Tobin Tax Research Articles

Contours of descent: U.S. economic fractures and the landscape of global austerity

In the past twenty-five years the free-market neoliberal model has been hailed as a panacea for economic ills in both the advanced economies and the developing world. Pollin dissects this model as it has been implemented in the U.S. during the Clinton and Bush administrations under Greenspan's Chairmanship of the Federal Reserve, and in developing countries under the auspices of the IMF. Clinton's Third Way Policies were hailed as combining a pro-business stance with social responsibility. This approach seemed to be vindicated by the extraordinary fall in both inflation and unemployment. In fact, the apparent successes of the Clinton years were based on anti-labor policies, the stagnation of real wages, deregulation of financial markets, and an historically unprecedented stock market boom. Even before 9/11 there were indications that the Clinton bubble would collapse into recession. Bush's response was to give big tax breaks to the rich, introduce more anti-labor measures, and cut social spending at both the federal and state levels. Both Clinton and Bush have applied free-market policies only selectively within the U.S. itself, when such policies have most benefited the interests of business. At the same time, through the IMF, the U.S. has compelled developing countries to slash public spending, deregulate financial markets and dismantle trade barriers virtually across the board. Argentina's embrace of this policy package culminated in financial ruin. Throughout Asia and Africa, sweatshops and poverty are the testaments to a bankrupt economic model. Pollin concludes by exploring concrete proposals that would promote full employment, economic growth and increased equality in the U.S. and throughout the less developed countries, drawing on the spreading movements for living wages, the Tobin Tax on financial speculation, and more generally workable alternative to neoliberal globalization.

The Tobin Tax: A Mean – Variance Approach

A Tobin tax (TT) is studied by means of a portfolio model defined over the means and variances of two rates of return (domestic and foreign). When the correlation is negative, the TT is likely to decrease the speculative component of the share of portfolio invested abroad and to increase the hedging component. For a TT to decrease both the components of the share, one needs not only a small expected gain from speculation, but also either a high positive correlation between the two rates of return or a sufficiently large value of the coefficient of variation of the foreign rate.

Is a transactions tax an effective means to stabilize the foreign exchange market

The desirability of a transactions tax in the foreign exchange market, or Tobin tax, depends on whether the tax deters short-term, destabilizing trade. While supporters claim that the tax would be a deterrent for short-term capital flows, critics contend that the deterrent capability of the tax would be limited. This paper attempts to resolve some lingering questions about the arithmetic of a transactions tax, and concludes that a tax would raise the required return from trade for any time horizon, and thus deter all trades driven by small expected capital gains (i.e., smaller than the square of one plus the tax rate), and not necessarily those driven by a short horizon of the investor. The paper then explores the consequences of this result on the effectiveness of the tax within competing paradigms and concludes that a Tobin tax is not likely to be an effective means to reach the declared objectives. JEL Codes: F31, H87 Keywords: Foreign Exchange

Comment on ‘Some Evidence that a Tobin Tax on Foreign Exchange Transactions may Increase Volatility’

Global turnover in foreign exchange markets averaged $1.2 trillion per day according to the most recent estimates available from the Bank for International Settlements.1 Yet, cross-border trade of goods and services accounts for less than 5 percent of the total trading. While it is difficult to get precise estimates on hedging, roughly 20 percent of total trading is aimed at hedging against future exchange rate changes. The remaining roughly 75 percent of total turnover in global foreign exchange markets is believed to be related to short or long term exchange rate speculation. The large fraction of global turnover in currency markets that is unrelated to trade or hedging has lead economists and policy markets to the conjecture that speculation is responsible for the perceived recent increase in volatility in foreign exchange markets. Several economists, most prominently Nobel Laureate Dr. James Tobin, have advocated levying a tax (a “Tobin tax”) on foreign exchange transactions to reduce volatility induced by exchange rate speculation. Recently, several European countries spearheaded by France have debated a proposed legislation to impose a tax on currency transactions.2 However, to date, there is no strong empirical evidence that an increase in transactions costs (which would be the result of a Tobin tax) would significantly dampen volatility. On the contrary, Umlauf (1993) finds that a transactions tax on stock trading, the so called “puppy-tax”, imposed in Sweden between 1984 and 1991 actually caused an increase in volatility and a dramatic reduction in home-

