Home > Economics - General > Time for a Tobin tax

Time for a Tobin tax

October 5th, 2011

There’s been a lot of discussion about the need for concrete demands from the #AmericanAutumn #OccupyWallStreet protests.

I just want to toss up the wholly unoriginal idea of a tax on financial transactions, originally proposed by James Tobin (he focused on international transactions, but the distinction is no longer meaningul). I’ve seen a sign advocating this on one of the videos of the protest, but I think it deserves more attention, for a bunch of reasons

* It’s directed squarely at Wall Street

* It’s global in its orientation

* It doesn’t require complicated structural change, as would a return of Glass-Steagall

* There’s an existing global movement supporting it

* It’s on the elite policy table right now, with support from the EU

* It would potentially raise substantial revenue, while greatly reducing the volume of short-term financial transactions

Here’s a  a piece I wrote about not long ago in Politics and Society and an older article on the Tobin tax, and over the fold some notes I prepared for our Parliamentary Library a few years back

1. The issues of whether volatility is excessive and  of whether a tax is likely to reduce volatility are presented as separate, but in fact they are closely linked. Models  of specualtion that imply that current levels of volatility are justified by changes in fundamentals also imply that a small tax will have very little effect on volatility. Conversely most models of excess volatility imply that a tax would reduce volatility. Although no final econometric resolution is likely, it is certainly true that volatility is far in excess of the levels anticipated by supporters of financial deregulation. In my view, the evidence favours the excessive volatility hypothesis and therefore the view that a tax would reduce volatility.

2. At different times leading economists have proposed taxes on different classes of financial transactions. For example, Stiglitz proposed such a tax on domestic security markets and Tobin on international currency transactions. Because of the ease with which one type of transaction can be substituted for another (for example, international interest rate futures for international currency transactions), the most effective and least distorting tax regime would be one which applied at a low rate to all financial transactions.
3. The effective tax base for such a tax is the financial services sector. On the broadest definition this covers around 12 per cent of GDP, but the component concerned with large-scale financial transactions is smaller (perhaps 4 per cent of GDP). Household transactions are already tax through financial institutions duty etc. Exposing financial services to effective tax rates similar to those of the luxury manufactured goods sector (say an effective tax rate of 25 per cent) would imply a tax yield of around 1 per cent of GDP or up to $4 billion a year. This estimate appears to be broadly consistent with estimates of around $100 bn/year for the world as a whole derived from the volume of transactions, after reductions in the volume of speculative transactions are taken into account.

4. The desirability of making a rapidly expanding sector of the economy (in the view of a significant group of economists, over-expanded) bear a reasonable share of the tax burden is an important argument for considering tax measures of this kind. On theoretical grounds a unit transactions tax is to be preferred to alternatives such as the imposition of a GST-style tax on bank margins.

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  1. Ernestine Gross
    October 7th, 2011 at 12:54 | #1

    @Chris Warren

    Your posts are always a challenge for me because of the word ‘capitalism’. Some time back, JQ wrote a post in which he talked about various interpretations of the word ‘capitalism’, including ‘financial capitalism’. So, I don’t have a problem when he uses the word. By contrast, I have no idea what it is that should change to satisfy your implicit and explicit demand for the abolishment of ‘capitalism’. I try to avoid using the ‘ism words as much as possible.

    Now to your questions.

    1. “I suppose economics is concerned with efficient resource allocation and finance with efficient capital allocation – but where is society??

    I do not know one theoretical model where the notion of ‘efficient resource allocation’ is defined independent of ‘society’, although the term ‘society’ is not always used explicitly nor is the pretence made that all possibly aspects of every empirically observable group of people who say they constitute a ‘society’ is taken into account.

    2. “So would political economy be concerned with efficient social outcomes?”

    I can’t answer this question, not least because the term ‘political economy’ has possibly more meanings than what I am aware of. My personal take on this question is that the question suggests there is only one interpretation of ‘political economy’ and only one interpretation of what constitutes an ‘efficient social outcome’. If so, then the term ‘political economy’ conveys a message I don’t like. But, if the description of what constitutes an ‘efficient social outcomes’ were endogenously arrived at, say by means of shared values (philosophical base of a society) and the shared belief that institutions should be designed to contribute toward achieving the shared values, then political economies (plural) are interesting.

    3. “Is not the real problem, that efficient economic and capital allocation systems seriously conflict with efficient social outcomes?” Not necessarily.

