Financial Transaction Taxes have recently risen to prominence since Germany, France and most recently the UK have endorsed the proposal. There is understandable confusion over exactly what this term implies – often fuelled by media portrayals describing all Financial Transaction Taxes as Tobin taxes. Here we attempt to unpack these sometimes tangled ideas.
Financial Transaction Taxes
The proposal for a Financial Transaction Tax that recently hit the headlines is a broad levy applied to various categories of financial transactions including: stocks, bonds and currency. Its motivation is to both regulate the market and produce revenue. The proposed rate is 0.05%. Crucially, it would require universal participation in order to work. And its projected revenue has been estimated to be US$600-700 billion a year if implemented on a global basis.
The most important thing to say about Financial Transaction Taxes is that they are commonplace. They exist on stocks, corporate bonds, government bonds and futures. In Argentina for instance, they have been applied on all of the above since 2000 at 0.6%, and they already exist in the US where they are used to pay the operating costs of the Securities and Exchange Commission.
The taxing of share transactions is particularly widespread. They exist in countries such as Austria, Belgium, India and the UK. In the latter case the rate is 0.5%, generating a revenue of almost £10 billion in 2005.
Tobin Tax
Addressing the Tobin tax itself, let us first note that a primary source of confusion is that the media is often guilty of describing all Financial Transaction Taxes as Tobin taxes. In fact, the Tobin tax historically refers to a levy on currency transactions. A further confusion is that there are three distinct Tobin taxes, or for better understanding, three different currency transaction levy (CTL) proposals.
1) Initially, there was James Tobin’s original idea from the 1970s of a 1% levy. The measure, by making currency transactions more expensive, favoured trading in goods and services, intending to price out speculative activity. The motivation for this was regulation of the market, not to raise revenue.
2) A second version of the idea emerged in the late 1990s in response to the South East Asia crisis. Here the collapse of the Asian Tiger economies was made much worse by aggressive currency speculation by powerful financial actors. An even higher rate CTL was proposed, at potentially far greater than 1%, to prevent this kind of behaviour by simply making it unprofitable to trade the currency under attack. Here again the motivation was regulation, not revenue.
3) Since 2005 a much smaller rate currency levy has been proposed specifically to raise revenue for global public goods. Its aim is to take advantage of the enormous volume of today’s foreign exchange market. The proposed rate is 0.005%. This low rate is designed not to distort normal market activities. Its motivation is to raise revenue and not to regulate. And the potential income it could produce is in excess of US$30 billion per annum. To read more about this modern conception of a Currency Transaction Levy, click here.
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