Some Evidence that a Tobin Tax on Foreign Exchange Transactions May Increase Volatility *

More than two decades ago, James Tobin suggested imposing a tax on all foreign exchange transactions (Tobin, 1978). Similar proposals for imposing transaction tax on trading of other securities (see Schwert and Seguin, 1993 for a review) are also often made by eminent economists (Stiglitz, 1989; Summers and Summers, 1989). One of the putative benefits of a transaction tax is that this may decrease the volatility of prices. The intuitive rationale behind this, believed to be first articulated by Keynes in 1936, is that a transaction tax would hurt the speculators disproportionately more because they tend to trade much more frequently. An implicit assumption in this argument is that speculative trading is on average destabilizing which in turn causes prices to be more volatile. A contrasting view is offered by Milton Friedman who argued (Friedman, 1953) that rational speculators may in fact help stabilize prices. The relative merits of these opposing views can only be judged by analyzing this issue empirically. The empirical evidence on the effect of transactions taxes on volatility of prices is rare. Umlauf (1993), using Swedish stock market data from the 1980s, shows that the introduction of, or an increase in Swedish tax, led to an increase in volatility of stock prices; Jones and Seguin (1997) show that the reduction in the commission

Addressing Human Wrongs: A Philosophy-of-Ontology Perspective

Addressing Human Wrongs:A Philosophy-of-Ontology Perspective Jamie Morgan In a recent issue of Philosophy East and West (vol. 52 [2] [April 2002]) Fred Dallmayr's excellent " 'Asian Values' and Global Human Rights" argued for a guarded form of rights relativism that acknowledges difference but also retains an aspiration for some form of genuine consensus. The key for Dallmayr, following Kothari and Sethi, is the creation of "shared norms of civilized experience," subject to the caveat that this is not a simple negation of universality or moral universalism, but rather a rethinking of human rights in a direction that gives primacy to considerations of global justice—which in turn sustains rights as a protective shield. Such a rethinking or reconfiguration treats universality not as a fait accompli, but rather as a hope or yearning; above all, it deprives any given culture—especially Western culture—of pretensions to monopolize universal truth. (pp. 184-185) For Dallmayr the project itself is best sustained as a bottom-up process of active citizenship across the "three generations of rights": civil and political, social and economic, and cultural and collective. In these regards I am in total agreement with Dallmayr, but I feel that two additions might be made in a short commentary. First, philosophically speaking, the openness of the process of global justice is not the same as the possibilities that sustain it. The possibilities are precisely the grounds of the source of our possession of different values, beliefs, and ethics, as well as our drive toward rights. While Dallmayr provides a clear critique of the prevailing foundational/anti-foundational divide, he abandons this fundamental issue at an unnecessary impasse that damages his otherwise clear argument. Dallmayr wants to argue that circumscribed universalism has some credence but finds no plausible candidate. A "hope or a yearning" cannot be its own explanation without reducing values, et cetera, to mere constructions. This, in the first instance, inadvertently affirms Richard Rorty's fundamental relativism, which Dallmayr explicitly wants to avoid and which Rorty himself later acknowledges as problematic in his Philosophy and Social Hope.1 In the second instance, it continues to beg the question: are values, et cetera, grounded in something, and if so, what? To address this issue I briefly discuss below some developments in the philosophy of ontology or being shared by Western Critical Realism and Chinese philosophy, including New Confucianism (Xinrujia). Second, I want to show how these developments enhance Dallmayr's practical concern with global justice. It is one of the chief strengths of his argument that he highlights how philosophy should take [End Page 575] seriously the practice of value formation as an engaged process of active citizenship. Such a process is always one of context dilemmas, of dialogues between interests and worldviews. A useful approach to what Dallmayr describes as "an entangled web of rights" in this regard is the Critical Realist concept of explanatory critique. I briefly illustrate this using a second-generation value (economy) example—the emergence of Tobin Tax organizations within Global and East Asian civil society in the wake of the East Asian financial crisis. The Roots of Dualism in Western Rights Thinking In a highly effective critique, Dallmayr explores (pp. 174-177) philosophical attempts to ground rights as an a priori to their social constitution. Such an a priori presupposes either a God who bestows natural rights (pace Augustine) or an evolved nature that imbues the individual with the same, such as characteristics of reason, reflexivity, intentionality, dignity, et cetera. Several objections are noted. The former entails not only a belief (that must then ultimately also be found to be true) in God, but in an active interventionist God. Meanwhile, both divinely bestowed and evolution-imbued rights raise (pace Bentham) the utilitarian conundrum of their causal status: since actualized rights are constituted in societies and humans cannot experience the pre-social, an a priori to rights seems to be simply a nonobservable postulate (a "nonsense on stilts"). Finally, if one reverses the logic of Bentham's critique, if evolution-imbued rights are accepted, one appears to confront the problem that social context then becomes an external constraint on the fundamental causal power of natural...

