{"id":5932,"date":"2009-11-09T18:01:16","date_gmt":"2009-11-09T08:01:16","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=5932"},"modified":"2009-11-09T18:01:16","modified_gmt":"2009-11-09T08:01:16","slug":"a-global-financial-tax","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=5932","title":{"rendered":"A global financial tax?"},"content":{"rendered":"

\t\t\t\tAt present, Australia is embroiled in yet another outbreak of boat people hysteria such that 72 poor souls who took the extraordinary risk to travel across the Indian Ocean to improve their circumstances and perhaps escape political intolerance are cast as being threats to our national sovereignty. The current debate continues years of shameful hysteria which has seen our government imprison children indefinitely because their parents wanted something better. More people come in daily by air and remain illegally than will ever come by boat. Apart from my moral repugnance for the scaremongering, it appears to be hypocritical that the free market lobby always calls for the free flow of capital but rarely for the free flow of people while the left seem to adopt the opposite view. I was thinking about that today when I read that the British PM Gordon Brown has renewed his call for a Tobin Tax<\/a>. How does that square with modern monetary theory (MMT)? Not very well.
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\nTo set things goings consider the following graph which is the reproduced Figure 1 from a recent study from WIFO (Austrian Institute for Economic Research) – A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal<\/a>, which is available in English and is interesting to read.<\/p>\n

The graph shows the explosion of global financial flows and derivative markets over spot markets (although the lines are a little hard to distinguish – going back to the original OECD data provides that conclusion).<\/p>\n

WIFO describe this dominance as follows:<\/p>\n

\nObservation 1: The volume of financial transactions in the global economy is 73.5 times higher than nominal world GDP, in 1990 this ratio amounted to “only” 15.3. Spot transactions of stocks, bonds and foreign exchange have expanded roughly in tandem with nominal world GDP. Hence, the overall increase in financial trading is exclusively due to the spectacular boom of the derivatives markets …<\/p>\n

Observation 2: Futures and options trading on exchanges has expanded much stronger since 2000 than OTC transactions (the latter are the exclusive domain of professionals). In 2007, transaction volume of exchange-traded derivatives was 42.1 times higher than world GDP, the respective ratio of OTC transactions was 23.5% …\n<\/p><\/blockquote>\n

In other words, most of the financial flows comprise wealth-shuffling speculation transactions which have nothing to do with the facilitation of trade in real goods and services across national boundaries. This is significant and conditions what my conclusions are later.<\/p>\n

\"World_financial_transactions\"<\/a><\/p>\n

<\/div>\n

Arising out of the G-20 meeting recently, a financial sector tax proposal was mooted. The IMF<\/a> is considering this idea and said that:<\/p>\n

\nThe G-20 officials – representing around 90 percent of the world’s wealth, 80 percent of world trade, and two-thirds of the world’s population – emphasized the need for quick implementation of banking industry reform, saying that stronger standards should be developed by the end of 2010, with the aim of implementation by the end of 2012 as financial conditions improve.<\/p>\n

British Prime Minister Gordon Brown said it was time to consider a global financial levy, such as a tax on transactions or an insurance fee, to build up a “resolution fund” as a buffer against future bailouts. Banks needed “a better economic and social contract” that reflected their responsibilities to society. Any measures must be implemented by all major financial centers, Brown noted.<\/p>\n

Following the Pittsburgh summit, the IMF has been working on suggestions for such a levy and plans to have some initial ideas by its Spring Meetings in April, to be held in Washington.\n<\/p><\/blockquote>\n

The idea of a global financial tax is not new. In the General Theory (1936), Keynes proposed a tax on stock market transactions. Later, James Tobin (1972, then 1978) proposed a tax on foreign exchange and share transactions.<\/p>\n

Tobin’s idea is the one people most associate with this sort of tax. He first proposed it during a lecture at Princeton University in 1972 which was subsequently published in J. Tobin (1972) The New Economics: One Decade Older<\/em>, Princeton University Press, 88-93. It was later developed in his Presidential Address to the Eastern Economic Association in 1978 which was published as J. Tobin (1978) ‘A proposal for international monetary reform’, Eastern Economic Journal<\/em>, 4.<\/p>\n

Gordon Brown has continued to push the idea at a G-20 Finance Ministers’ meeting in Scotland at the weekend. Given they were at St. Andrews I would have recommended they would have used their time better having a round of golf instead of talking.<\/p>\n

Brown is quoted as saying that a Tobin tax would provide:<\/p>\n

\n… a better economic and social contract to reflect the global responsibilities of financial institutions to society.\n<\/p><\/blockquote>\n

The US does not support the tax, with the US Treasury Secretary being quoted in the above article as saying “A day-by-day financial transaction tax is not something we’re prepared to support”. The French, Germans and other European nations are reportedly in favour of the proposal.<\/p>\n

Australia is waiting for the IMF to tell us whether we should have one. Our Treasurer said:<\/p>\n

\nBut I just would make this point – that it [the proposal] was raised in the context of countries where there had been massive bail-outs of the banking system. And that has not been the case in our country.\n<\/p><\/blockquote>\n

Gordon Brown’s interest seems to be that the tax would:<\/p>\n

\n… make banks pay for the risks the financial sector poses to the broader economy, and the prevailing possibility that the taxpayer will be called upon to the bail them out.\n<\/p><\/blockquote>\n

So you immediately see that from a MMT perspective the motivation is suspect. Taxpayers are not bailing anyone out in the current crisis which is not the say that the government isn’t. If the motivation is to “raise revenue” then a MMT would argue this is redundant as the national governments are not revenue-constrained.<\/p>\n

The other logical point that I find difficult to agree with is that there is an implicit assumption that bail-outs will occur again so governments better have a bail-out fund.<\/p>\n

I would have thought that the merits of the Tobin Tax, which is periodically wheeled out as the solution to financial instability when there is a crisis, but has never been adopted, should be assessed in terms of its capacity to prevent destabilising and damaging financial market behaviour.<\/p>\n

If it cannot do that then there is not case for its introduction.<\/p>\n

So how does it work?<\/strong><\/p>\n

WIFO proposes that the best option would be for a:<\/p>\n

\n… general and uniform financial transaction tax (FTT). Such a tax would be imposed on transactions of all kinds of financial assets, and, hence, would not be restricted to specific markets …\n<\/p><\/blockquote>\n

All foreign transactions would be subject to the ad valorem tax. In his written work Tobin thought rates below 1 per cent would be adequate. Various low rates have been proposed over the years.<\/p>\n

It is argued that the Tobin tax is biased against short-run speculative flows. For long-term investment, a small tax would be relatively minor compared to the total scale of the project. But short-term speculators who are moving in and out of a currency sometimes within hours of taking their positions would be more exposed to the tax.<\/p>\n

The main aim of the tax is according to a European Parliament working paper<\/a> would be:<\/p>\n