Global Policy Forum

If a "Tobin tax" is not implemented on a worldwide basis, activity will tend to migrate to tax-free jurisdictions. An illustrative example is provided by the transaction taxes on equities and bonds in Sweden. Following the doubling of the excise tax on share transactions to 1 per cent for both buyers and sellers and the introduction of a 0.15 per cent excise tax on money market instruments and bonds in 1984, about half of the turnover in Swedish stocks moved to London, and trade with monetary instruments and bonds in Sweden declined by 80 per cent. The tax appeared to have no effect on domestic market volatility, while it was associated with a 2.2 per cent drop in the Swedish All-equity index the day it was announced and an increase in bid-ask spreads (a measure of transaction costs).

Other financial or real markets would also offer ways to avoid a "Tobin tax". For example, oil or commodities contracts denominated in different currencies could be exchanged against each other. However, costs of transacting in foreign exchange would likely be higher and resource allocation to unproductive financial engineering would be encouraged. Finally, such a tax could increase the attractiveness of tax havens and off-shore centres.

What are the potential revenues from such a tax?

Given the high volume of trading in foreign exchange markets, some recent advocates of the "Tobin tax" suggest that it would raise substantial revenues that could be used for development assistance. In 2001, based on a survey of market activity by the Bank of International Settlements, the daily trading volume was estimated to be 1,25 trillion dollars (Figure VIII.2). Assuming 240 trading days and a tax of 0.5 per cent, the potential upper limit of tax revenues would be about 1½ trillion dollars, a sum out of proportion with that currently spent on overseas development assistance.

Abstracting from implementation issues, any estimate of potential revenues would have to allow for the effect that the tax would have on the base itself. A recent official report notes the following features of the foreign exchange markets:

- Transaction costs in this market are low. For interbank-market trading in major currencies, the price spread between buyers and sellers is 0.02 per cent, while for trading between banks and non-banking customers, the spread is about 0.10 per cent. Acknowledging a lack of empirical evidence on the sensitivity of trading volumes with respect to these spreads, the report argues that it is likely large for big customers and narrower for smaller ones, and suggests an elasticity in the range of -1.5 to -0.5.

- Even in a best-case scenario - using the lower elasticity and assuming a tax rate of 0.5 per cent, with initial transaction costs of 0.10 per cent - the drop in the tax base would be quite large, approximately 66 per cent. If the elasticity were higher and the initial transaction costs lower, then the reduction in the base would be dramatic.

Such calculations suggest that the revenue take could be significantly reduced by the tax, although it would remain substantial.

Another question is whether or not a "Tobin tax" is the best way to finance over-seas development assistance. From an economic perspective, the use of earmarked taxes may not be the most efficient option. Rather, provided that such assistance is worthwhile, it would be best to finance it in a way that implies as little distortion and as much certainty about revenues as possible. This is unlikely to be achieved through a "Tobin tax". Its popular appeal may nonetheless reflect a view that it would be paid by relatively well-to-do taxpayers. This argument rests on the confusion that a tax is being paid by those on whom it is levied. In practice, taxes are being shifted through changes in prices and wages and the ultimate payer of the tax may be a quite different person from the one handing over the tax revenue. In the case of a "Tobin tax", its final incidence is not very clear but it cannot be excluded that some of those paying the tax would be the same developing countries that it was meant to help. Finally, the linking of a "Tobin tax" to overseas development assistance may divert political attention away from the issue of whether such transfers should be increased.

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