Zur Durchführbarkeit einer Devisentransaktionssteuer – Anmerkungen zur Machbarkeitsstudie von Prof. Paul Bernd Spahn

Abstract In the context of the discussion of the new financial architecture the idea of a Tobin tax is revived. Mainly due to the pressure of several non-governmental organisations (NGO’s) the Tobin tax is currently discussed seriously in various policy circles. Recently, the German Federal Ministry of Economic Co-Operation and Development has commissioned a feasibility study on the implementation of a Tobin tax. The study was written by Paul S. Spahn (2002). This article discusses the feasibility study critically and points out its main deficiencies.

Tobin Tax Effects Seen from the Foreign Exchange Market's Microstructure

AbstractThere are strong calls for the introduction of a ‘Tobin tax’ on foreign exchange (FX) transactions. Despite its popularity, research has not yet made full use of available insights from the recent microstructure literature. The role of banks in FX trading is quite different from the assumptions of proponents. Asset managers are most probably the group with the heaviest influence on shorter‐term exchange rate movements. They speculate under comparatively longer horizons than FX dealers, although their behaviour also tends to be short‐termist. We argue that there is no tax rate that could both influence their behaviour and simultaneously maintain the desired high level of liquidity. We conclude that no uniform proportional Tobin tax can achieve its objectives.

Sand in the wheels or spanner in the works? The Tobin tax and global finance

This paper presents a radical critique of the Tobin tax—a tax on currency transactions—by undercutting certain assumptions about the size and character of the world's foreign exchange markets which furnish the tax with its basic rationale. While it is acknowledged that only a fraction of the massive volumes of FX transactions relate directly to trade in goods and services or to cross border investments, it is denied that all the residual transactions are motivated purely by exchange rate considerations (speculative or hedging activities). Rather, the argument is that a significant proportion of FX trades have money market characteristics and that these trades, together with domestic money market transactions, play an important role in the day to day operation of the global financial system. This perspective is used to show that the imposition of a Tobin tax would cause extensive material damage to the system, with consequences that may run counter to the expectations of supporters of the tax.

International policy coordination for financial market stability in the Asian economies

Based on the understanding of financial crisis as the self-fulfilling crisis of speculators belief system, this paper examines the feasibility of introducing the Tobin tax system to reduce financial volatility in the Asian foreign exchange markets. The model analysis in this paper provides the following policy implications. To reduce the motivation to deviate from the policy coordination, it is required to allow all tax revenues to collecting countries, especially to Singapore and Hong Kong. Even without the participation of the major western countries, the start of the tax policy coordination in the Asian region can have significant signalling effects to reduce speculative motivation.

Currency attacks, information externalities and search

The currency crisis literature now comprises three main schools of thought; first‐generation models consider the depletion of foreign exchange reserves as a consequence of incompatible exchange rate and monetary policies. Second‐generation models are based on speculative theories whereby the belief of investors that monetary policy will be modified as a result of an attack makes the attack possible. Third‐generation models have been designed in an attempt to explain the nature of the Asian crises of 1997/1998. Each school of thought considers the nature of a speculative attack. However, this model uses a search framework to explain the timing of an attack in terms of an information externality in the foreign exchange market. It then assesses the efficacy of a Tobin tax in delaying and thereby possibly preventing such a crisis.

