Financial transaction tax
A financial transaction tax is a tax placed on a specific type (or types) of financial transaction for a specific purpose (or purposes). This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers.
There are several types of financial transaction taxes. Each has its own purpose. Some have already been implemented, and some remain unimplemented concepts. Concepts are found in various organizations and regions around the world. Some are domestic and meant to be used within one nation; whereas some are multinational.
History of the concept
Among the first proponents of a financial transaction tax was John Maynard Keynes, who first proposed his version in 1936.
At the February 5, 2010 G7 meeting in Canada, early consensus emerged for a ongoing levy charged against large banks to cover the cost to government of insuring banks against future crisis. The levy could be collected either by fees on deposits or by a financial transaction tax. The Financial Times reported that US treasury secretary Tim Geithner, who was previously against the idea, is now in favour. G7 officials plan to seek approval from other G20 nations before moving forward with the idea.
Types of financial transaction taxes
Transaction taxes can be raised on the sale of specific financial assets (such as stock, bonds or futures); can be applied to currency exchange transactions; or can be general taxes levied against a mix of different transactions. Examples include:
* Keynes financial transaction tax (first suggested domestically for the USA.)
* Currency transaction tax (a concept most commonly associated with a multinational tax) Examples are the Tobin tax and the Spahn tax.
* Stamp duty - These include a "Stamp Duty Reserve Tax on share purchases," such as the Stamp duty in the United Kingdom
* Swedish financial transaction tax on equity securities, fixed income securities and financial derivatives
* Peruvian government general financial transaction tax (domestic)
* United Nations global tax
* G20 global tax
* In 2009, in the US Congressman Peter DeFazio of Oregon propoposed the DeFazio financial transaction tax. (This was proposed domestically for the United States only.)[4] (domestic)
* Transfer tax
* Robin hood tax
Keynes financial transaction tax
Among the first proponents of a financial transaction tax was John Maynard Keynes, who first proposed his version in 1936.
He proposed that a small transaction tax should be levied on dealings on Wall Street, in the United States, where he argued that excessive speculation by uninformed financial traders increased volatility. For Keynes, the key issue was the proportion of ‘speculators’ in the market, and his concern that, if left unchecked, these types of players would become too dominant. Keynes writes:
"Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation. (1936:159)"
"The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States. (1936:159-60)"
Currency transaction tax
The types of currency taxes which have been proposed are the Tobin tax, and later the Spahn tax.
Tobin tax
A Tobin tax is a tax on all spot conversions of one currency into another. Named after the economist James Tobin, the tax is intended to put a penalty on short-term financial round-trip excursions into another currency. Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system effectively ended.
Robin hood tax
The Robin Hood tax is a proposed tax on Financial transactions. It is similar to the Tobin tax, which was proposed in 1972 by James Tobin, but never implemented.
The campaign for the Robin Hood tax was launched on 15 February 2010 and is being run by a coalition of charities and organisations.
Spahn tax
In 1995, Paul Bernd Spahn opposed the original form of a Tobin Tax in a Working Paper International Financial Flows and Transactions Taxes: Survey and Options, concluding "...the original Tobin tax is not viable. First, it is virtually impossible to distinguish between normal liquidity trading and speculative noise trading. If the tax is generally applied at high rates, it will severely impair financial operations and create international liquidity problems, especially if derivatives are taxed as well." But then he continued with this statement: "Most of the difficulties of the Tobin tax could be resolved, possibly with a two-tier rate structure consisting of a low-rate financial transactions tax and an exchange surcharge at prohibitive rates." This new form of tax, the "Spahn tax," was later approved by the Belgian Federal Parliament in 2004.
Stamp duty
Stamp duty is a tax that is levied on documents. Historically, this included the majority of legal documents such as: cheques; receipts; military commissions; marriage licences; land transactions; etc. A physical stamp (a tax stamp) had to be attached to or impressed upon the document to denote that stamp duty had been paid before the document was legally effective. More modern versions of the tax no longer require a physical stamp. Places which have a stamp duty include states within Australia, Hong Kong, Singpore, Ireland, United Kingdom, states within the United States, and Sweden. In the past, the United States federal government formerly imposed various documentary stamp taxes on deeds, notes and other transactional documents.
In January, 1984, Sweden introduced a 0.5% tax on the purchase or sale of an equity security. Hence a round trip (purchase and sale) transaction resulted in a 1% tax. In July, 1986, the rate was doubled, and in January, 1989, a considerably lower tax of 0.002% on fixed-income securities was introduced for a security with a maturity of 90 days or less. On a bond with a maturity of five years or more, the tax was 0.003%. Analyst Marion G. Wrobel prepared a paper for Canadian Government in July, 2006, examining the international experience with financial transaction taxes, and paying particular attention to the Swedish experience.
The revenues from taxes were disappointing; for example, revenues from the tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kroner per year. They did not amount to more than 80 million Swedish kroner in any year and the average was closer to 50 million. In addition, as taxable trading volumes fell, so did revenues from capital gains taxes, entirely offsetting revenues from the equity transactions tax that had grown to 4,000 million Swedish kroner by 1988.
On the day that the tax was announced, share prices fell by 2.2%. But there was leakage of information prior to the announcement, which might explain the 5.35% price decline in the 30 days prior to the announcement. When the tax was doubled, prices again fell by another 1%. These declines were in line with the capitalized value of future tax payments resulting from expected trades. It was further felt that the taxes on fixed-income securities only served to increase the cost of government borrowing, providing another argument against the tax.
Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991 the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.
Peruvian government general financial transaction tax
In 2003 the Peruvian government introduced a 0.1% general financial transaction tax, with the aim of raising finance for the education sector.
