10 of the 17 eurozone countries have agreed to adopt a financial transactions tax (FTT), often known as a ‘Tobin tax’ after James Tobin who first proposed such a tax back in 1972. The European Commission has backed the proposal, which involves levying a tax of 0.1% on trading in bonds and shares and 0.01% on trading in derivatives.
The 10 countries, France, Germany, Austria, Belgium, Greece, Italy, Portugal, Slovakia, Slovenia and Spain, and possibly also Estonia, hope to raise billions of euros from the tax, which will apply whenever at least one of the parties to a trade is based in one of the 10 (or 11) countries.
On several occasions in the past on this site we’ve examined proposals for such a tax: see, for example: Pressure mounts for a Tobin tax (update) (Nov 2011), A ‘Robin Hood’ tax (Feb 2010), Tobin or not Tobin: the tax proposal that keeps reappearing (Dec 2009) and A Tobin tax – to be or not to be? (Aug 2009). Tobin taxes are also considered in Economics (8th ed) (section 26.3) and Economics for Business (5th ed) (section 32.4).
As we noted last year in the blog Is the time right for a Tobin tax?, the tax is designed to be too small to affect trading in shares or other financial products for purposes of long-term investment. It would, however, dampen speculative trades that take advantage of tiny potential gains from very short-term price movements. Such trades account for huge financial flows between financial institutions around the world and tend to make markets more volatile. The short-term dealers are known as high-frequency traders (HFTs) and their activities now account for the majority of trading on exchanges. Most of these trades are by computers programmed to seek out minute gains and respond in milliseconds. And whilst they add to short-term liquidity for much of the time, this liquidity can suddenly dry up if HFTs become pessimistic.
Supporters of the tax claim that it will make a major contribution to tackling the deficit problems of many eurozone countries. Critics claim that it will dampen investment and growth and divert financial business away from the participating countries. The following articles look at the arguments.
EU Commission backs 10 countries’ transaction tax plan Reuters, Jan Strupczewski (23/10/12)
EU ‘Robin Hood’ tax gets the nod fin24 (23/10/12)
European financial transaction tax moves step closer The Guardian, Larry Elliott (23/10/12)
Financial transaction tax for 10 EU states BBC News (23/10/12)
Rejecting a Robin Hood tax would be a spectacular own goal The Guardian, Max Lawson (11/10/12)
More than 50 financiers back Robin Hood Tax The Robin Hood Tax (23/10/12)
Topical Focus – Transaction Taxes Tax-News (23/10/12)
Could a transactions tax be good for capitalism? BBC News, Robert Peston (3/10/11)
A Tax to Kill High Frequency Trading Forbes, Lee Sheppard (16/10/12)
Questions
- Explain how the proposed financial transactions tax will work.
- Why would many parties to trades who are not based in one of the 10 participating countries still end up paying the tax?
- What are likely to be the advantages and disadvantages of the proposed tax?
- Is it appropriate to describe the proposed FTT as a ‘Robin Hood Tax’?
- How does a financial transactions tax differ from the UK’s stamp duty reserve tax?
- Explain why the design of the stamp duty tax has prevented the flight of capital and trading from London. Could a Tobin tax be designed in such a way?
- What are HFTs and what impact do they have on the stability and liquidity of markets?
- Would it be desirable for the FTT to ‘kill off’ HFTs?
Induced hydraulic fracturing or “fracking”, is a technique used to make fractures in shale beds, normally deep underground, through the injection of liquids under high pressure. The idea is to release oil or gas. Fracking has transformed the oil industry by allowing vast reserves to be tapped.
Although the main ingredient of the fracking liquid is water, it is also necessary to include sand and a gelling agent to increase the viscosity of the liquid and bind in the sand. The commonest gelling agent is guar gum, a gel made from powdered guar seeds, which are grown in the semi-desert regions of India and Pakistan. Guar gum is also widely used in the food industry as a binding, thickening, texturising and moisture control agent.