Heterogeneous traders and the Tobin tax

To study the effectiveness of the Tobin tax, we develop a model of heterogeneous interacting agents. Traders either speculate on the basis of technical or fundamental analysis, or abstain from the market, a decision which depends on profit considerations, as well as communication between agents. Simulations generate stylized facts such as unit roots in exchange rates, fat tails for returns, or volatility clustering. The imposition of a Tobin tax leads to a crowding out of speculators and stabilizes the dynamics. However, the decreasing impact of fundamentalists triggers misalignments if tax rates are too high.

Some Criticism of the Tobin Tax

High volatility and enormous international capital flows are negative effects of the globalization of financial markets that can lead to financial crises like those of the 1990s. The Tobin tax often has been put forward as a measure to diminish globalization risks since it is claimed to discourage short-term speculation. The arguments of the pro- ponents of this transactions tax are based on the assumption that (i) short-term trading is destabilizing and speculative and causes the volatility to increase, (ii) the Tobin tax does discourage this speculation and (iii) the Tobin tax causes market participants to orientate more by macroeconomic fundamentals. This paper suggests that these assumptions are quite questionable. Moreover, a Tobin tax of a sensible rate would be too small to pro- tect countries from currency fires and would generate only little monetary autonomy. In addition to theoretical economic doubts there arise some political problems, which can make the tax to become infeasible.

World Finance and Economic Stability: Selected Essays of James Tobin

Nobel Prize winner James Tobin has made outstanding contributions to modern macroeconomics. In this final collection of his work he examines the economic policies of the United States and its relations with other major economies after 1990. In James Tobin's view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact. This book brings together James Tobin's recent work, both published and unpublished, on finance and globalization, currency crises and bailouts. Emphasis is placed on international economic relations and policies, and on the IMF and World Bank. In particular, economic and monetary relations among nations, exchange rate problems and policies and the 'Tobin Tax', popular in Europe but much misunderstood, are discussed. Professor Tobin also examines the impact of his earlier work on recent US fiscal policy. The Clinton administration followed a tight fiscal policy leading to budget surpluses, and this enabled Alan Greenspan at the Federal Reserve to follow an 'easy', low interest rate, monetary policy. This mix was advocated back in the 1950s and 1960s by Paul Samuelson and James Tobin. The memo Professor Tobin wrote for the J.F. Kennedy campaign of 1960 is published for the first time. The policy was not applied until 30-35 years later. Presenting a framework for understanding monetary and fiscal policies and how they determine full employment and growth, the book will prove invaluable to students and scholars of macroeconomics, as well as economists wishing to gain an insight into Professor Tobin's unique contribution to economics.

Why the Tobin Tax Can Be Stabilizing

This paper clarifies why a transaction tax of the type proposed by James Tobin can have a stabilizing influence in financial markets. It argues that such a tax is potentially stabilizing, not because it reduces the excessive volume of transactions, but because it can slow the speed with which market traders react to price changes. To the extent that a Tobin tax causes financial market traders to delay their decisions a few of sand in the wheels of international finance can indeed be stabilizing. Whether that is sufficient, or whether boulders - not just grains - are needed to prevent speculative attacks on currencies, is, however, a different matter.

Innovative Sources of Development Finance - Global Cooperation in the 21st Century

The steady decline of funds available through ODA implies the necessity of design of innovative funding mechanisms for development. This paper considers several such proposals including an international carbon tax, a Tobin tax, aviation taxes, bit taxes, taxes on international trade, taxes on the arms trade and the like. It evaluates their likely impacts as well as likely revenue potential. It argues for the establishment of a World Development Organization which is to be entrusted with providing a rationale for such taxes, collecting and earmarking the revenues and designing formulae for disbursal of such aid to developing countries.

