview on Nov. 7.

Brown repeated his call for nations to consider the financial-transaction tax today. Measures to tighten supervision “may not be sufficient to protect against future risk and to compensate for wider costs to the general public,” he wrote in the Financial Times.

Other proposals listed by Brown at the summit included getting banks to pay an insurance fee that reflects their risk, forcing them to create a pool to finance bailouts or ordering them to pay an upfront amount in return for being able to raise money if they run into trouble.

The Tobin-tax split this weekend, along with tensions over Chinese currency policy, nevertheless suggests the G-20’s ability to find consensus is being tested two months after leaders made it the main body for coordinating global policy.

Battle Lines

“Each day the crisis recedes, the old battle-lines reemerge and it gets tougher to find common conclusions,” said Tim Adams, the U.S. Treasury’s top international official during George W. Bush’s administration and now a managing director at the Lindsey Group, an investment consultancy run in Fairfax, Virginia.

Chinese central bank Governor Zhou Xiaochuan arrived at St. Andrews dismissing suggestions that China is under pressure to allow the yuan to appreciate. Later that day, Japan said a more flexible currency would be desirable and the IMF told the G-20 that the yuan is “significantly undervalued” after being kept unchanged against the dollar since July 2008.

The G-20 also failed to reach an agreement on climate change finance ahead of next month’s summit in Copenhagen.

Brown’s Tobin-tax push broke with his past resistance to a levy, lending momentum to a debate started earlier this year by French President Nicolas Sarkozy and backed by Germany.

Speculation Tax

Geithner responded that a “day-by-day” tax on speculation is “not something we’re prepared to support.” British Bankers’ Association Chief Executive Officer Angela Knight said it “wouldn’t work in practice.”

Brown was trying to “start the debate” by proposing several possible measures for discussion, his spokesman, Simon Lewis, told reporters in London today. “The prime minister has set out four options. He doesn’t favor one of the options. They all deserve consideration.”

Geithner says the U.S. would prefer to cover the cost of bailouts by forcing banks to repay rescue funds once the crisis is over. European Central Bank President Jean-Claude Trichet said Brown’s other proposals may be more acceptable.

For Brown, trailing in polls less than seven months before the next election is due, the comments are designed to open a divide with the Conservative opposition. While they say the biggest risk to the economy is the record budget deficit, Brown has stepped up his attacks on banks.

Economists argued over the merits of a tax on speculation. Julian Jessop, chief international economist at Capital Economics Ltd., said it “could make a useful contribution to reducing the risk of future financial crises and sharing the costs more fairly.”

‘Populist Measure’

Bill Witherell, chief global economist at Cumberland Advisors Inc. in Vineland, New Jersey, countered that banks would circumnavigate it and that it would do more harm than good.

“The idea of trying to tax transactions is a populist measure that may appeal to those upset with banks, but would be short-sighted,” said Witherell.

The G-20 still agreed to keep interest rates low and maintain record budget deficits until recoveries take hold, supporting stock markets today. The Dow Jones Stoxx 600 Index and the MSCI World Index both advanced 1.9 percent at 5:00 p.m. in London. The dollar weakened to a 15-month low against the currencies of major U.S. trading partners as governments’ commitment to maintain stimulus spurred appetite for risk.

Banks are also still vulnerable, the Financial Stability Board told the G-20, saying that some are too optimistic about the state of their finances.

To ensure the next expansion is less reliant on excesses such as U.S. spending and Chinese saving, the G-20 signed up to a plan in which they will outline plans to fix weaknesses in their economies and subject themselves to an IMF-led examination by counterparts.

Members will submit reports on their own economies by the end of January before refining their goals in concert for a summit of leaders in South Korea next November. “The hard work does not end here,” Brown said. “In fact it begins now.”

Brazil taxes foreign portfolio flows

Brazil's currency and stocks fell sharply yesterday after the government imposed a 2 per cent tax on foreign portfolio investments to stem the rapid rise of its exchange rate.

The move, announced shortly before local markets closed on Monday, followed steady gains in Brazil's currency, the real, which has advanced 36 per cent against the US dollar this year, reducing the competitiveness of Brazilian exports.

Foreign direct investment is unaffected by the tax. The imposition of taxes on international financial flows has symbolic significance for emerging market investors. Malaysia, blaming foreign speculation for destabilising its economy, imposed capital controls to prevent a run on its currency in 1998 during the Asian financial crisis. Chile maintained controls on capital inflows for many years but has now suspended them.

The possibility of a permanent "Tobin tax" on foreign exchange or other financial transactions has gained more attention after the Group of 20 leading nations asked the International Monetary Fund to consider the idea.

Analysts expected the tax on foreign flows into equities and fixed income instruments to have little lasting impact on Brazil's currency. "If this is aimed at the exchange rate they will have a very tough time," said Alvise Marino of IDEAglobal, a New York research company. "They are fighting against the whole market. Everybody wants to be in Brazil now."

The real fell to R$1.71 against the US dollar on Monday from its intra-day high of R$1.70 and dropped below R$1.74 yesterday during morning trading before rallying slightly. The main stock market index fell by 4.1 per cent.

Brazil emerged from a short recession in the second quarter. It is expected to post marginal economic growth this year and 5 per cent or more in 2010.

Edemir Pinto, chief executive of the BM&FBovespa, Brazil's futures and equities exchange, said foreign investors might now prefer to buy Brazilian companies' US-listed American Depositary Receipts, which would not be affected by the tax.

"The Brazilian market was one of the first to recover this year and was on a fantastic growth path," he said.

"About 70 per cent of shares in IPOs are bought by foreigners. So we didn't expect the government to take this drastic measure."

Gordon Brown's team to lobby IMF on Tobin tax

"UK prime minister Gordon Brown has sent Treasury officials to lobby the IMF on the implementation of a global Tobin tax.

His representatives will also be meeting with officials from other G20 countries as they attempt to win support for the idea, reports the Guardian.

The proposed tax on financial transactions between banking institutions was first suggested by the late James Tobin, an economics professor.

At a G20 meeting last week, Brown suggested such a tax could be implemented in order to fund any future bank bailouts.

"In the long run, this is the only way that we can solve the problem of social responsibility of world banking to the community," he said last week.

But the idea met with opposition from several key economic figures, including IMF managing director Dominique Strauss-Kahn.

However, support for Brown's idea appears to be growing, with French president Nicolas Sarkozy and German chancellor Angela Merkel offering some support for the plan."

"U.K. Prime Minister Gordon Brown said the Group of 20 nations should consider measures such as taxing financial transactions to penalize excessive risk taking and limit the burden on taxpayers of bank failures.

“It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us,” Brown told G-20 finance ministers and central bankers at a meeting today in St. Andrews, Scotland. Tighter capital rules and pooled bank resolution funds could also be considered, he said.

The comments add momentum to a global debate on how governments should rein in markets after bad bets almost toppled the global financial system, triggering a worldwide recession and a string of government bailouts. French President Nicolas Sarkozy and Adair Turner, chairman of the U.K.’s Financial Services Authority, have both supported a so-called Tobin tax.

Brown, who didn’t say whether he’d endorse a levy, said any policy would need to be implemented by all financial centers including those in the Middle East, Asia and Switzerland. He also acknowledged the “enormous and difficult” issues that need to be overcome to set up a “globally cohesive system.”

The debate over whether to implement a global levy on speculation has mounted in recent months with the G-20 asking the International Monetary Fund in September to study it. Twelve nations including Britain, France, Germany and Brazil agreed last month to set up a panel of economists to research its feasibility.

