Revisiting the Tobin Tax
Posted by ecoshift on September 1, 2009
This discussion is a good companion piece for an earlier post linking to information on the growth of the financial services sector…
Tobin taxes are back in circulation again. The financial crisis has highlighted the fundamental problems of financial stability as well as the costs associated with bailouts of the financial sector.
Interestingly the family of tobin taxes, better known as financial transaction taxes ot security transaction taxes are good tools which can help tackle both of these problems. Their potential and role in helping provide solutions to the challenges confronting us are discussed briefly in this policy note here. This note which was written a while back will be followed by a Re-Define Policy Paper out next week.
Exponentially expanded financial markets
It is widely known that turnover in financial markets (the total value of financial instruments traded every year) has grown exponentially. This has been the case for almost all financial markets both on-exchange such as stock markets and off-exchange such as OTC derivate markets.
Currency market turnover for example rose from about $4 trillion in the 70s to $40 trillion in the 80s to more than $500 trillion now. Turnover in equity markets registered a seven fold increase between 1993 and 2005 to about $51 trillion and the wealth held in the global bond market is more than $60 trillion now with turnover substantially higher. The notional value of OTC credit default swaps, just a single kind of derivate, rose to more than $60 trillion from almost nothing a decade ago.
It is also well-understood now that this rapid rise in turnover is not unambiguously positive. Those who insisted that this rise in turnover was an indication of higher liquidity have been proven wrong by the financial crisis. Liquidity comes from having a diversity of participants and views in the financial markets with the number of trades being only one part of it.
Clearly financial markets and financial market participants have been the winners of globalization and now are the recipients of trillions of dollars of tax payer bailouts. Having already not paid their share of taxes in the past and having generated enormous wealth for themselves, these financial market participants are likely to escape paying a fair share of their tax burden in the future with the ‘little people’ left to bear the brunt of the costs of the bailouts.
Taxing financial transactions for a fairer burden sharing arrangement
One of the answers to this question no doubt has to be the taxation of financial transactions. This clearly has a tremendous potential to generate revenue at even very low levels (a few basis points) of taxation simply because the volume of transactions is so high. Our first estimates show that such taxes could easily raise predictable, stable, easy to collect and equity enhancing revenues in the range of hundreds of billions of dollars annually.
This money could then be used in a variety of ways – for example to reduce other taxes such as income taxes especially on the lowest levels of income, to repay the borrowings of governments which have expanded massively since the financial crisis hit or less ambitiously merely as an additional tool in the portfolio of taxes that most modern governments levy. All of these would result in a fairer burden sharing across citizens belonging to various income groups.