    I can’t reply to your last question because of the difficulty I have with your terminology as indicated in the first paragraph. However, I can venture a guess. It seems to me your usage of the term ‘efficient market hypothesis’ is different from that in JQ’s book on zombie ideas and from my post(s) on this topic.

  2. may
    October 7th, 2011 at 13:41 | #2

    TerjeP :@may
    You can split hairs but either way it is effectively a tax. It raises revenue and it’s compulsory.

    if i want to drive a car on a public road i have to pay for a licence.

    but i can’t sell that licence.

    if i want to release carbon dioxide into the atmosphere i have to pay to do so and i can sell that permit and recover my money.

    how can this be called a tax?

  3. Chris Warren
    October 7th, 2011 at 13:50 | #3

    @Ernestine Gross

    You have hit the nail right on the head.

    If there are different concepts of capitalism, then everything gets blurred.

    John Quiggin’s definition 2002, is invalid:

    ‘Capitalism is a system where economic decisions are made in response to individual preferences as expressed through markets.’

    .

    If this was so, then contesting the EMH makes sense. And the errors we would need to address would be such as exposing the futility or nonsense of those holding onto Zombie ideas – John Quiggin’s project.

    However if market socialism is ‘…. a system where economic decisions are made in response to individual preferences as expressed through markets.’ then capitalism becomes:

    the expropriation of wealth by Capital from producers.

    If there is no such expropriation, then there is no capitalism.

    So what should change is precisely the amount of transparency, monitoring, understanding and regulation of this expropriation.

    The exclusion of many from society’s economy is probably more serious than a notion of a broad:

    every empirically observable group of people who say they constitute a ‘society’

    Poverty income levels, plus exclusion from the labour market and current employment, exclude many people from society’s economy. By definition, capitalist pricing will always exclude labour from ever being able to purchase their own products (unless they go into debt).

  4. Ernestine Gross
    October 7th, 2011 at 14:30 | #4

    @Chris Warren

    We may be moving a bit too far off topic, but I’ll make one more reply consisting of 2 points.

    1. I leave the meaning of ‘capitalism’ to the experts but I am pleased about the apparent improvement in communication.

    2. I concur with the first sentence in your last paragraph regarding observations on societies like ours. But I don’t agree with mixing up my comment on restrictions on the meaning of ‘society’ in theoretical models with observation on some contemporary (and past) societies. I don’t agree with the second sentence in your last paragraph because ‘expropriation of wealth’ is possible among people, each one of them is a ‘ producer’ (the term ‘capital’ is also a problem).

  5. Chris Warren
    October 7th, 2011 at 17:25 | #5

    @Ernestine Gross

    The meaning of capitalism is the core economic issue. You cannot operate as an economist without understanding this issue. This is fundamental to the GFC (and earlier Argentinian crisis, Asian crisis, and various other crisis such as the US S&L debacle).

    Of course expropriation of wealth is possible among people – but the mechanism fundamentally determines the nature of society. Eg with one pattern of expropriation you get Viking plunder, with another Roman and Egyptian slavery, with another you get feudalism, with another mechantilism, and then there is colonial slavery/exploitation and with another you get capitalism.

    Expropriation is not unique to capitalism – but the form capitalist expropriation is uniquely characterised by structural crisis tendencies once countervailling tendencies have been exhausted.

    I actually rank the quality of Australian economists purely on the basis of their understanding of the political economy of capitalism, and to the extent they recognise the need for a welfare state under capitalism.

  6. Ikonoclast
    October 7th, 2011 at 20:17 | #6

    I resort to the Wikipedia these days. It seems to be “The People’s Encyclopedia”.

    “Capitalism is an economic system in which the means of production are privately owned and operated for profit, usually in competitive markets.[1] There is no consensus on the precise definition of capitalism, nor on how the term should be used as a historical category.[2] There is, however, little controversy that private ownership of the means of production, creation of goods or services for profit in a market, and prices and wages are elements of capitalism.[3]” – Wikipedia.

    This definition seems both specific enough and broad enough to end scholastic debates about the definition of capitalism.

    It’s pretty simple really. Capitalism IS theft. A proportion of the value of the workers’ work is stolen, by the capitalist. The capitalist does nothing to earn this new capital other than invest previous capital which was also stolen. Capitalism is un-democratic and anti-democratic. Possession of wealth (in the form of private ownership of the productive apparatus) confers power to exploit workers and power to subvert trends to democracy. Capitalism will collapse when it has depleted non-renewable resources and substantially destroyed the biosphere’s “holocene benignity”. Communism, at least as practiced in the Soviet Union and Red China, was and is a failure also. Humanity is too flawed to make any good system.