Currency Trading

Their inspiration is a 1971 proposal by U.S. economist James Tobin to tax currency trading to deter speculation in the wake of the collapse of the Bretton Woods system of pegging exchange rates. Tobin, who died in 2002, won the 1981 Nobel Prize for his work on financial markets.

For Brown, who is trailing in polls less than seven months before the next U.K. election is due, the comments are designed to open a divide with the Conservative opposition. While the Conservatives say the biggest risk to the economy is the government’s record budget deficit, Brown has stepped up his attacks on banks.

Brown and Chancellor of the Exchequer Alistair Darling say loose oversight of the banking industry allowed institutions to take on too much risk, destabilizing the financial system by the time the subprime crisis dried up credit in 2007.

Social Contract

“There must be a better economic and social contract between financial institutions and the public based on trust and a just distribution of risks and rewards,” Brown said today. “We need a better economic and social contract to reflect the global responsibilities of financial institutions to society.”

Some G-20 members are already acting alone on trading taxes. Brazil last month imposed a 2 percent tax on foreign purchases of equities and fixed-income securities in a bid to fend off excess speculation.

“Various countries have discussed the measure and are even thinking of adopting it,” Brazilian Finance Minister Guido Mantega said in a Nov. 5 interview with Bloomberg Television.

G-20 finance ministers and central bankers are meeting in the so-called home of golf to hammer out policies that will cement a recovery from the worst global recession since World War II and prevent a repeat of the financial crisis. After channelling more than $500 billion to bail out banks such as Royal Bank of Scotland Group Plc and Citigroup Inc., they’re also looking to impose tougher banking regulations.

Banking Mess

Brown’s speech “clearly opens the door for a financial transactions tax to make the bankers pay for the mess they’ve caused,” said Max Lawson, a policy adviser at aid organization Oxfam International. “There is a real rage against the banks which the prime minister is speaking to. There are big obstacles for such a tax, but this is a big moment.”

A tax of 0.05 percent on financial transactions may raise up to $700 billion a year, according to the WWF, a global environmental pressure group.

The British Bankers’ Association issued a statement saying that regulatory changes must be “properly costed” and the “timetable for change clearly set out.”

Economists are divided over whether any tax on financial transactions could work.

Former European Central Bank Chief Economist Otmar Issing said Oct. 26 that talk of such a measure is “like the Loch Ness monster; it appears once or twice a year, then goes away,” arguing it could never be imposed across borders and investors would circumnavigate it.

French officials including Sarkozy have suggested a levy on speculation for most of this decade without success."

G20 to task IMF to probe “Tobin tax”

"I would underscore that while public attention has been focused on the process of regulatory reform, bolstering supervision will prove to be equally critical for success. Improving the performance of supervisory authorities will require increasing the resources devoted to this task, and providing the backing needed to make sure that supervisory recommendations are taken seriously.

As the latest Senior Supervisors report has underscored, notable risk management deficiencies still persist in many important financial institutions, even following the widely recognized shortcomings exposed during the buildup to the crisis. Moreover, the FSB already has promulgated standards for compensation at financial institutions that should help to reduce concerns that compensation schemes are encouraging excessive risk-taking.

Not only the public in general, but also financial market professionals have been shocked by the scale and scope of public support that has been required to stabilize the financial system over the past two years. Although the eventual net cost of this intervention remains uncertain – and there is broad consensus that they avoided more serious damage -- the direct outlays to date typically have been borne either from general government funds and/or by central banks.

Looking ahead – and with the benefit of time for study and reflection -- an obvious issue is who should bear the cost of crisis mitigation measures. Reflecting both the costs involved, as well as the public controversy over the scale and details of the public sector involvement, this issue ranks high on the current policy agenda. As you may know, the G-20 Leaders asked the IMF to provide an analysis of the relevant policy options in time for their June 2010 Summit.

This is a complex and contentious issue, but despite the acceptance of the idea that deposit insurance is typically paid by a banking levy, this topic up to now has received surprisingly little systematic attention and analysis. In particular, there is an obvious trade-off between introducing more constraining regulation – that could limit prospective risks, but reduce the scope for the financial system to allocate capital –- and creating mechanisms to compensate for the potential cost of risk mitigation. Moreover, the basic assumptions underlying much of the current public discussion about taxation of the financial sector have tended to be unclear, perhaps creating more confusion than clarity. For example, the issue of whether and how to recoup the costs of the net support already provided likely would lead to a different set of policy options than the issue of whether and how to create a mechanism to cope with potential future costs. Both issues are relevant and related, but they need to be analyzed independently.

Perhaps most notably, there has been substantial public discussion about the advisability of a tax on financial transactions. This is often referred to as a “Tobin tax”, reflecting an early 1970’s proposal by Nobel laureate James Tobin. However, Tobin’s specific proposal was restricted to foreign exchange transactions, and was intended to suppress transactions, rather than to raise revenue. While some of the current supporters of a transactions tax intend it in Tobin’s sense, others have extolled such a tax as a potential source of earmarked revenues for a variety of purposes.

The Fund’s analysis will hew to the Leaders’ request of “analyzing policy options for how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions” to repair the system. Our study will cover the issues and options broadly, taking into account both current practices and the available expertise. Included will be the knotty issues of how broadly to define the institutions and/or activities that would be affected, and whether a fund should be created in advance of any future use.

Avoiding distortions and insuring systemic efficiency and effectiveness will be important considerations in evaluating the options, including a potential transactions tax, among other alternatives.

"G20 leaders have tasked the International Monetary Fund to investigate ways the financial markets could pay for the effects of the economic crisis, such as a tax on all international financial transactions, a G20 source said on Friday.

“A so-called ‘Tobin tax’ on all international financial transactions will not be mentioned specifically in the final communiques, but it was discussed. The IMF will now investigate and report back to the next G20 meeting,” the source involved in the G20 summit in Pittsburgh said.

German Chancellor Angela Merkel told ARD Germanan television that the G20 ask the IMF to make proposals on bearing the costs of the global economic crisis and one such possibility is a financial market transaction tax.

“We will likely have a formulation that makes clear that we are dealing with the question of who pays the costs of such a crisis,” Merkel told ARD German television from the G20 summit in Pittsburgh.

“We ask the International Monetary Fund to make us proposals on this by the next meeting. One possibility is a financial market transaction tax,” she added."

Taxing trading feasible Turner says

Source: ‘Tobin Tax’ Is Feasible and Enforceable, Avinash Persaud Says Bloomberg, August 28, 2009

"Adair Turner, the chairman of Britain’s Financial Services Authority, has provoked the ire of bankers by saying he’s willing to look at a “Tobin tax” on banking transactions, yet financial transaction taxes are commonplace and have become easier to enforce, said Avinash Persaud, who heads Intelligence Capital Ltd., a research firm.

Writing in the Financial Times, he said consolidation of clearing and settlement systems means that a tax of the kind proposed by economist James Tobin in 1971 for foreign-exchange transactions is feasible and would be costly to avoid.

Financial institutions naturally concentrate on the most lucrative activities, and those are ones that involve extensive trading; consequently, the financial system is biased toward heavy trading and churning and has less interest in developing products that are fit for a long-term purpose but aren’t traded so often, Persaud said.

That’s why great attention is devoted to hedge funds involved in high-frequency trading and less to buy-and-hold pension funds, he added.

