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From Tobin to Robin: Ins and Outs of the Financial Transaction Tax

What is a Tobin Tax?

Despite the fact that the Tobin Tax is a fairly widespread idea, there are several concepts converging on this proposal for a new tax and a significant amount of skepticism around it. Even the economic theorist behind this speculative tax, Mr. Tobin, expressed some serious doubts regarding his own proposal in an interview conceded to Der Spiegel back in 2001. The tax rates vary between 0.0001% to 1%. Moreover, the idea itself is far from being new, as some countries like Germany, UK or Sweden already have experience with similar levies: Stamp Duty Reserve Tax in the UK; a stock exchange turnover tax in Germany, or a stock market transaction tax in Sweden.

The first thing to know on the Tobin tax, it is that it was Keynes who, in his famous chapter XII of the General Theory on Employment Interest and Money, prescribed a tax on transactions. Keynes went as far as to announce, already in the early years of the last century, that excessive speculation by uninformed financial traders increased volatility[1]. Does this sound familiar?

Key facts about the tax:

  • James Tobin, a Nobel-prize winning economist and disciple of Keynes,  suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system of monetary management ended.
  • Focusing on currency exchange, the tax was intended to penalize buying and selling currency on a very short-term basis just for quick benefits, hypothesizing that speculation over currency rates could be dissuaded by including a levy on the transaction. According to Tobin, exchange rate speculation “can frequently have serious and painful real internal economic consequences”.
  • Keeping the influence of currency value on inflation and exports in mind (to quote just some economic factors), it is fundamental to return the decision on national currency from markets to countries themselves.
  • In addition, the levy would provide funds for aid to developing countries.

Some disadvantages have been identified. First, the risks of seeing foreign investment flee to countries that have not implemented the tax, creating new types of fiscal paradises and stronger mechanisms to punish tax evaders. Second, the possibility of bilateral (and uncontrolled) transactions in the stock exchange system. Third, there is also a risk of creating a financial VAT burden for the consumers, both of financial products (like insurances) or indirectly by rising production prices. Finally, the arguments in favor may turn against if the number of actors in the financial market is reduced, i.e. decrease of the offer, disappearance of scale economies, monopoly, or even less financial tax payers.

Just don’t call it Tobin Tax     

Furthermore, Tobin’s first idea has evolved from currency matters to include several other international transactions, such as financial ones, always under the generic label “Tobin Tax”. As mentioned on their own website, ATTAC (The ‘Association pour la Taxation des Transactions financière et l’Aide aux Citoyens’ (Association for the Taxation of financial Transactions and Aid to Citizens)) was founded in France in December 1998 after the publication of the Le Monde Diplomatique editorial titled ‘Désarmer les marchés’ (Disarm the markets) that launched the notion of creating an association to promote the Tobin tax.”

Even though they recognize the importance of Tobin’s concept, ATTAC and other organizations consider that the original tax concept must be expanded, so as to integrate different types of financial transaction taxes (FTT). The goals remain the same: take the power away from the markets and bring it back to citizens and governments, and invest the profits in the development needs.

Given the controversy around the “Tobin” name, recent years have seen the rise of a similar concept under a new nickname: the Robin Hood tax. The heroic English outlaw was known for stealing from the rich and giving to the poor, while being pursued by the sheriff of Nottingham. Today, the tax named after him keeps the idea of giving back to the poor and is supported by several NGOs, businesspeople and Nobel prizes. Robin tax’s supporters propose it to be implemented in different geographical scales (global, regional or national) and to include all kinds of financial assets, such as the purchase and sale of stocks, bonds, commodities, unit trusts, mutual funds, derivatives such as futures and options and also counting bank levies and a financial activities tax.

A European Tobin tax

In September 2011, in his “state of the union” speech, the president of the European Commission (EC) José Manuel Durão Barroso proposed the introduction of a financial transaction tax so as to enhance the own resources of the European Union and become less dependent on the EU member states’ funding.  He also recalled that the EU has already provided €4.6tn assistance to the financial sector, insisting the time has come for this sector to contribute to society.

The tax, to be implemented in 2014, would target all transactions involving stocks, bonds and derivatives that are conducted between financial institutions. It would apply to banks, insurance companies, investment funds, stockbrokers and hedge funds, among other financial firms. The taxes would be paid by both partners in the transaction, the seller and the buyer. For stocks, a tax of 0.1 percent has been proposed. For derivatives, such as, for example, futures or credit default swaps (CDS), the tax would be 0.01 percent.

As Der Spiegel explains, the tax has two aims. First and foremost, it is hoped that it will slow down overwrought financial markets, especially concerning the spread of electronic trading. The second aim is that of forcing the financial world to share in the costs created by the crisis.

Even if last March, the EC president insisted on the idea, trying to enlarge it to the G20, the European FTT is far from being unanimously approved by the European Council. The tax is strongly supported by countries like Germany, France, Austria, Finland or even Spain, but fiercely opposed by the United Kingdom, whose financial sector (“the City”) is oversized. Other countries like Sweden, Denmark or Ireland have also expressed their concern.

Due to this blockage, some countries, like Spain, are endeavoring to install national FTTs as from 2013. [The FTT remains a key element on the Commission proposal for a future EU Budget unveiled in June last year. Discussions on the budget at the European Council have resumed this September and negotiations on the “European Tobin Tax” promise to be stiff.]  The EC president keeps his stance on FTT, saying that it “would ensure that taxpayers benefit from the financial sector, not just that the financial sector benefits from taxpayers.”

[1] Volatility is a measure for variation of price of a financial instrument over time (cf. Wikipedia)

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