UN Global Tax
According to Dr. Stephen Spratt, "the revenues raised could be used for....international development objectives...such as meeting the [ Millennium Development Goals ]." These are eight international development goals that 192 United Nations member states and at least 23 international organizations have agreed (in 2000) to achieve by the year 2015. They include reducing extreme poverty, reducing child mortality rates, fighting disease epidemics such as AIDS, and developing a global partnership for development.
In 2000, a representative of a “pro Tobin tax” NGO proposed the following: "In the face of increasing income disparity and social inequity, the Tobin Tax represents a rare opportunity to capture the enormous wealth of an untaxed sector and redirect it towards the public good. Conservative estimates show the tax could yield from $150-300 billion annually. The UN estimates that the cost of wiping out the worst forms of poverty and environmental destruction globally would be around $225 billion per year."
At the UN September 2001 World Conference against Racism, when the issue of compensation for colonialism and slavery arose in the agenda, Fidel Castro, the President of Cuba, advocated the Tobin Tax to address that issue. (According to Cliff Kincaid, Castro advocated it "specifically in order to generate U.S. financial reparations to the rest of the world," however a closer reading of Castro's speech shows that he never did mention "the rest of the world" as being recipients of revenue.) Castro cited holocaust reparations as a previously established precedent for the concept of reparations.
Castro also suggested that the United Nations be the administrator of this tax, stating the following:
"May the tax suggested by Nobel Prize Laureate James Tobin be imposed in a reasonable and effective way on the current speculative operations accounting for trillions of US dollars every 24 hours, then the United Nations, which cannot go on depending on meager, inadequate, and belated donations and charities, will have one trillion US dollars annually to save and develop the world. Given the seriousness and urgency of the existing problems, which have become a real hazard for the very survival of our species on the planet, that is what would actually be needed before it is too late."
On March 6, 2006, US Congressman Dr Ron Paul stated the following: "The United Nations remains determined to rob from wealthy countries and, after taking a big cut for itself, send what’s left to the poor countries. Of course, most of this money will go to the very dictators whose reckless policies have impoverished their citizens. The UN global tax plan...resurrects the long-held dream of the 'Tobin Tax'. A dangerous precedent would be set, however: the idea that the UN possesses legitimate taxing authority to fund its operations."
G20 global tax
On December 7, 2009 Nancy Pelosi, Speaker of the United States House of Representatives stated her support for a "G20 global tax."
DeFazio financial transaction tax proposal in the USA
In 2009, in the US Congressman Peter DeFazio of Oregon proposed a financial transaction tax in his "Let Wall Street Pay for the Restoration of Main Street Bill". (This was proposed domestically for the United States only.)
List of financial transaction taxes already implemented
National (domestic)
* Swedish tax on equity securities, fixed income securities and financial derivatives
* A Stamp Duty Reserve Tax (SDRT) was introduced in the UK in the Finance Act 1986 at a rate of 0.5% on share purchases, and this remains in place today, albeit with a relief for intermediaries(such as market makers and large banks that are members of a qualifying exchange).
* In 2003 the Peruvian government introduced a 0.1% general financial transaction tax, with the aim of raising finance for the education sector.
* Latin America - Bank of the South- In early November 2007, a regional Tobin tax was adopted by the Bank of the South, after an initiative of Presidents Hugo Chavez from Venezuela and Néstor Kirchner from Argentina.
Supporters and Opposers (in chronological order)
See also the Supporters and Opposers of the Tobin tax which is a "currency transaction tax," a more specific type of financial transaction tax
* 1936 - Among the first proponents of a financial transaction tax was John Maynard Keynes, who first proposed his version in 1936.
* 1972 - Supporter: James Tobin, author of a "currency transaction tax" which was later dubbed "Tobin tax"
* On August 1, 1995, an IMF Working Paper No. 95/77 Financial Transactions Taxes by Shome,Parthasrathi and Stotsky, Janet Gale found that "the economic effects of financial transactions taxes on capital markets are seen to be pervasive. They may impose significant efficiency costs by impairing the smooth functioning of financial markets, increasing the cost of capital, and distorting the structure of capital financing. Their effects on the volatility of capital flows, either in domestic or international financial markets, are uncertain, as are their distributional and revenue effects."
* In 2001 the charity War on Want released The Robin Hood Tax, a report explaining the case for a currency transactions tax. War on Want also sets up the Tobin Tax Network to develop the proposal and press for its introduction.
* 2001 - Supporter: Fidel Castro - At the UN September 2001 World Conference against Racism, when the issue of compensation for colonialism and slavery arose in the agenda, Fidel Castro, the President of Cuba, advocated the Tobin Tax to address that issue. (According to Cliff Kincaid, Castro advocated it "specifically in order to generate U.S. financial reparations to the rest of the world," however a closer reading of Castro's speech shows that he never did mention "the rest of the world" as being recipients of revenue.) Castro cited holocaust reparations as a previously established precedent for the concept of reparations.
* December 3, 2009 - Supporters - 22 representatives in the United States House of Representatives supported the US DeFazio financial transaction tax (not an international tax)
* December 7, 2009 - Supporter: Nancy Pelosi, Speaker of the United States House of Representatives
* 2010 - Supporter: Gordon Brown - In an interview with The Financial Times on 10 February 2010, British prime minister Gordon Brown advised that the world's leading nations are moving closer to agreement on a global bank tax, and hopes matters will be settled at the June 2010 G20 summit in Canada. The tax may take the form of a Tobin tax which Mr Brown advocated in 2009, though it remains possible a non - transactional form of levy will be used.