Setting the right level of a transaction tax will be difficult, but probably not as difficult as it was for Adair Turner to be one of the first regulators to discuss the matter openly, Persaud concluded.

Sarkozy to press for 'Tobin Tax'

"French President Nicolas Sarkozy will urge fellow G20 leaders to introduce a special tax to reduce risky behaviour by banks, the BBC has learned. Mr Sarkozy wants a levy known as a Tobin Tax to be applied to every financial transaction. The move is aimed at cutting excessively speculative trades and encouraging long-term decision-making.

But senior EU officials told the BBC that the chances of getting a global agreement were "less than minimal".

The proposal does not yet have the formal backing of the EU or Germany - France's largest trading partner - and according to the BBC's business reporter Joe Lynam, it is widely expected to face resistance from Britain and the US, home to the world's largest financial centres. The BBC has also learnt that the issue of bankers' pay, especially bonuses, will also be on the agenda at the G20 meeting in Pittsburgh, the US, next weekend.

There will be no suggestion of capping individual bonuses, our correspondent says, but it is likely that overall bonuses as a proportion of a company's earnings could be restricted. There may also be a possibility of payment deferral and the option of clawing payments back should decisions by bankers prove to have been excessively risky or erroneous."

Miliband supports Tobin tax, claims French foreign minister

Foreign minister David Miliband was named today by his French counterpart as a supporter of a Tobin tax on financial transactions in a move designed to show growing support for a clampdown on excessive bank profits.

Bernard Kouchner, the French foreign minister, said in an interview that Miliband agreed on the need for a new tax on financial transactions to fund development. Kouchner said that he wanted to maintain momentum for a tax which already has the backing of Lord Turner, the chairman of Britain's Financial Services Authority.

The idea, put forward by economist James Tobin in the early 1970s and supported by anti-poverty campaigners, argued that a small levy applied to every foreign exchange transaction would mean billions of pounds could be redirected to support developing nations. Turner said he sympathised with applying a tax that would be "a nice, sensible revenue source for funding global public goods".

Last night, the Foreign Office were unable to comment on the French reports on Kouchner's comments.

Kouchner's comments follow agreement among the two main parties in Germany to lobby for a Tobin tax ahead of the G20 summit in Pittsburgh next week. The left-of-centre SPD unveiled plans last week for a global tax on foreign exchange and other financial trades to supplement proposals for a new tax on stockmarket trading.

German finance minister Peer Steinbrueck, a member of chancellor Angela Merkel's coalition government, accused banks of "binge-drinking" on capital markets. Merkel, with less enthusiasm, said she sympathised with the demands, though they were unlikely to gain much ground in discussions at the G20.

IMF reviewing a "Tobin tax"

"... The public debate also seems to be divided about the purpose of a new financial sector charge or tax. For example, the issue of whether and how to recoup the costs of the net support already provided in the current crisis would lead to a different set of policy options than the issue of whether and how to create a mechanism to cope with potential future costs. Both issues are relevant and related, but they need to be analyzed independently.

Perhaps most notably, there has been widespread public discussion about the advisability of a tax on financial transactions. This is sometimes referred to as a “Tobin tax,” reflecting an early 1970s proposal by the late Nobel laureate James Tobin. However, Tobin’s specific proposal was restricted only to foreign exchange transactions, and was intended to suppress transactions, not raise revenue. While some of the current supporters of a financial transactions tax intend it in Tobin’s sense, others have extolled such a tax as a potential source of earmarked revenues for a variety of purposes.

The IMF’s analysis will cover the issues and options broadly. These options, including—but not limited to—a financial transactions tax, will be evaluated in terms of their potential to reduce distortions and improve systemic efficiency and effectiveness. The pros and cons of creating a fund in advance of future crises also will be addressed. This analysis will be supported by an evaluation of more technical issues such as the definition of systemically important institutions, the perimeter for the supervised financial sector and implementation of any regulatory changes needed to support financial stability.

In short, the entire reform effort won’t be either quick or easy, but the potential payoff could be significant in terms of underpinning long-term growth, and enhancing systemic stability. Actual implementation will require sustained cooperation and focus. Improved global governance—including of the IMF—will aid this effort, and this will be the subject of the next piece in this series."

IMF chief: “simplistic” financial tax won’t work

International Monetary Fund Managing Director Dominique Strauss-Kahn said on Friday a “simplistic” tax on financial transactions would not be a good idea, but the IMF will continue work on proposals for systemic risk funding from the financial sector.

“I don’t think that the very simplistic idea of just putting a tax on transactions will work; for many technical reasons I think it’s very difficult to implement,” Strauss-Kahn said at a briefing at the opening of IMF annual meetings here.

But he added that the idea of having money come from the financial sector to deal with systemic risks created by financial institutions is a good idea worth further study. The IMF will prepare a report on such special funding for the Group of 20 rich and developing economies, he added.

China taxing internal repo trades

China’s State Administration of Taxation is seeking suggestions from the industry on standardising the basis of different types of bond trading on how they will be taxed, which may dampen trading activity, several sources told Reuters.

The final rules, to be announced soon, will include clarifications on how trading of outright bond repurchases will be taxed — whether an outright repo agreement should be taxed as one fund-raising contract or as two, the sources said.

A banker in eastern China believes that the final rules will likely tax a repo business as two contracts, hurting trading activity there.

In a repo, the borrower agrees to sell a financial security, such as a government bond, to a lender and also agrees to buy the same security from the lender at a fixed price at a later date for the purpose of short-term fund raising.

The volume of outright repo transactions in China’s interbank market reached 2.2 trillion yuan ($323 billion) in the first 10 months of this year, including 122 billion yuan in October. ($1 = 6.82 yuan)

Congressional consideration

Trading tax "dead" for the 111th Congress

The proposed 0.25 percent securities transaction tax (STT) is dead in Congress--at least for now.

But opponents warn that the idea could be resurrected and dropped into almost any bill, as the U.S. government seeks new sources to close record deficits.

Still, others believe that the tax just won't happen this year. That's good news for prop traders and high-frequency traders, whose profit margins are razor thin to begin with. The tax, many fear, would push them out of the market and lessen liquidity for all investors.

Next year, however, is another story and the idea to tax trades could gain traction. But for now, it's a back-burner issue, sources say.

"The 0.25 percent is not going to happen," said Paul Zubulake, a securities industry analyst with Aite Group. "That would have had a devastating effect on in the industry. But a smaller STT could still happen." Zubulake said the government's need for more revenues could lead to new forms of taxing Wall Street.

Rep. Peter DeFazio, D-Ore., drafted the STT bill, HR 4191. It would assess a 0.25 percent tax on financial transactions. Money generated by the tax would pay down the debt and create public sector jobs. The STT would be imposed on "stocks, futures, swaps, credit default swaps and options," according to the bill.

In public statements, DeFazio has argued that the proposal is fair because the government "bailed out" the securities industry during the 2008 market meltdown.

Still, the securities industry has argued that the STT would have the unintended consequence of hurting the individual investor.

"For fund investors, a securities transaction tax would raise the cost of trades that a fund can make for its portfolio and would depress fund returns," according to Paul Schott Stevens, president and CEO of the Investment Company Institute.

Although the DeFazio bill, along with another STT plan in the Senate, has not cleared committee and has few co-sponsors, many in the trading industry fear that the idea of making Wall Street pay higher taxes will succeed.

"It's still a politically popular thing to tax Wall Street," said a lobbyist for the Securities Traders Association. Added John Giesea, STA president and CEO, "We're still taking this very seriously."

