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.
John Quiggin 
yup
that’s it. Typical of our species. We’ll introduce an “appropriate” tax – just in time for it to have absolutely no effect.
the world will now see-saw down into a long decline and financial transactions will become a dwindling memory of past greatness as we will look to tax anything that moves even if it’s dying
a better idea is to tax TV – have every TV set record the time it is “on” and transmit its usage to a central system that then issues tax bills based on TV watched
that would cut down the amount of time wasted by millions of people sitting in front of a propaganda system that splits its focus between getting people mindlessly to buy junk they really don’t need and bombarding them with messages that the elite want them to support – like think just how unlikely the Iraq war would have been if Fox and its ilk had not spurred the western world into a fever of hatred and blood-lust
you’d kill two birds with one stone – raise tax revenues and lower expenditure – like we’d not have to fund an endless war on terror if there was little awareness of it and zero support
and, with all that wasted time channeling aggression and frustration on watching our war-like sports heavily reduced, people could instead turn their focus to thinking about what slimy things our leaders try to get us to support – people might, hang on, become, yes that’s it, strange as it might sound – “politically aware” of real issues not the packaged side tracking we are constantly exposed to
yes that’s it – a TV tax!
it will save the world and it’s globally applicable
pop
i’ve often wondered if the peak of population looms
and our time is bright but short just like a fleeting flower blooms
and maybe there’s no going back the tipping point’s been crossed
’cause we’re all of us the most we’ll be – peak people
http://thepeakoilpoet.blogspot.com/2011/08/peak-people.html
Volatility got lift off when we ended the gold standard. I’d rather go back to a gold standard than suffer under a tobin tax.
More correctly, it should be called a Keynes Tax. I am in favour of it. Excess speculation is an antisocial and unproductive activity.
“A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another. The tax is intended to put a penalty on short-term financial round-trip excursions into another currency…
In the development of his idea, Tobin was influenced by the earlier work of John Maynard Keynes on general financial transaction taxes:
I am a disciple of Keynes, and he, in his famous chapter XII of the General Theory on Employment Interest and Money, had already prescribed a tax on transactions, with the aim of linking investors to their actions in a lasting fashion. In 1971 I transferred this idea to exchange markets.[3][4]
Keynes’ concept stems from 1936 when he proposed that a transaction tax should be levied on dealings on Wall Street, where he argued that excessive speculation by uninformed financial traders increased volatility. For Keynes (who was himself a speculator) the key issue was the proportion of ‘speculators’ in the market, and his concern that, if left unchecked, these types of players would become too dominant.[8] Keynes writes:
Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation. (,[8] p. 104)
The introduction of a substantial government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.” – Wikipedia.
I’m all for it. Given the completely inflationary nature of currency speculation, this might bring some sanity back to the markets.
Put the money in something called, say, the World Development Fund, and give it out to developing nations that can demonstrate strong institutions/accountability, which in the medium term will help to make them attractive investment opportunities.
This is a really sensible and humanistic reform.
TerjeP: haha, yes, because returning to the gold standard won’t entail any suffering.
A tax on international transactions is by far the best option to protect welfare state capitalism and, in time, fund fossil fuel replacement.
It is supported by sensible capitalists such as Carnegie on Lateline last night
see: abc.net.au/lateline/content/2011/s3332317.htm
It was supported by some ALP members (eg John Langmore), and probably would be supported by unions, progressive parties, churches, community-based media, ACOSS and so on.
The lastest tax summit, saw greedy capitalists call for yet lower taxes on their incomes but when asked how the lost revenue would be recouped could only say:
Just give us more wealth and we’ll produce more growth which produces:
and
This is just jargon, the virtuous circle is in fact, ratcheting macroeconomic imbalances (from the 1960’s) and the fiscal dividend is more debt than cash and flows to the rich more than workers.
Naturally we are going to have to put-up with snide, misconstrued comments from Terge and PeakOilPoet and others. But so what.
I presume that a known, predictable, foreign transactions tax at a low tax rate, would have such a low impact that it would be dwarfed from the impacts of unpredictable, fluctuating exchange rates.
The only reason not to implement a international financial transactions tax is the baying from the right-wing capitalists, lobbyists, and media.
