Debunking the myths about the Tobin tax
Opponents to the financial transaction tax, also known as the Tobin tax, have been around for as long as the idea of the tax, which goes back to the seventies. The financial crisis has opened up a window of opportunity to make the tax a reality, namely under the enhanced cooperation of eleven member states of the EU. This has caused a paradigm shift in the opponents' myths: from previously arguing against its feasibility to – now that the tax is planned to be implemented – arguing against its desirability.
Unsurprisingly, some blue-chip companies such as Siemens claim that the tax might damage their business. The reason behind these companies’ resistance to the tax is surely that they have become big players in financial trading themselves, for example with Siemens Financial Services. According to an executive, even consumer goods company Tchibo earns more in its financial business than in selling products and coffee.
The charm of the financial transaction tax is that it is only excessive trading like day trading that will be impacted noticeably. This is due to the very small levy per transaction. Hence the tax can slow down trading and volatility which is crucial to real economic business. If asset prices become more stable, businesses need to spend less on protecting against volatility, thus freeing up capital for investment.
Consequently, the financial transaction tax has received the support of business leaders as well, such as the signatories of the statement “Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management” issued by the Aspen Institute in Washington already in 2009.
The signatories, amongst them investor magnate Warren Buffet, state that shareholders, managers and regulators have allowed short-term considerations to overwhelm desirable long-term objectives of business. They wish to restore a sustainable focus. Therefore, these business leaders propose to revise capital gains tax provisions or to implement an excise tax designed to discourage excessive trading.
Three years later in 2012, another 50 business personalities wrote a letter in support of financial transaction taxes - whether agreed to by the Group of Twenty (G20), EU, or by individual countries - to G20 and European leaders. In this letter, individuals such as Arielle de Rothschild, Managing Director Rothschild Group, and Charles Ewald, former Vice President Goldman Sachs, demand the tax to improve the functioning of markets. They correctly point out that short-term trading dominates the financial system and that high frequency trading has been shown to drain liquidity in stressed markets when it is needed most.
To best achieve its stabilising steering effect, the tax base should capture all types of securities like bonds, stocks and derivatives, traded on exchange or over-the-counter. That is exactly why the broad-based concept of the financial transaction tax is highly advantageous. It is seemingly too much progress for some opponents, who are presently lobbying extensively to limit the scope of the tax to stocks.
The tax shall, of course, impact the financial sector's business models and avoid a very short-term trading mentality. That is the objective of the tax: to “throw some sand in the wheels“, according to its first proponent, economic Nobel laureate James Tobin. Additionally, the tax rate should be scalable - just like central bank's interest rates. This suggestion, made by economist Paul Bernd Spahn, would enable the tax to efficaciously contribute to preventing speculative bubbles.
Another key advantage is that even under the enhanced cooperation of eleven countries, the tax as proposed by the European Commission will nevertheless apply to trades across the globe. Since whenever a security of these eleven countries is involved, its trade will be taxed wherever it takes place - for example, an Italian bond traded in Britain, China or the United States. Thus the British government began to worry about its main trading place, the City of London. It did not consider it to be beneath itself to launch legal action against the tax in April at the European Court of Justice.
However, as an international financial centre its contribution to the tax shall be justified. That is not least in view of the external effects the City of London brings by its excessive trading of other states' securities. It is easy to imagine that the City was already looking to benefit from some extra profit, namely through trade moving out of the financial transaction tax zone to London.
Regarding pension schemes, they too will benefit from the tax. This is because for clients, pension funds are long-term investments which do not require frequent trading. On the contrary – simplicity often outperforms complexity; it also lowers the costs clients are charged for the fund management. Further, the German Institute for Economic Research argues effectively to not exclude pension funds from the tax: as influential institutional investors they should refrain from rapid trading and provide sustainable long-term financing.
Calm down, opponents: stop feeding the world with myths. Remain steadfast, politicians: stop multiplying the opponents' myths.
Suleika Reiners is a policy officer at the World Future Council in Hamburg.