With the rapid growth in fracking, especially in the USA, the demand for guar gum has rocketed – and so has its price. In just one year the price of guar beans, from which the seeds are extracted, has risen ten fold from about 30 rupees (about 34 pence) to around 300 rupees per kilo. This has transformed the lives of many poor farmers. Across the desert belt of north-west India, fields are being planted with guar.
But will it last? What will the oil and gas extraction companies do in response to the higher price? What will the food industry do? What will happen to the demand and supply of guar gum over the longer term? Is it risky for farmers in India and Pakistan to rely on a single crop, or should they take advantage of the high prices while they last? These types of questions are central to many mono-crop economies.
Webcast
The little green bean in big fracking demand CNN, Mallika Kapur (10/9/12)
Articles
Frackers in frantic search for guar bean substitutes Reuters, Braden Reddall (13/8/12)
After first-half surge, US drillers find respite in guar wars Reuters (20/7/12)
Guar Gum Exports From India to Drop on Halliburton Stocks BloombergBusinessweek, Prabhudatta Mishra (3/9/12)
Frackers Seek Guar Bean Substitutes The Ithaca Independent, Ed Sutherland (13/8/12)
Synthetic Fracking Ingredient to Replace Guar Bean Greener Ideas, Madison E. Rowe (15/8/12)
From emu farms to guar crops: Why the desert is fertile for Ponzi schemes The Economic Times of India, Vikram Doctor (10/9/12)
Guar gum replacer cuts cost by up to 40% Food Manufacture, Lorraine Mullaney (4/9/12)
Less Guar Needed: TIC Gums Introduces Ticaloid Lite Powder TIC Gums (27/8/12)
Immediate Supply of Guar Gum Available in the US PRLog (1/9/12)
Questions
- Why have guar bean, powder and gum prices risen so rapidly? Use a demand and supply diagram to illustrate your answer.
- How is the price elasticity of supply of guar likely to differ between the short term and the long term? What will be the implications of this for guar prices and the livelihood of guar growers?
- How is the price elasticity of demand for guar likely to differ between the short term and the long term? What will be the implications of this for guar prices and the livelihood of guar growers?
- What would you advise guar growers to do and why?
- What is the role of speculation in determining the price of guar?
- What is a ‘ponzi scheme’? Why is the ‘desert so fertile for ponzi schemes’? (Note that the symbol for a rupee is Rs or ₹, that 100,000 rupees are referred to as 1 Lakh and that 100 Lakh are referred to as 1 Crore.)
Paul Volcker was Chair of the US Federal Reserve from 1979 to 1987. He was also Chair of the Economic Recovery Advisory Board under President Barack Obama from February 2009 to January 2011. In the webcast and articles below, he reflects on the current state of the world financial system – from regulation, to the euro crisis, to world imbalances, to the system of floating exchange rates.
He argues that global financial systems are vulnerable to breakdowns. What is needed is reform to the system, and for that there needs to be consensus by politicians, regulators and central banks.
But, in the absence of international consensus on some key points, reform will be greatly weakened, if not aborted. The freedom of money, financial markets and people to move – and thus to escape regulation and taxation – might be an acceptable, even constructive, brake on excessive official intervention, but not if a deregulatory race to the bottom prevents adoption of needed ethical and prudential standards.
Perhaps most important is a coherent, consistent approach to dealing with the imminent failure of “systemically important” institutions. Taxpayers and governments alike are tired of bailing out creditors for fear of the destructive contagious effects of failure – even as bailouts encourage excessive risk-taking.
According to Volcker, countries must be prepared to surrender some sovereignty. Policies must be co-ordinated internationally and there must be stronger regulation by international bodies, such as the IMF and stronger concerted action by global organisations, such as the G20.
Left to their own devices, in an era of floating exchange rates, countries may pursue policies that exacerbate global imbalances.
Not so long ago, we were comforted by theorising that floating exchange rates would mediate international adjustments in a timely and orderly way. But, in the real world, many countries, particularly but not limited to small, open economies, simply find it impractical or undesirable to permit their currency to float.
We are left with the certainty, however awkward, that active participation in an open world economy requires some surrender of economic sovereignty. Or, to put the point more positively, it requires a willingness to co-ordinate policies more effectively.