Even progressive capitalists know this is the way to go.
i guess that means Chris Warren did not like the idea of me putting a tax on his TV watching
but i guess that’s to be expected from someone who sees my comments as “snide” (i guess that’s a sign of a limited vocab eh or maybe he just likes that word – snide – rhymes with hide, pride, fried….)
deary me
my dear boy i was quite serious – that we would come around to a financial trx tax at this very late stage is like closing the barn door after the horse has bolted – it should have been introduced 15-20 years ago – not now – when we are staring down the barrel of a modern replay of what happened back during the great depression
if things turn to poo the globalisation (which is nothing more than the free flow of capital) will decline – perhaps drastically – taxing what’s left of financial activity will be like flogging the poor horses that did not flee – when it’s the wild ones out there free that should be getting their asses whipped (sic)
you really need to read more chappy – get a bigger picture of the world – this constant rigidity of thought is not a healthy thing
i’ll tell you first i’m not a Jew
a Muslim? No, i’m not that too
i’m not a Christian that’s for sure
a Buddhist? No, not any more
but i have always loved the Word
the Ten Commandments that i heard
when i was young i learned them well
and now i’m old i’ve this to tell
http://thepeakoilpoet.blogspot.com/2011/09/breaking-three-breaks-one-and-two.html
pop
@The Peak Oil Poet
Just ignore this stuff.
John
Stephen Grenville wrote in support of a Tobin Tax on the Lowy Institute’s blog yesterday:
http://www.lowyinterpreter.org/post/2011/10/04/The-Tobin-Tax-revisited.aspx
The Peak Oil Poet is a Vogon.
Ah, but Sam Wylie of Core Economics will tell you that no serious economist supports a Tobin Tax (That’s pretty much his whole argument).
The excessive volatility of recent times and the antipathy of the financial market to any kind of regulation despite the intrinsically dangerous nature of that volatility, means such a tax would be well worth while for everyone else. The difficulty would be to get enough consensus in the world to ensure that it was effective. However there are enough forums around to launch a proposal and to inch us towards this kind of device. It is worthwhile discussing it.
The TV watching scenario is just silly and not even poetic.
@Jill Rush
kill joy 😦
@Jill Rush
Is consensus really so important. This is the grand claim from business. They raise the spectre of huge capital flight to tax fee nations, but even with a unilateral international financial transactions tax, I wonder if this is a real problem. An offshore centre will still charge transactions fees or else they obtain no real benefit.
Capital is in Australia to combine with factors of production – so this useful capital will stay (or return when costs need to be covered – power, wages, rates, building, consumables etc).
A well designed policy should be able to address this. It could be that Capital flight is more political than economic.
with the high (really high)speed transactions done in bulk at millisecond speed just think of the benefit.
the razor thin margins of the financial skim machine would no longer be worth the odds and the market could possible revert to a place where goods and services regain their primacy in market transactions.
no wonder the financial skim machine “shriek machine”is in rev-up mode.
Didn’t Pauline Hanson suggest some form of Tobin Tax about 10 years ago?
May: Yep. And they’re running ye olde “it won’t work, but it’ll be really painful” a la carbon tax. Which is it, princesses? It can’t be both.
Successful speculation generally smooths the market. Speculators profit from volatility but in doing so they reduce it. If you want to dabble with incentives in order to smooth the markets then you need a tax that punishes speculators that make losing trades and rewards speculators that make winning trades. A tobin tax just penalises everybody irrespective of their virtue regarding smoothing effects.
p.s. If you want to smooth markets the empiracal evidence for transaction taxes being at all useful are pretty weak.
http://en.wikipedia.org/wiki/Tobin_tax#Empirical_studies
@Marisan
Yes Pauline championed a lot of leftwing lost causes when it came to her economic policies. She was hardly a proponent of free trade market liberalism.
Yes, its one of several small but significant measures that turned up again as suggestion, for more efficient commerce and economics.
In the wake of the Meltdown and studiously avoided during all the conferences and summits in the wake, it was left in a folder some where, lest capitalism of the Goldmann Sachs type be forced to any accomodation of reality, even in the monitoring- which is all the Tobin is meant to be, since it is suggested at a rate that wouldn’t trouble an African refugee, let alone Murdoch or the Koch bros.
A Tobin tax does not penalise everybody. It subtracts a sliver from international transactions to fund huge welfare gains for others. The little unhappiness for speculators will not exceed the happiness of those needing assistance in society today.
If you tax $1000 on a million dollars as it crosses borders, and use it to (for example) provide dental needs for the unemployed, or fund Xmas gifts, the net gain for society is positive.
Whether is reduces volatility (an old argument) is not so relevant. Debt expansions, inflation and ballooning derivatives, stockmarket movement plus underlying exchange rate volatility probably cause greater movements. Total volatility, and changes in volatility, are likely greater than any attributable to a 0.1% (or 0.5%) tax on travelling capital.
The argument for a Tobin Tax is more moral and ethical than commercial and cannot be derailed by commercial scaremongering.
OT.
why is a carbon price that is openly traded called a tax?
is the price taxed?
small brain confusion.
Pauline Hanson’s proposed EasyTax was levied at an order of magnitude higher that than that proposed here, IIRC.
May:
It’s not traded yet. It’s just taxed at $23/tonne for the time being (Ken Henry proposed $26).