But HR 4191, DeFazio says, would have "a negligible impact on the average investor and pension funds."

The bill would exempt from the tax the first $100,000 of transactions. DeFazio concedes the bill will have tough going because it has been introduced late in the Congressional session. A spokeswoman for Rep. DeFazio said the bill is now pending in the House Ways and Means Committee. She said it was not clear when the committee will hold hearings on the bill.

The bill has some supporters in the securities business, notably fund industry critic John Bogle, the founder of the Vanguard Group of Funds.

Wall Street trading tax proposed by Democrats

A group of congressional Democrats proposed taxing large transactions in stocks and derivatives, an idea that has received a cool reception from the Obama administration.

Iowa Senator Tom Harkin, Oregon Representative Peter DeFazio and five other House Democrats proposed the measure, designed to raise $150 billion a year to fund a new jobs bill and help close the federal budget deficit.

“Let me be blunt: We need new revenue,” Harkin said at a news conference today in Washington. He called a tax the “most painless way” to raise revenue and stop risky market speculation. “Ask not what America can do for Wall Street, but what Wall Street can do for America,” Harkin said.

House Speaker Nancy Pelosi said there’s a “great deal of merit” in imposing a tax on large stock transactions as long as other major nations do it as well.

Treasury Secretary Timothy Geithner said during a Nov. 7 meeting of Group of 20 finance ministers in St. Andrews, Scotland, that a “day-by-day” tax on speculation is “not something we’re prepared to support.”

Geithner was speaking in response to U.K. Prime Minister Gordon Brown, who said a transaction tax might prevent excessive risk-taking and compensate for the billions of dollars the public has spent on bank bailouts.

Harkin said he will introduce the bill in the Senate next week with Senator Bernard Sanders, a Vermont independent who caucuses with Democrats.

0.25 Percent for Stocks

The measure would be based on legislation DeFazio proposed in the House that would apply a tax of 0.25 percent or 25 basis points to stock transactions in excess of $100,000, and a levy of 0.02 percent or 2 basis points on derivatives including futures, options, swaps and credit default swaps.

Harkin and DeFazio said the proposed new levy is backed by more than 200 economists, the AFL-CIO labor union federation and business leaders including Warren Buffett and Vanguard Group Inc. founder John C. Bogle, now president of Bogle Financial Markets Research.

“I endorse the Harkin-DeFazio bill in principle,” Bogle said in an e-mail released by the lawmakers. He urged “careful study” to find appropriate tax rates. His office confirmed the authenticity of the e-mail.

Business groups including the Financial Services Roundtable and the Securities Industry and Financial Markets Association oppose the bill.

‘Nearly Every American’

“Nearly every American would be impacted by a new transaction tax, no matter how small it is,” said Steve Bartlett, president and chief executive officer of the Financial Services Roundtable.

Kenneth Bentsen, executive vice president for the securities industry group, called the bill “the wrong policy at the wrong time.” He said it would make capital more expensive, hurt U.S. companies’ ability to compete globally and increase compliance burdens.

Christopher Bergin, president and publisher of Tax Analysts, a Falls Church, Virginia publisher of tax information, predicted the lobby groups will successfully fend off the proposal.

“Willie Sutton robbed banks because that’s were the money is,” Bergin said. “There’s certainly money” in taxing stock and derivative trades, “but this bank is just too well guarded” by lobbyists who oppose the idea, he said.

Affecting Liquidity

Clint Stretch, a tax policy specialist at the Deloitte Tax LLC consulting firm, also said lawmakers will be reluctant to do anything that would be perceived as affecting liquidity.

“The current state of the economy and market does not suggest that Congress will want to risk having an adverse impact on markets,” he said.

Theodore Seto, a tax law professor at the Loyola Law School of Los Angeles, said supporters of the tax believe it will make markets more efficient by reducing risks created by the rise of computer-oriented trading.

The tax “reduces the pressure to operate with less information,” Seto said. “Markets that operate on the basis of more information are much less likely to produce the kinds of self-reinforcing bubbles that led to this past crash.”

The tax would be refunded for tax-favored retirement accounts, mutual funds, education savings accounts and health savings accounts.

DeFazio told reporters he thinks the idea will gain traction even though the Obama administration is resisting it because it will appeal to ordinary Americans in an era of government bailouts of investment banks.

“Mr. Geithner is just protecting the interest of Wall Street,” DeFazio said. He also said he thought the proposal would catch on around the globe. “There’s pretty much consensus around the world.

Wall Street tax must be international: Pelosi

Any tax imposed on financial transactions would have to take effect internationally to keep Wall Street jobs and related business from moving overseas, U.S. House of Representatives Speaker Nancy Pelosi said on Thursday.

"It would have to be an international rule, not just a U.S. rule," Pelosi said at a news conference. "We couldn't do it alone, we'd have to do it as an international initiative."

Several House Democrats have proposed a Wall Street tax to pay for job-creating legislation they plan to pass in December. The tax, which could raise $150 billion per year, would tap into widespread public outrage at Wall Street in the wake of the financial crisis.

"There's something really out of kilter in this society," said Democratic Representative Marcy Kaptur, noting the gap between wages in her Ohio district and Wall Street bonuses.

But support is tepid among key legislators, especially those from the New York region who worry that finance jobs could disappear if the tax drives trading activity overseas.

The No. 4 Democrat in the House, Representative John Larson, said his proposal to impose a 0.25 percent tax on over-the-counter derivatives transactions would apply internationally.

"Part of our proposal would include that it would be international," Larson told Reuters after meeting with other lawmakers about the jobs package.

Democratic Representative Peter DeFazio said his separate proposal, which would tax a wider array of trading activity, would cover all U.S. corporations and individuals no matter where their trades took place.

Pelosi and other Democratic leaders have emphasized that the proposal is merely one of many ideas in play.

"It hasn't been developed to a high priority, but it has substantial currency in our caucus," Pelosi said.

Britain urged other governments earlier this month to consider a bank tax as a way to fund future bailouts, and France and Germany have also called for a bank tax. The International Monetary Fund is studying the idea.


But it has little support in the Obama administration.

Treasury Secretary Timothy Geithner said on Thursday that he has "not seen a version of that tax that I think would be appropriate for our country."

Hoyer says trading tax in jobs bill ‘On the Table’

House Democratic Leader Steny Hoyer said a tax on large financial transactions is one of the ideas being considered to help pay for jobs-creation legislation.

“There are a lot of ideas on the table,” Hoyer said today when asked about the plan. “I wouldn’t say it’s getting serious consideration over other proposals,” he told reporters after a meeting of House leaders. Hoyer, a Maryland Democrat, wouldn’t say whether he supports the idea.

Hoyer said yesterday that House Democrats will try to pass a job-creation plan this year that may include money for highway construction and tax credits for small businesses to hire more workers.

Democrats weigh tax on financial transactions

Source: Democrats Weigh Tax On Financial Transactions Wall Street Journal, October 10, 2009

Taxing financial transactions on Wall Street is gathering support in high places.

With federal budget deficits soaring, policy makers and other advocates are eyeing the huge sums that could be raised as a way to cover the costs of new initiatives.

Labor unions, in particular the AFL-CIO, have proposed a financial-transactions tax as a way to defray costs of a health-care overhaul. Lawmakers have discussed a similar fee as a way to cover the cost of future financial oversight. Liberal advocates are pushing the tax to pay for new stimulus spending.