Webcast
Volcker Urges Global Monetary System Overhaul BloombergBusinessweek (31/5/12)
Articles
Is global financial reform possible? Guardian, Paul Volcker (6/6/12)
Volcker Urges Global Financial System Overhaul After Crisis BloombergBusinessweek, Robyn Meredith and Shamim Adam (31/5/12)
Questions
- What reforms, according to Volcker, need to be implemented in order for the euro to function effectively without crises?
- What can the USA do to ease the euro crisis?
- What are Volcker’s views on the regulation of the US banking system?
- How are incentive structures in banks related to speculative activities?
- Should banks be allowed to fail?
- What financial imbalances exist between countries?
- What international monetary reforms are required?
- What light can game theory shed on the difficulty of achieving global policy co-ordination?
- Is an international system of floating exchange rates appropriate given the size of international financial flows?
Last October (2011) we considered the case for a Tobin tax: also known as a financial transactions tax (FTT) or a ‘Robin Hood tax’. Since then there have been increased calls for the world to adopt such a tax.
It was promoted by President Sarkozy and supported by many other leaders at the G20 conference in Cannes on 3 and 4 November 2011. It has also been publicly supported by Bill Gates, the Archbishop of Canterbury and the Vatican, as you can see from the video clips and articles below. It is also one of the demands of protesters at St Pauls in London and at other places around the world.
However, the introduction of such a tax is vehemently opposed by many banks and by the US, UK, Canadian and Australian governments, amongst others. In the articles below, we consider the latest arguments that are being used on both sides. With such strong feelings it looks as if the arguments are not going to go away.
Update
On 29 January 2012, French President, Nicolas Sarkozy, announced plans to introduce a 0.1% levy on financial transactions. Naturally, by taking the lead, he hopes that other EU countries will follow suit. The final set of articles consider his move.
What is a Tobin Tax? BBC News, Andrew Walker (2/11/11)
Rowan Williams: St Paul’s protest has ‘triggered awareness’ BBC News (2/11/11)
Bill Gates explains his support for a Tobin tax BBC News (2/11/11)
Robin Hood tax: What is the Tobin tax? BBC Newsnight, Andrew Verity (17/11/11)
Q&A: What is the Tobin Tax on financial trading BBC News (2/11/11)
Head-to-head: the Robin Hood tax BBC News, Gemma Godfrey and Prof Avinash Persaud (9/12/11)
Time for us to challenge the idols of high finance Financial Times, Rowan Williams, Archbishop of Canterbury (1/11/11)
Gates says ‘Robin Hood’ tax has part to play Financial Times, Chris Giles (3/11/11)
Sarkozy Pledges Fight for Transaction Tax Bloomberg, Rebecca Christie and Helene Fouque (4/11/11)
Financial Transaction or Speculation Taxes: Not Quite What They Seem Forbes, Tim Worstall (4/11/11)
Is a Robin Hood Tax the Answer? Forbes, Kelly Phillips Erb (3/11/11)
Bill Nighy takes Robin Hood tax to the G20 Guardian, Patrick Wintour and Larry Elliott (3/11/11)
G20 tax moves disappoint charities Press Association (4/11/11)
Jamaica should support the Robin Hood Tax Jamaica Observer (6/11/11)
World Leaders Need to Agree to the Robin Hood Tax at G20 Huffington Post, Bill Nighy (3/11/11)
Obama, the G20, and the 99 Percent Huffington Post, Jeffrey Sachs (1/11/11)
Now is the moment to bring banks to heel This is Money, Jeffrey Sachs (3/11/11)
Note on financial reform from the Pontifical Council for Justice and Peace The Vatican Today
Tobin Tax would cost £25.5bn and cause job losses says think-tank London loves Business, Rebecca Hobson (4/11/11)
The Spurious Case Against A Financial Transactions Tax – Analysis Eurasia Review, Dean Baker (2/11/11)
Update
Sarkozy Says France to Impose Transaction Tax From August Bloomberg Businessweek, Helene Fouquet and Mark Deen (30/1/12)
Struggling Sarkozy unveils financial transactions tax Sydney Morning Herald, AFP (30/1/12)
Sarkozy announces French financial transaction tax BBC News (30/1/12)
French president announces unilateral financial transaction tax Deutsche Welle Spencer Kimball, Andrew Bowen and Nicole Goebel (30/1/12)
Questions
- What are the main arguments in favour of a financial transactions tax?