It switches over to being an ETS in 2015.
@Dan
but if it is to be traded ,how can it be a tax?
@may
You can split hairs but either way it is effectively a tax. It raises revenue and it’s compulsory.
An ETS is NOT a carbon tax. I am happy to cal lit a tax though.
A Tobin tax is fantastic theoretically but impossible to put into practice.
Once one nation doesn’t implement it then it fails
KB, I’m not sure about that. There may be other reasons to do business in the countries that have the tax.
This is a canard. Capital always flows where it obtains the best long-term return. A tax on international transactions will tax capital as it flows out to escape a tax, and if it stays out, it looses its claims to Australian economic growth and presumably this absence will provide plenty of opportunities for remaining Australian capital to flourish. Where-ever capital goes, it will still be hit by local fees and government requirements. Sensible businesses do not really want to duplicate such fees and accounting requirements.
A short-term capital flight essentially will be a politically driven flight. In the long-run enough new funds will be available to underpin the welfare state.
The trick is to have a low tax rate so it is not worth Capital incurring transactions costs and new fees and administration by settling in some other jurisdiction particularly where long-term investment opportunities are second best. If the overseas investment opportunities were better – capital will already be there.
The capital that is most likely to take flight is the more volatile overseas-owned capital. This capital is already paying most of its dividends overseas anyway. So if it leaves, it will need to sell its Australian assets, which will benefit Australian enterprises. Dividends from these assets and production will now be paid in Australia, unless an alternative capitalist (not undertaking flight) purchases them.
In all cases where capital flight is political, flying capital loses out. It separates itself from its own preferred occupation and ends up having to pay fees and charges and administration in jurisdictions it had no intention of paying, and having to look for fresh investment opportunities it would rather not have to move too.
Any capital flight will provide an opportunity for Aussie Bonds to make up any absence – because the labour, raw materials, factories, skills and infrastructure are still in Australia.
Chris capital flows from where?
From workers.
Ok, now that I’ve seen who is against the Tobin tax, I am definitely for it 🙂
Wouldn’t people be able to create a shadow market and a derivative that netts out shadow transactions up to an expiry date, so that the final payout cops only a single tax event? The frequency of tax events in the real market, and the size of the tax per transaction, if large enough, would provide the incentive for shadow markets to be created. OTC derivatives already flourish with little regulatory oversight (OTC, after all), so what’s stop this sort of behaviour?
As with most of my off-the-top-of-the-head ideas this probably has more holes than a collander; if such financial instruments came to being, however, it would be an interesting shaper of volatility in the real markets. Perhaps it would provide the illusion of a lower volatility in the same manner that the credit derivatives hid credit risk by either transforming it, or moving it “off-market” via OTC mechanism. Perhaps it would lift volatility during “normal trading periods” whilst reducing it in “abnormal trading periods”; in this case it might be a good thing, or at least not worse than nothing.
Anyway, on a different tax issue: isn’t it high time that negative gearing on property got removed? And what about baby bonuses? Can we really afford it? Wouldn’t it be better applied to health services for the living, or as an overall reduction in taxes?
Here’s an interesting article that’s just appeared on the online journal PLoS ONE: Serotonin Transporter Genotype (5-HTTLPR) Predicts Utilitarian Moral Judgments. The finding fits with previously observed relationships found with people taking SSRI drugs.
http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0025148 (open access)
They found a single gene that influences the individual’s moral appraisal of utilitarian decisions that harm one individual to protect others, eg, diverting a tolley car to kill one rather than five people.
It would be interesting – to me, at least – to see how this gene plays out in the Tobin tax debate, among other issues. All I need is a DNA sequencer and some tissue samples and consent forms 🙂
This is, of course, a single result but I’m guessing we will see many more. Overall, these discoveries offer a “orthogonal” take on a variety of moral and political debates.
workers in WHICH country?
@Chris Warren
yeh, from workers like us to leeches like you
right?
or surprise me and tell us all that you generate a lot of revenue (or have ever done so – ever)
and are not slurping your life from the backs of others
i very very much doubt you have ever generated an honest dollar of your own
but a CV would suffice to prove me wrong – a CV with you generating wealth and not consuming someone else’s
pop
Sure. And the law that establishes the tax will contain loopholes for Goldman Sachs.
No truly problem-solving laws will ever be passed by a Congress that is legally bought and paid for by the interests who like things just the way they are.
@KB Keynes
I am not following you.
However Australia has a high income deficit, so presumably some capital flows out of Australia, but some also flows in.
Similarly with debt – one country can owe another billions, but at the same time be owed billions eg: Spain owes Italy $31 billion but Italy owes Spain $47 billion.
If we tax all moving capital across our borders, it is a secondary issue where it goes or where it comes from, or who owns it.