This week, the left-leaning Economic Policy Institute floated the idea of a national transaction tax that would raise $100 billion to $150 billion a year. The tax, at a rate of 0.1% to 0.25% of the value of the trade, would be levied on all financial transactions such as stock trades, but not on consumer transactions such as with credit cards.

The money would be used initially to pay for temporary aid to states, hiring incentives for public- and private-sector employers and school construction money.

"We are in a difficult time right now, so people are looking at every opportunity to gain some revenue to fund" new initiatives, said Rep. Stephen Lynch (D., Mass.), a member of the House Financial Services Committee. "Because I was one of the first to suggest using this to fund [new] regulatory infrastructure, folks have come to me and said, 'That's a good idea; I've got a better one: Why don't we use it for stimulus or especially health care?'"

One Democratic aide said the idea is under consideration among House leadership, though the discussions are preliminary.

A spokeswoman for Republican House leader John Boehner of Ohio criticized the idea. "How is killing more American jobs by stifling capital investment, further eroding families' savings and diverting much-needed investment out of the United States a good idea during a severe economic downturn?" said the spokeswoman, Antonia Ferrier.

Unnoticed by many, the concept already has found its way into federal law. At the urging of House Democratic leaders, last year's $700 billion financial-bailout bill contains a provision requiring the president to submit legislation to "recoup" from the financial-services industry any eventual shortfall in the Troubled Asset Relief Program, or TARP.

The provision, inserted during last-minute negotiations, was encouraged by moderate Democrats who worried that taxpayers would be left footing the bill if the government investment produced big losses.

Transactions taxes first were proposed in the 1970s for currency trading, to reduce volatility in exchange rates. The idea later was seized on as a way to reduce volatility in financial systems.

In an interview Friday, Rep. Barney Frank, chairman of the House Financial Services Committee, said he supported the legislation's idea of recouping future losses from the industry.

"I was one of the ones who suggested" the idea for the TARP provision, said the Massachusetts Democrat. He said he didn't specifically propose a financial-transactions tax. The provision could be structured as either a tax or a fee, he said, and could be a one-time provision rather than a permanent tax.

That would make it less likely that parties to financial transactions would seek to escape the tax by moving activity to another country. He said imposing such a tax "country by country...would be a problem."

Many economists have argued against a financial-transactions tax on policy grounds, saying it could have consequences for markets, in part by driving activity outside the U.S. Critics said it also would throw sand in the gears of capital markets.

Still, some appear to be changing their minds. "I'm not as hostile as I used to be," said Len Burman, a Syracuse University professor and former head of the Tax Policy Center, a venture of the left-of-center Brookings Institution and Urban Institute. Curbing frequent trading might be a good idea, he said, though he is "skeptical this is the best way to do it."

Mr. Frank said additional fees might be imposed on financial-industry participants such as payday lenders in order to pay for a consumer-protection agency.

Fees to pay for regulatory activities aren't considered a tax under House rules. The new fees would be relatively minor, he said, adding that details haven't been worked out. Similar fees already help pay for the operations of some agencies such as the Securities and Exchange Commission.

A broader question is whether levies on the financial industry might be used to help establish a rescue fund for future calamities.

In response to a question at a House hearing in September, White House economic adviser and former Federal Reserve Chairman Paul Volcker said it "might be interesting" if Congress ordered a study of the idea of a transactions tax. But he pointed to the problem of driving transactions to other countries. "That's the No. 1 problem; you'll have to get some consistency internationally," he said.

Trade unions are backing the idea to reduce government deficits and pay for new jobs initiatives, among other purposes. Amid their urging, the Group of 20 industrial and developing nations recently pushed the International Monetary Fund to study the idea, which has drawn endorsements from some leaders in the U.K. and Germany.

DeFazio's legislation on financial transactions

"Campaigners are battling to build a transatlantic coalition to back proposals for a "Tobin tax" as a US congressman prepares to table a bill that would use such a levy on financial transactions to pay for banking bailouts.

Peter DeFazio, a Democrat representative from Oregon, is expected to table proposals later this week to levy a tax on all financial transactions – excluding those connected to pension schemes, health and education savings.

The proceeds would be used to pay back the costs of the financial sector rescue package and to create jobs in the US economy, where one in 10 of the workforce are now unemployed.

DeFazio opposed the $700bn troubled asset relief programme – known as Tarp – introduced by George Bush's treasury secretary, Hank Paulson, that has been used to stabilise the US financial system.

The idea of a "Tobin tax" on City trading has gained new currency since it was proposed by Gordon Brown as a potential solution to the problem of how to make sure banks met the hefty costs of bailing out the financial sector.

But campaign groups that have long championed the idea, including Oxfam and Stamp Out Poverty, would like to see some of the proceeds devoted to international causes, such as meeting the UN's Millennium Development Goals to tackle poverty, and helping poor countries adapt to climate change.

Tim Geithner, Paulson's successor as treasury boss, expressed scepticism about the idea after Brown's speech in Edinburgh, but DeFazio's bill will provoke a fresh debate in the US on the principle of transaction taxes.

Analysts believe there is little political support on Capitol Hill for devoting the funds raised to projects outside the US. But support for the idea in emerging economies, such as China, is likely to depend on a promise that not all the proceeds will be retained in the world's major financial centres, such as the US and UK, where most transactions take place..."

AFL-CIO, Dems push new Wall Street tax

Source: AFL-CIO, Dems push new Wall Street tax The Hill, August 30, 2009

"The nation’s largest labor union and some allied Democrats are pushing a new tax that would hit big investment firms such as Goldman Sachs reaping billions of dollars in profits while the rest of the economy sputters.

The AFL-CIO, one of the Democratic Party’s most powerful allies, would like to assess a small tax — about a tenth of a percent — on every stock transaction.

Small and medium-sized investors would hardly notice such a tax, but major trading firms, such as Goldman, which reported $3.44 billion in profits during the second quarter of 2009, may see this as a significant threat to their profits.

“It would have two benefits, raise a lot of revenue and discourage speculative financial activity,” said Thea Lee, policy director at the AFL-CIO.

“The big disadvantage of most taxes is that they discourage some really productive activity,” she said. “This would discourage numerous financial transactions. People flip their assets several times in an hour or a day. They make money but does it really add to the productive base of the United States?”

Lee said that taxing every stock transaction a tenth of a percent could raise between $50 billion and $100 billion per year, which could be used to pay for infrastructure projects and other spending priorities. She said the tax could be applied nationwide or internationally.

The proposal would hit especially hard those hedge funds and large banks earning hefty profits despite the shaky economy from a practice known as high-frequency trading. High-frequency traders use powerful computers to conduct hundreds of thousands of orders in mere seconds, taking advantage of slower traders.

Only the biggest investment firms can afford to develop the technology, which delivers handsome profits at little risk. The growing popularity of the practice has contributed to the soaring volume of trades on Wall Street in recent years and, some critics argue, market volatility and rampant speculation.

High-frequency trading is estimated to earn about $20 billion in profits for the nation’s biggest investment firms, who guard the their practices zealously. Goldman Sachs, for example, has accused a former computer programmer of stealing the valuable code, launching a high-profile legal battle.

The AFL-CIO and some allied Democrats would like to cut down on the overall level of trading, or at least give the U.S. government a piece of the action, which would likely tamp down trading.

