The European Commission will propose a Tobin tax on financial transactions this autumn with the aim of introducing it by 2018. The tax is intended to raise revenue, reduce market volatility, and discourage risky behavior by financial institutions. However, previous attempts to implement financial transaction taxes have raised less revenue than expected and had unclear effects on volatility. Actual implementation of an EU-wide Tobin tax is unlikely due to opposition from Sweden and the UK. A stability levy on balance sheet positions may be easier to implement.

1. WEDNESDAY
EU Tobin tax unlikely to pass 6 JULY 2011
The European Commission will present a proposal the autumn of this year with the aim of introducing it no
later than 1 January 2018.
for a Tobin tax on financial transactions this
autumn. Its most important aim appears to be to So far, details are sketchy, probably to ensure the
generate tax revenue although legislators also proposal is not rejected out of hand. However, the results
seek to reduce market volatility and activities by of the underlying analysis are presented in European
financial institutions characterised by excessive Commission (2011).
risk. However, experience from previous attempts
to introduce financial transaction taxes is poor; The broad motivation for introducing a tax on financial
transactions is to require the sector to contribute more to
actual tax-income raised has been less than
the costs of stabilising the financial system. The tax has
expected while the measurable effect on market three main objectives; to raise revenue, to reduce
volatility has been unclear. Furthermore, actual “overly risky” activities by financial institutions and
implementation of a European Union Tobin tax is to avoid fragmentation of the internal market for
unlikely as both Sweden and the UK oppose it. It financial services which could result from
would be easier to find support for a stability levy. uncoordinated national taxes. It is intended that the
initiative represent an initial step towards the application
of a financial transaction tax on a global level and that it
THE ORIGINAL TOBIN TAX. The original “Tobin tax” was would “allow the EU to lead by example”.
suggested by the American economist James Tobin in
1972, shortly after the break-up of the Bretton Woods As far as the size of the tax rate is concerned, specific
system, and was later presented in more detail in Tobin details will be introduced together with the concrete
(1978); see reference list. Tobin suggested a new system legislative proposal this autumn. However, it has been
for international currency stability, of which an stated that “a very low tax rate would be imposed”
international charge on foreign-exchange transactions and that legislation will differentiate between different
was a key component. The objective was to reduce groups of instruments, possibly 0.1 per cent for bonds
exchange rate volatility by levying a small tax on all spot and shares and 0.01 per cent for derivatives products.
conversions of one currency into another, penalising very Revenue generated, estimated by the EU Commission at
short-term investments. The tax was intended to reduce over EUR 30bn per annum, should flow into the EU
harmful speculation by “throwing sand into the budget.
wheels of foreign exchange markets”. Tobin had no
view on how the proceeds of such a tax should be used A TOBIN TAX COULD HAVE HARMFUL EFFECTS. The
as its aim was not to create tax revenue but to dampen underlying assumption justifying a Tobin tax is that
exchange rate fluctuations. speculation in financial markets is inherently negative.
This is debateable; while speculation can result in the
The term “Tobin tax” sometimes refers to Tobin’s original development of harmful asset bubbles it can also have
suggestion of a specific currency transaction tax and several advantages. Speculation can help markets to
sometimes to a more general type of tax on all financial work better by stimulating the process of price discovery
transactions. The present European Commission and improving liquidity. Furthermore, it is extremely
proposal is of the latter kind. difficult to distinguish between speculative and non-
speculative transactions.
THE EUROPEAN COMMISSION PROPOSES A TOBIN
TAX. The European Commission has stated that it will Irrespective of the utility or otherwise of speculation,
present a proposal for an EU financial transaction tax in there are several problems connected with Tobin
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2. Economic Insights
taxes. The most fundamental is that the introduction voiced criticism, stating that a financial transaction tax
of a tax on financial transactions risks relocating would be harmful for the financial sector in the EU at a
those transactions to other jurisdictions. The process time when the sector is in need of increased activity.
of globalisation has integrated financial markets and
relocation is much more of a problem now than during Since EU member states wield veto powers on most tax
the 1970s. To be effective such a tax would have to take issues it seems unlikely that a tax on financial
the form of an internationally agreed uniform tax (as transactions will eventually be implemented.
suggested by Tobin). Another problem is that a Tobin tax Instead, it is more likely that new taxation of the financial
could eliminate day-to-day low-margin trading while still sector will take the form of a stability levy such as that
failing to prevent speculation where expected profit used in Sweden. Within such a system a fee is levied on
widely exceeds the tax payable. The tax also threatens to certain balance sheet positions (rather than on more
increase the cost of capital for business. mobile financial market transactions) in order to reduce
leverage. The fee payable could limit excessive risk-
Empirical evidence that the introduction of a Tobin tax taking but risk driving activity into other parts of the
could reduce market volatility is weak at best. Most financial sector. A stability levy has already been
empirical studies have failed to find a statistically discussed in underlying analysis published by the
significant causal link between increases in European Commission. While it would be easier to find
transaction costs and reductions in volatility. Some support for this kind of system among member states, a
studies have even found that a Tobin-style tax may stability levy does not form part of the current proposal.
actually increase volatility due to a reduction in the
number of transactions and liquidity in financial markets. References
European Commission (2011): “Financing the EU Budget:
SWEDEN’S EXPERIENCE IN IMPLEMENTING A TOBIN- Report on the Operation of the Own Resources System”,
STYLE TAX IS INSTRUCTIVE. Several countries have Commission Staff Working Paper, SEC (2011) 876 final.
experience of financial transaction taxes based on
various designs. Sweden is one such example; between Tobin, J. (1978): “A Proposal for International Monetary
1984 and 1991 a general form of financial transaction tax Reform”. Eastern Economic Journal, 4(3-4), July/October,
was implemented beginning with introduction of a tax on pp. 153-159.
the purchase and sale of equities, followed later by taxes
on fixed-income securities. The amount of revenues Andreas Johnson
generated was disappointing. As transactions were SEB Economic Research
driven abroad taxable trading volumes fell sharply and + 46 73 523 77 25
actual tax revenues were less than 5 per cent of the andreas.johnson@seb.se
expected amount. The impact on fixed-income securities
trading was dramatic; the volume of bond trading fell by
more than 80 per cent and the options trading market
disappeared. By the end of 1991 these taxes had been
abolished completely and trading volumes returned. The
Swedish experience outlines one of the main
problems with a Tobin tax; trading is driven abroad
and the expected increase in tax revenue fails to
materialise. Experiences differ but countries such as
Canada and Switzerland have also experienced
relocation of trading.
ACTUAL IMPLEMENTATION IS UNLIKELY. Suggestions
for introducing Tobin taxes have resurfaced now and
then during the last twenty years and the financial crisis
has served to strengthen its advocates. However,
passing legislation to tax financial transactions will be
difficult. A Tobin tax enjoys the support of the French
and German governments but Sweden has argued
strongly against its introduction based on the argument
that trading will be relocated. The UK is only prepared to
support a transactions tax if it is agreed at global level.
The president of the ECB, Jean-Claude Trichet, has also
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