Overconfidence and Speculative Bubbles

Motivated by the behavior of internet stock prices in 1998-2000, we present a continuous time equilibrium model of bubbles where overconfidence generates disagreements among agents regarding asset fundamentals. With short-sale constraints, an asset owner has an option to sell the asset to other over-confident agents who have more optimistic beliefs. This re-sale option has a recursive structure, that is, a buyer of the asset gets the option to resell it. This causes a significant bubble component in asset prices even when small differences of beliefs are sufficient to generate a trade. Agents pay prices that exceed their own valuation of future dividends because they believe that in the future they will find a buyer willing to pay even more. The model generates prices that are above fundamentals, excessive trading, excess volatility, and predictable returns. However, our analysis shows that while Tobin's tax can substantially reduce speculative trading when transaction costs are small, it has only a limited impact on the size of the bubble or on price volatility. We give an example where the price of a subsidiary is larger than its parent firm. Finally, we show how overconfidence can justify the use of corporate strategies that would not be rewarding in a rational environment.

How can a Currency Transaction Tax Stabilize Foreign Exchange Markets?

In 1971, after the demise of the international monetary system, the so-called Bretton Woods system that ensured semi-fixed exchange rates thanks to capital controls, James Tobin conceived his now famous Tobin tax. Since then, some supporters of his original proposal have introduced some major changes to make it more suited to financial globalization. Paul Bernd Spahn (2002) in particular has proposed a two-tier Currency Transaction Tax (hereafter CTT). The CTT could curb the usual speculation that occurs during normal times but also deter big speculative attacks that strike especially, but not exclusively, developing countries. This paper shows that a fine tuned CTT could discourage, if not suppress, capital flights that plague fragile developing countries before and after the burst of an economic crisis. However it is true that a CTT cannot do everything, but the same applies for every other proposal such as prudential regulations and capital controls. Rather than looking for the fairy's wand, it is wiser to combine a full array of instruments at hand to construct a safe financial environment for economic progressive policies.

CONT–BOUCHAUD PERCOLATION MODEL INCLUDING TOBIN TAX

The Tobin tax is an often discussed method to tame speculation and get a source of income. The discussion is especially heated when the financial markets are in crisis. In this article we refer to the foreign exchange markets. The Tobin tax should be a small international tax affecting all currency transactions and thus consequently reducing destabilizing speculations. In this way this tax should take over a control function. By including the Tobin tax in the microscopic model of Cont and Bouchaud one finds that this tax could be the right method to control foreign exchange operations and to get a good source of income.

Renda mínima e tobin tax como instrumentos para aliviar a pobreza no Brasil

O imposto de Tobin (Tobin Tax) - tributo que já tem sido debatido ao redor do mundo e agora volta a ser debatido também no Brasil - foi inicialmente colocado em debate no ano de 1972, na Universidade de Princeton, e apresentado para publicação em 1974, em um artigo intitulado The New Economics One Decade Older. A proposta inicial baseia-se na idéia de impor uma tributação uniforme sobre todas as operações do mercado à vista que envolvessem transações entre moedas, incidindo de forma proporcional ao prazo de maturidade da transação. Como a redução da pobreza e/ou eliminação da fome (consideramos que com o montante de recursos proposto em nosso artigo será possível atingir ambos os objetivos) no Brasil envolvem volume considerável de recursos começamos o trabalho fazendo estimativas sobre o montante de recursos a serem arrecadados com a implantação do tributo de Tobin. Em seguida, mostramos que o tributo penaliza os capitais de curto prazo, porém não inviabiliza a movimentação de capitais de médio e longo prazos, necessários às economias emergentes. A seguir formulamos uma proposta para reduzir a pobreza no Estado de São Paulo e no Brasil. Para isso calculamos quanto faltava à renda dos cidadãos para que ela atingisse o valor de um salário mínimo (em 1996). Propusemos obter este valor utilizando dois tributos, um deles é a Tobin Tax e o outro a contribuição provisória sobre movimentações financeiras (CPMF), e mais uma complementação utilizando a arrecadação de um fundo similar ao Fundo Social de Estabilização (FSE). Na ausência de uma conjunção de forças políticas para criar tal fundo, propusemos, como alternativa, trabalhar com os recursos do Orçamento da União. Não deixamos, porém, de notar que a utilização de tais recursos provavelmente virá a aumentar o tamanho da máquina administrativa e receber, portanto, oposição de setores da sociedade. Além disso, pode contribuir para um aumento nos índices de corrupção, o que, entretanto, não ocorrerá necessariamente.