Democrats and labor officials would also like to take a bite out of Goldman’s profits. Liberals are angry the company, which immersed itself in the frenzy of speculation leading to last year’s financial collapse, is now making huge profits after accepting (and repaying) $10 billion in government aid. Goldman employees are on track to earn an average of more than $700,000 this year."

Geithner dismisses tax on financial transactions as unworkable

"Treasury Secretary Timothy Geithner, throwing cold water on a plan by congressional Democrats to tax financial transactions, said banks and other market participants would find ways to circumvent the expense.

“I have not seen the version of that that I think works,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” that airs throughout the weekend. Firms are “going to move in a heartbeat to get around any tax like that.”

The Treasury chief also predicted a “quite high” chance that the U.S. unemployment rate will be lower than 10 percent in a year, and he called yesterday’s Labor Department report showing the smallest monthly job loss in two years “progress but not good enough.”

Geithner also continued to push Congress to pass legislation that would rewrite financial rules and said that the Obama administration was close to announcing a new tack for the $700 billion bailout. Geithner said he expects the Troubled Asset Relief Program to get as much as $175 billion in repayments from banks by the end of next year.

The prospect of a so-called Tobin tax, floated last month by U.K. Prime Minister Gordon Brown, is already provoking nervous U.S. financial companies to lobby for its defeat. Democrats, including Oregon Representative Pete DeFazio and Iowa Senator Tom Harkin, this week proposed taxing large transactions in stocks and derivatives. House Speaker Nancy Pelosi said the idea has a “great deal of merit.”

Tobin Tax

In yesterday’s interview, Geithner, echoing some of the banking industry’s reasons for opposing a Tobin tax, said he was concerned it wouldn’t be able to be adopted globally, making it harder to impose. He also noted that the tax may hit less sophisticated investors, instead of the big firms.

“There’s a real risk that retail investors, who’ve got fewer choices, they end up bearing the cost of the tax,” he said..."

Krugman endorses Tobin tax

"Should we use taxes to deter financial speculation? Yes, say top British officials, who oversee the City of London, one of the world’s two great banking centers. Other European governments agree — and they’re right.

Unfortunately, United States officials — especially Timothy Geithner, the Treasury secretary — are dead set against the proposal. Let’s hope they reconsider: a financial transactions tax is an idea whose time has come.

The dispute began back in August, when Adair Turner, Britain’s top financial regulator, called for a tax on financial transactions as a way to discourage “socially useless” activities. Gordon Brown, the British prime minister, picked up on his proposal, which he presented at the Group of 20 meeting of leading economies this month.

Why is this a good idea? The Turner-Brown proposal is a modern version of an idea originally floated in 1972 by the late James Tobin, the Nobel-winning Yale economist. Tobin argued that currency speculation — money moving internationally to bet on fluctuations in exchange rates — was having a disruptive effect on the world economy. To reduce these disruptions, he called for a small tax on every exchange of currencies.

Such a tax would be a trivial expense for people engaged in foreign trade or long-term investment; but it would be a major disincentive for people trying to make a fast buck (or euro, or yen) by outguessing the markets over the course of a few days or weeks. It would, as Tobin said, “throw some sand in the well-greased wheels” of speculation.

Tobin’s idea went nowhere at the time. Later, much to his dismay, it became a favorite hobbyhorse of the anti-globalization left. But the Turner-Brown proposal, which would apply a “Tobin tax” to all financial transactions — not just those involving foreign currency — is very much in Tobin’s spirit. It would be a trivial expense for long-term investors, but it would deter much of the churning that now takes place in our hyperactive financial markets.

This would be a bad thing if financial hyperactivity were productive. But after the debacle of the past two years, there’s broad agreement — I’m tempted to say, agreement on the part of almost everyone not on the financial industry’s payroll — with Mr. Turner’s assertion that a lot of what Wall Street and the City do is “socially useless.” And a transactions tax could generate substantial revenue, helping alleviate fears about government deficits. What’s not to like?

The main argument made by opponents of a financial transactions tax is that it would be unworkable, because traders would find ways to avoid it. Some also argue that it wouldn’t do anything to deter the socially damaging behavior that caused our current crisis. But neither claim stands up to scrutiny.

On the claim that financial transactions can’t be taxed: modern trading is a highly centralized affair. Take, for example, Tobin’s original proposal to tax foreign exchange trades. How can you do this, when currency traders are located all over the world? The answer is, while traders are all over the place, a majority of their transactions are settled — i.e., payment is made — at a single London-based institution. This centralization keeps the cost of transactions low, which is what makes the huge volume of wheeling and dealing possible. It also, however, makes these transactions relatively easy to identify and tax.

What about the claim that a financial transactions tax doesn’t address the real problem? It’s true that a transactions tax wouldn’t have stopped lenders from making bad loans, or gullible investors from buying toxic waste backed by those loans.

But bad investments aren’t the whole story of the crisis. What turned those bad investments into catastrophe was the financial system’s excessive reliance on short-term money. As Gary Gorton and Andrew Metrick of Yale have shown, by 2007 the United States banking system had become crucially dependent on “repo” transactions, in which financial institutions sell assets to investors while promising to buy them back after a short period — often a single day. Losses in subprime and other assets triggered a banking crisis because they undermined this system — there was a “run on repo.”

And a financial transactions tax, by discouraging reliance on ultra-short-run financing, would have made such a run much less likely. So contrary to what the skeptics say, such a tax would have helped prevent the current crisis — and could help us avoid a future replay.

Would a Tobin tax solve all our problems? Of course not. But it could be part of the process of shrinking our bloated financial sector. On this, as on other issues, the Obama administration needs to free its mind from Wall Street’s thrall."

Harvard's Rodrik speaks out about the "casino known as global finance"

"Something happened in late August that I never thought I would see in my lifetime. A leading policymaker in the Anglo-American empire of finance actually came out in support of a Tobin tax – a global tax on financial transactions.

The official in question was Adair Turner, the head of the United Kingdom Financial Services Authority, the country’s chief financial regulator. Turner, voicing his concerns about the size of the financial sector and its frequently obscene levels of compensation, said he thought a global tax on financial transactions might help curb both.

Such a statement would have been unthinkable in the years before the sub-prime mortgage meltdown. Now, however, it is an indication of how much things have changed.

The idea of such a tax was first floated in the 1970’s by James Tobin, the Nobel laureate economist, who famously called for “throwing some sand in the wheels of international finance.” Tobin was concerned about excessive fluctuations in exchange rates. He argued that taxing short-term movements of money in and out of different currencies would curb speculation and create some maneuvering room for domestic macroeconomic management.

The idea has since become a cause-célèbre for a wide range of non-governmental organizations and advocacy groups that see in it the double virtue of cutting finance down to size and raising a big chunk of revenue for favored causes –foreign aid, vaccines, green technologies, you name it. It has also been endorsed by some French (predictably!) and other continental European leaders. But, until Turner mentioned the idea, you would not have been able to identify a single major policymaker from the United States or the UK, the world’s two leading centers of global finance, with anything nice to say about it.

The beauty of a Tobin tax is that it would discourage short-term speculation without having much adverse effect on long-term international investment decisions. Consider, for example, a tax of 0.25% applied to all cross-border financial transactions. Such a tax would instantaneously kill the intra-day trading that takes place in pursuit of profit margins much smaller than this, as well as the longer-term trades designed to exploit minute differentials across markets.

Economic activity of this kind is of doubtful social value, yet it eats up real resources in terms of human talent, computing power, and debt. So we should not mourn the demise of such trading practices.