- What are the main arguments against a financial transactions tax?
- To what extent is the debate a normative one and to what extent could evidence be used to support one side or the other?
- What would determine the extent to which the tax would be passed on to consumers?
- Would a financial transactions tax impede growth? Explain.
- Would financial intermediation be made more efficient by the imposition of such a tax?
On several occasions in the past on this site we’ve examined proposals for a Tobin tax: see, for example: A ‘Robin Hood’ tax (Feb 2010), Tobin or not Tobin: the tax proposal that keeps reappearing (Dec 2009) and A Tobin tax – to be or not to be? (Aug 2009). A Tobin tax is a tax on trading in financial products, sometimes known as a ‘financial transactions tax’ (FTT). It could also be levied on trading in foreign currencies. It is considered in Economics (7th ed) (section 26.3) and Economics for Business (5th ed) (section 32.4).
The tax would be levied at a very low rate: somewhere between 0.01% and 0.5% and would be too small to affect trading in shares or other financial products for purposes of long-term investment. It would, however, dampen speculative trades that take advantage of tiny potential gains from very short-term price movements. Such trades account for huge financial flows between financial institutions around the world and tend to make markets more volatile. The short-term dealers are known as high-frequency traders (HFTs) and their activities now account for the majority of trading on exchanges. Most of these trades are by computers programmed to seek out minute gains and respond in milliseconds. And whilst they add to short-term liquidity for much of the time, this liquidity can suddenly dry up if HFTs become pessimistic.
The President of the European Commission, José Manuel Barroso, has announced that the Commission has adopted the idea of a financial transactions tax with the backing of Germany, France and other eurozone countries. This Tobin tax could be in operation by 2014. According to the Commission, it could raise some €57bn a year. Unlike earlier proposals for a Tobin tax (sometimes called the ‘Robin Hood tax’), the money raised would probably be used to reduce EU deficits, rather than being given in aid to developing countries.
The UK government has been highly critical of the proposal, arguing that, unless adopted world-wide, it would divert trade away from the City of London.
The following articles consider how such a tax would work and its potential advantages and disadvantages.
Theory inches ever closer to practice Guardian, Larry Elliott (28/9/11)
Osborne expected to oppose EU’s proposal for Tobin tax on banks Guardian, Jill Treanor (28/9/11)
Tobin tax could ‘destroy’ business models Accountancy Age, Jaimie Kaffash (30/9/11)
Tobin tax is likely, says banking chief Accountancy Age, Jaimie Kaffash (5/10/11)
Could a transactions tax be good for capitalism? BBC News, Robert Peston (3/10/11)
EU to propose tax on financial transactions BusinessDay (South Africa), Mariam Isa (5/10/11)
European politicians plot to block UK veto on ‘Tobin tax’ The Telegraph, Louise Armitstead (3/10/11)
Opinion Divided on EU Transaction Tax Tax-News, Ulrika Lomas (5/10/11)
Tobin taxes and audit reform: the blizzard from Brussels The Economist (1/10/11)
Questions
- What are HFTs and what impact do they have on the stability and liquidity of markets?
- Explain how a Tobin tax would work.
- What would be the potential advantages and disadvantages of the Tobin tax as proposed by the European Commission (the ‘financial transactions tax’)?
- Are financial markets efficient? Can a market be ‘excessively efficient’?
- How are ‘execute or cancel’ orders used by HFTs?
- Why do HFTs have an asymmetric information advantage?
- How does a financial transactions tax differ from the UK’s stamp duty reserve tax?
- Explain why the design of the stamp duty tax has prevented the flight of capital and trading from London. Could a Tobin tax be designed in such a way?