Capital flows go via foreign exchange markets.
do you think they would be situated in countries that have the tax?
That depends on the size of the tax. A single country tax would only be able to tax funds flowing across borders – not transactions in offshore foreign exchange markets.
Foreign parties holding Australian dollars offshore, and buying and selling Australian dollars offshore are not subject to any Australian tax.
As I said several posts above – funds crossing borders can be taxed. The extra circulation through foreign exchange markets is not visible to Australian monitoring, so cannot be taxed.
Although if there was sufficient international agreement and machinery, even this may change.
Responding to some comments:
Tobin tax spruikers regularly talk about the good the revenue raised by the Tobin tax could do when spent (on poverty, etc). This is true, but it a separate question to whether we should have a Tobin tax. If a Tobin tax is a bad idea we could just use other better taxes to fund that useful spending.
The analogy is: the fact that you want to spend a lot of money gives you some idea of how much money you want to earn (how much revenue you want to tax), but it doesn’t help you choose between two jobs that pay the same amount (two taxes that raise the same amount).
Robert –
That analysis is fine if you are operating in a world of first best policy, or only hang out with earnest economics students. But lots of people implicitly factor in second best, political economy considerations in their arguments. So if you think (a) we should tax more, (b) a Tobin tax is a pretty decent way to do that, and (c) the Tobin tax is a good way to sell the said tax increase, it’s not obvious that the tax level and the tax mechanism can be or should be separated in political-policy discussion.
In other words, given political economy considerations, one might consider the [Tobin tax plus the tax increase we can get with that] is superior to other achievable tax bundle, tax level combinations – even if absent political economy considerations we could be even better off with a different tax mechanism.
On a similar vein, a very small tax on emails sent would not hinder ordinary people, but would ruin the business model of the spammers.
Jim – are you saying that with a little gene therapy social democrats can be cured of their disease? 😉
@Robert Wiblin
All tax spruikers talk about the good revenue raised by taxes do.
Tax revenues, and the use they are put, cannot be separated from whether we should have any particular tax or tax as a whole.
Peoples want to spend is effectively unlimited – the amount you want to earn is also relatively unlimited – the amount you earn is determined by a constellation of innate, social, labour market and economic factors.
If some taxes are bad ideas, then taxing foreign transactions may be a better way to obtiain revenue – but better than this, is to expand the existing tax base by including a tax on foreign transactions as this phenonema has increased since the 1960’s. Increased international flows are a feature of the post-Keating, deregulated environment.
There is certainly no need to choose between a international transaction tax and any other. They are not substitutes. The real driver is globalisation and taxing a growing aspect of globalisation helps future proof the economy.
@John Brookes
Yes because spammers always pay their taxes.
A global financial transaction tax would be ideal, but would require a very high level of international cooperation. Would such a tax being raised in a more limited amount of countries also be a good idea? How large would the group of countries need to be to manage the issue of leakage? If coverage were not universal, would it make sense to charge the tax at a lower rate that you would charge it if coverage were universal?
@Peter
A Tobin tax on the main currencies and in the main countries would probably be sufficient because those are the ones where the most benefit would be obtained from dampening the excess volatility and largely useless (but highly profitable) and otherwise dangerous shuffling of currencies for quick profit that goes on.
@James Booth
If they want to say that the Tobin tax is good because they want more revenue, and the Tobin offers the best trade off between good policy and political feasibility available at the moment, then OK. But it’s not usually presented that way.
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’. In theoretical models in Economics, an, ‘efficient capital allocation’ (if it exists) is an implication of an efficient resource allocation (if it exists), given a definition of the notion of ‘efficiency’ (there is more than one). By reversing the order one gets at least one zombie idea (the efficient market hypothesis).
JQ is a master in teaching methodology in an applied context. IMHO, this is not something one can learn from teacher development programs offered these days at Universities or reading volumes of empirical studies in Finance or the blog of a certain critic of JQ’s Zombie Ideas book. But curriculum design and university degree structures may be relevant.
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.
@Ernestine Gross
I suppose economics is concerned with efficient resource allocation and finance with efficient capital allocation – but where is society?
So would political economy be concerned with efficient social outcomes?
Is not the real problem, that efficient economic and capital allocation systems seriously conflict with efficient social outcomes.
It is rather easy to argue against claims of “misallocation”, “analytical failure”, “need for circuit breaker” etc. based on the recognition that these are just challenging symptoms and looking for placebo reforms and band-aids.
These are all subject to the underlying reality of capitalism. This reality is not visible to those who focus purely on the economic and financial – to the exclusion of political economy.
Once you strip out capitalism (or fuedalism) and have no debt – are we so sure that the efficient market hypothesis is nonsense? On what basis?