Meanwhile, investors with longer time horizons going after significant returns would not be much deterred by the tax. So capital would still move in the right direction over the longer term. Nor would a Tobin tax stand in the way of financial markets punishing governments that grossly mismanage their economies.

Moreover, it is undeniable that such a tax would raise a great deal of money. Revenue estimates for a small tax on international currency transactions run into hundreds of billions of dollars per year. The receipts would be even greater if the base is extended, as was implied by Turner, to all global financial transactions. Whatever the precise amount, it is safe to say that the numbers in question are huge – larger than, say, foreign-aid flows or any reasonable assessment of the gains from completing the Doha Round of trade negotiations.

Predictably, Turner came in for severe criticism from City of London bankers and the British Treasury. Much of that criticism misses the mark. A Tobin tax would raise the cost of short-term finance, some argued, somehow missing the point that this is in fact the very purpose of a Tobin tax.

Others argued that such a tax fails to target the underlying incentive problems in financial markets, as if we had an effective, well-proven alternative to achieve that end. It would threaten the role of London as a financial center, some complained, as if the proposal was meant to apply just in London and not globally. It can easily be evaded by relying on offshore banking centers, some pointed out, as if not all financial regulations face that very same challenge.

In any case, as Dean Baker of the Center for Economic and Policy Research in Washington observed, there are many imaginative ways in which a Tobin tax could be made harder to dodge. Suppose, he argues, that we give finance workers who turn in their cheating bosses 10% of the receipts that the government collects. That would be quite an incentive for self-monitoring.

What the Tobin tax does not do is help with longer-term misalignments in financial markets. Such a tax would not have prevented the US-China trade imbalance. Neither would it have stopped the global saving glut from turning into a ticking time bomb for the world economy. It would not have protected European and other nations from becoming awash in toxic mortgage assets exported from the US. And it would not dissuade governments intent on pursuing unsustainable monetary and fiscal policies financed by external borrowing.

For all of these problems we will need other macroeconomic and financial remedies. But a Tobin tax is a good place to start if we want to send a strong message about the social value of the casino known as global finance."

Financial industry gears up to fight

A tax on securities transactions is quietly moving ahead in Congress, even as the securities industry gears up for an all-out war against it.

On December 23, with little fanfare and while public attention was focused on passage of healthcare reform, U.S. Sen. Tom Harkin, D-Iowa, introduced S 2927, a bill that would impose a $150-billion-a-year tax on securities transactions. The bill is similar to H.R. 4191, a bill titled “Let Wall Street Pay for the Restoration of Main Street Act of 2009,” introduced on December 3 by U.S. Rep. Peter DeFazio, D-Ore.

Harkin’s bill is co-sponsored by Senators Bernie Sanders, Ind.-VT, Sheldon Whitehouse, D-RI, and Sherrod Brown, D-Ohio, while DeFazio’s co-sponsors are 27 other Democrats.

Harkin and DeFazio worked together to draft the bills, which will now be taken up by the Senate Banking Committee, and House Ways and Means.

The rationale for the controversial tax was laid out last month, in a joint press conference held by Harkin and DeFazio. They said that the goal is to deter high-volume speculators and raise $150 billion for the government. The money could go to job creation and helping the middle class, the legislators said.

Both the House and Senate bills would impose a tax that is applied to stock transactions at a rate of 0.25 percent, plus an 0.02 percent tax on futures, an 0.02 percent tax on futures contracts, swaps, credit default swaps, and on options at the rate of the underlying asset.

Congressional supporters of the legislation say it is aimed at making it clear to constituents that they know Main Street is suffering, and that a restored Wall Street should now share its recovery with everyone else.

But such arguments are being drowned out by a tsunami of industry opposition. Vocal opponents include the Security Traders Assn. (STA), the Securities Industry and Financial Markets Assn. (SIFMA), the Investment Company Institute (ICI), and the U.S. Chamber of Commerce.

Traders don’t like it because they say it would have a major impact on high-frequency trading – namely, that if high-frequency traders are taxed, they will exit the business as their razor-thin margins turn to losses.

“The concept is dangerous generally, because there is an incredible need for revenue,” says David E. Franasiak, head of financial services at the law firm Williams and Jensen, which represents the STA. Still, he says, “I don’t think [the idea] is going to go away.”

Appeals to Main Street

On the STA’s advocacy site, it says that “Wall Street and Main Street are not separate entities,” and that the tax would be passed through to Main Street investors, “the very people that the creators of this bill claim they are trying to protect.”

“To tax the average investor just to build roads seems to be a bit of a disconnect,” adds Franasiak. “The problem belies the reality of how much Main Street is tied to the stock market.”

The STA argues that the vast majority of Main Street investors invest via managed accounts and mutual funds, and the tax would be passed through to those investors.

“A transaction tax on nearly all securities is the wrong policy at the wrong time,” says Kenneth E. Bentsen, Jr., SIFMA’s EVP for public policy and advocacy. Bentsen argues that the tax would raise the cost of capital, and “tax everyday investors at a time when the economy remains fragile and assets are just beginning to regain value.”

The ICI, the main trade association for mutual funds, has entered the fray as an opponent of the tax. In a December 16 speech at the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, ICI President Paul Schott Stevens said that the “effort to punish Wall Street is going to damage Main Street instead.”

Despite the fact that the legislation carries exemptions for purchases and sales of mutual funds, pensions and retirement accounts, and trading activity of less than $100,000 a year, Stevens maintains that it still taxes the funds’ trading on investors’ behalf in stocks and derivatives. If the tax had been in place in 2008, Stevens says that “the tax burden would have been equivalent to one-third of the total expenses of equity index funds.”

He also warns it could spawn a whole new industry – financial engineering dedicated to avoiding the tax.

On the other side, Damon Silvers, policy director at the AFL-CIO, which supports the tax, says that it would provide sorely needed help in reducing the federal deficit. Speaking on the Public Broadcasting System’s Nightly Business Report, Silvers said that DeFazio's proposal would generate $150 billion in annual revenue to “in short order pay back what deficit spending is necessary in the short run.”

The STA is not deterred. Says Franasiak, “It [the legislation] will have to be debated, and ultimately be defeated – not taken up in committee, or passed in one House [of Congress] and not picked up by the second.”

If the activity of speculators creates distortions

  • Source: Tobin tax and market depth, G. Ehrensteina , F. Westerhoffb and D. Stauffera, Institute for Theoretical Physics, Cologne University and the Department of Economics, University of Osnabruck, November, 2003

Since the mid 1980s, the daily turnover in financial markets has increased sharply. Moreover, the trading volume increasingly reflects very short-term and speculative transactions. In foreign exchange markets, for example, operations of intraday traders account for 75 percent of the market volume (Bank for International Settlements 2002).

In comparison, only 15 percent of the trading volume is on account of non-financial customers, with international trade transactions representing merely 1 percent of the total. The fast and hectic trading leads to complex financial market dynamics.

According to Cont (2001) and Lux and Ausloos (2002), the behavior of financial prices may be characterized by five universal features:

  1. the evolution of the prices shows little pair correlations between successive daily changes,
  2. severe bubbles and crashes occasionally emerge,
  3. the prices fluctuate strongly,
  4. the distribution of log price changes possesses fat tails, and
  5. periods of low volatility alternate with periods of high volatility.

Two competing views exist about the efficiency of financial markets.