  7. Ikonoclast
    October 7th, 2011 at 20:19 | #7

    I resort to the Wikipedia these days. It seems to be “The People’s Encyclopedia”.

    “Capitalism is an economic system in which the means of production are privately owned and operated for profit, usually in competitive markets.[1] There is no consensus on the precise definition of capitalism, nor on how the term should be used as a historical category.[2] There is, however, little controversy that private ownership of the means of production, creation of goods or services for profit in a market, and prices and wages are elements of capitalism.[3]” – Wikipedia.

    This definition seems both specific enough and broad enough to end scholastic debates about the definition of capitalism.

    It’s pretty simple really. Capitalism IS theft. A proportion of the value of the workers’ work is stolen, by the capitalist. The capitalist does nothing to earn this new capital other than invest previous capital which was also stolen. Capitalism is un-democratic and anti-democratic. Possession of wealth (in the form of private ownership of the productive apparatus) confers power to exploit workers and power to subvert trends to democracy. Capitalism will collapse when it has depleted most non-renewable resources and substantially destroyed the biosphere’s “holocene benignity”.

  8. Chris Warren
    October 7th, 2011 at 22:17 | #8

    @Ikonoclast

    I agree with this. But there is a little bit of hair-splitting.

    Other forms of economy were also based on theft from others. It is true that capitalism is theft, but there is something more specific about how this occurs under capitalism, compared to (for example) fuedalism.

    For most, the element of theft is very hidden within market relationships.

  9. Freelander
    October 8th, 2011 at 06:25 | #9

    Ernestine Gross :The title of JQ’s paper, “Financial markets: masters or servants?” conveys the crux of the matter. In one line the crucial difference between Economics and Finance is made clear.
    Economics is concerned with efficient resource allocation while Finance is concerned with ‘efficient capital allocation’. …
    …At the August 2011 Lindau meeting, Martin Hellwig (another mathematical economist, who contributed to the understanding why the efficient market hypothesis is nonsense) opined that the period leading up to the GFC (‘great moderation’) has resulted in significant misallocation of resources and that the fundamental problems are still not being addressed. Another speaker at the GFC crisis session saw analytical failure in much of the prevailing ‘economics’ during this period as a major problem. At the same meeting, Joe Stiglitz talked about the need for ‘circuit breakers’ (ie international rather than global). Who could argue against these statements except Zombie Idea defenders?
    Thoroughly enjoyed your article, JQ. Yet another piece toward providing a ‘circuit breaker’ in the global dissemination of zombie ideas.

    Good comment. Sadly, as well as failure to make those distinctions, many who think they’re economists knowadays talk as if both economics and finance are about nothing but making a profit – the larger the profit, the more efficient and better the social outcome must be.

  10. Freelander
    October 8th, 2011 at 19:52 | #10

    “CHART OF THE DAY: Corporate Efficiency Is Getting Absurd”

    http://www.businessinsider.com/chart-of-the-day-corporate-efficiency-is-getting-absurd-2011-8

    Another confusion of efficient outcome. Following this logic slavery must have been the most efficient of all!
    Otherwise, quite a shocking graph.

  11. Glenn Condell
    October 12th, 2011 at 16:15 | #11
  12. Jarrah
    October 12th, 2011 at 16:22 | #12

    “Capitalism IS theft. A proportion of the value of the workers’ work is stolen, by the capitalist. The capitalist does nothing to earn this new capital other than invest previous capital which was also stolen.”

    I’ll leave a response in the Sandpit.

  13. paul walter
    October 12th, 2011 at 23:46 | #13

    Jarrah, quite right and just scanned the other thread, agree it can be complex, given the mentality of the entrepreneur. Steve Jobs types can add through socially productive innovation and imagination, on the other hand you have the destructive scum that run brothels, a la 4Corners.
    I guess you’re looking for “wiggle room”, within the wider theory. It’s there. Might take another million years of evolution before conditions right for the facilitation of a genuinely rational mentality emerge, as a species not long down from the trees continues its erratic trudge away from the jungle and feudalism, with atavistic cultural remnants reinforcing a consciousless mentality, probably only eliminated slowly and painfully, or we expire as a species.
    Good to see brighter folk instigating some local solidarity for those “occupying” Wall St, btw.
    Capitalism needs to put to work for civilisation, not the other way round, or eliminated (at least in the current emotionally subjective, rigid and oligarchic form). It’s become an existential threat, full stop.
    Ps, that other thread IS a good thread, back for a more detailed look.

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