The efficient market hypothesis states that prices reflect their fundamental values. Thus, the statistical features of asset price changes are fully explained by those of the underlying fundamental process. For instance, volatility clustering arises since the intensity of news alternates over time. Extreme price changes reflect the arrival of very important new information.

However, it is hard to imagine that the aforementioned stylized facts are fully caused by an exogenous news process.

Models with heterogeneous interacting agents seem to describe the working of financial markets more realistically than the traditional neo-classical paradigm. For instance, in Palmer et al. (1994), Kirman (1991), Brock and Hommes (1998), Cont and Bouchaud (2000), Lux and Marchesi (2000), or Farmer and Joshi (2002), the dynamics is mainly driven endogenously through the activity of boundedly rational speculators.

Complicated dynamics may arise due to non-linear trading strategies, switching between different types of predictors, or social interactions such as herding behavior.

Clearly, these models indicate that financial markets may not be efficient.

If the activity of speculators creates distortions, it is interesting to ask whether there exist any means to regulate these markets.

Recently, several models with heterogeneous interacting agents have been applied as computer laboratories to explore whether certain policy measures may stabilize financial markets.

Note that such simulation experiments have the advantage that they allow the exploration of a certain policy in a well-defined and controlled environment.

For instance, one can control for all kinds of random shocks, measure the policy objectives precisely and produce as many observations as required.

The focus of this paper is how the Tobin tax affects foreign exchange markets.

As early as 1972, Tobin (1978) suggested imposing a uniform tax of around 1 percent on all currency transactions in order to curb speculation.

Nowadays, a tax rate of between 0.05 and 0.5 percent is being discussed (Eichengreen et al. 1995, Haq et al. 1996, Frankel 1996, Mende and Menkhoff 2003).

Supporters of Tobin’s proposal claim that a transaction tax favors long-term investments over short-term investments.

Note that around 80 percent of the daily speculation trade takes place because traders would like to take advantage of profits below the 10−3 border.

The effect of a small tax rate could therefore be quite strong.

On the other hand, a low tax rate should not harm firms engaged in international trade. Advocates of the Tobin tax also argue that such a device could also raise a substantial amount of tax revenues."

Background on the tax

A Tobin tax is the suggested tax on all trade of currency across borders.

Named after the economist James Tobin, the tax is intended to put a penalty on short-term speculation in currencies. The original tax rate he proposed was 1%, which was subsequently lowered to between 0.1% and 0.25%.

On August 15, 1971, Richard Nixon announced that the US dollar would no longer convert to gold, effectively ending the Bretton Woods system. Tobin suggested a new system for international currency stability, and proposed that such a system include an international charge on foreign-exchange transactions.

The idea lay dormant for more than 20 years and was revived by the advent of the south east Asia economic crisis in the late 1990s.

In 1997 Ignacio Ramonet, editor of Le Monde Diplomatique, renewed the debate around the Tobin tax with an editorial titled "Disarming the markets".

Ramonet proposed to create an association for the introduction of this tax, which was named ATTAC (Association for the Taxation of financial Transactions for the Aid of Citizens).

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.

Bio of James Tobin

"At the age of 84, James Tobin died in New Haven, Connecticut.

From the many obituaries, the titles of a few are listed here along with some of the major details about Tobin's life and career.

In addition, a list of books by and about Tobin that are available in the Western Libraries is provided for your convenience.

Among the more interesting accounts of his life see:

  • "Economist Built on the Work of Keynes," in The Times, March 22, 2002, p.14;
  • "Obituary: Professor James Tobin," The Independent, March 14, p.6 (this one was written by one of Tobin's graduate students) and
  • "James Tobin, Nobel Laureate in Economics and an Adviser to Kennedy, Is Dead at 84," by Holcomb B. Noble, New York Times, March 13, 2002, p.B10.

In addition, there was a tribute to Tobin by Paul Krugman, "Missing James Tobin," March 12, 2002, p.A27.

For a brief essay see "Finance And Economics: A Worldly Philosopher; Economics Focus; The Economist, London; Mar 16, 2002; pg. 91 which is provided here.

The obituaries are available via Lexis/Nexis.

At this time, Professor Tobin's home page is still available at Yale and it includes a biographical sketch and vita - see here.

Brief biographical details:

TOBIN was born in Champaign, Illinois, in 1918. His father was a publicity director at the University of Illinois and his mother was a social worker. She told him tales of the suffering caused by unemployment and he noted later that the Depression had marked him profoundly. "It was clear that a lot of things that were wrong with the world had a lot to do with economics," he recalled.

Tobin was an undergraduate at Harvard in the '30s when the university's economics department included Joseph Schumpeter and Alvin Hansen. During this time he was introduced to the ideas of Keynes, who had just published his book The General Theory of Employment, Interest and Money (1936), which advocated government intervention in the economy. Tobin's undergraduate thesis, which explored similar issues, was broadly supportive of Keynes, though it was critical of some of his methods, and he remained wedded to Keynes's theory throughout his career.

Tobin graduated in 1939. In 1941 he joined the office of price administration as an economist, and after the Japanese attack on Pearl Harbor he enlisted in the navy.Tobin finished his naval duty after four years on the destroyer Kearny in the Atlantic and the Mediterranean.

Having returned to Harvard, he completed his doctorate in 1947 before spending three years as a junior fellow in the Society of Fellows and moving to Yale in 1950. In the early '50s he edited two economics journals, Econometrica and the Review of Economic Studies, and he became a professor at Yale in 1955. From 1957 until 1988 he served as Sterling professor of economics. (During the '70s he created a short-lived student loan program at Yale with Milton Friedman.)

The "Tobin Tax"

"Tobin first floated the idea in the early '70s and the idea was received enthusiastically by development agencies. But in recent years anti-globalisation groups have favoured the implementation of the Tobin tax to reduce poverty in developing countries. Tobin, however, distanced himself from the proposals. "I have been hijacked," he said last year. "I have nothing in common with this revolution against globalisation." He supported free trade as the best means of increasing prosperity in developing countries and felt that institutions such as the World Bank and the International Monetary Fund should be strengthened. But, even before his death, anti-globalisation groups had planned to publicise their aims by labelling March 13 Tobin tax day."

His Legacy

Paul A. Samuelson, a professor emeritus at the Massachusetts Institute of Technology, called Dr. Tobin "the leading macroeconomist of our generation."

Books by James Tobin in the Western Libraries (in reverse chronological order)

  • Economic Events, Ideas and Policies: The 1960s and After
  • Full Employment and Growth: Further Keynesian Essays on Policy
  • Essays in Economics: National and International
  • The Tobin Tax on International Monetary Transactions
  • The Other Side of the Coin: Acceptance Paper
  • Money, Macroeconomics, and Economic Policy: Essays in Honor of James Tobin
  • Two Revolutions in Economic Policy: The First Economic Reports of Presidents Kennedy and Reagan
  • Policies for Prosperity: Essays in a Keynesian Mode
  • "Reaganomics After Five Years"
  • Macroeconomics, Prices, and Quantities: Essays in Memory of Arthur M. Okun
  • Essays in Economics, Theory, and Policy
  • Asset Accumulation and Economic Activity: Reflections on Contemporary Macroeconomic Theory
  • The New Economics, One Decade Older
  • Essays in Economics
  • Welfare Programs: An Economic Appraisal
  • Studies of Portfolio Behavior
  • Financial Markets and Economic Activity
  • Risk Aversion and Portfolio Choice
  • The Intellectual Revolution in U.S. Economic Policy-Making
  • National Economic Policy: Essays


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