The Tobin Tax The Real Way Forward

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The Tobin TaxThe Real Way Forward

• Sony Kapoor
• Policy Advocacy Advisor
• Tobin Tax Network
• International Finance Consultant
• New Economics Foundation
• Swedish Parliament
• May 2004

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The foreign exchange market

• So how big is it really?
• How rapidly has it grown?
• But isnt it about trade?
• And where is it based?
• But am I not a part of it?
• Isnt it run by economic fundamentals?

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The Norwegian Story

• About the Tobin tax
• Opponents
• Ineffective
• Harmful
• Utopian

• Supporters

• Effective
• Beneficial
• Realistic

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Which Tobin Tax?

• Purpose Stability, Development or Policy
  Independence?
• Jurisdiction Universal or Unilateral?
• Percentage 10, 1 or 0.01?
• Structure Single tier or Two tier?
• Revenue 200 billion or 20 billion?
• Currency Single or Multiple?
• Tobin Tax and World Poverty

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What is our proposition?

• Size of profits in the market
• Small (0.005) first tier tax
• Amount of revenue?
• Currency Based tax
• Large (up to 20-30) second tier tax
• Collected at settlement
• On Derivatives and Spots

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An Outlandish Idea?

• Six out of the G10 countries have STT
• US 0.003 on Stocks, France 0.15
• UK 0.5 Stamp Duty Reserve Tax
• Belgium 0.17 Stocks, 0.07 Bonds
• US raised 4 billion, UK raised 7 billion
• Circuit Breakers in major stock markets
• Introduced after Black Monday 1987
• September the 11th 2001

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But how will it help?

• Raise significant revenues
• Reduce likelihood of financial crises (308)
• Reduce volatility
• Encourage trade and investment
• Engender and more stable economy
• Lower interest rates and higher growth

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What is in it for us?

• World Economy (Lower Interest Rates)
• High Income Countries (New ERM, Yen)
• Middle Income Countries (Stability)
• Low Income Countries (Aid)
• Multilateral Agencies (Mandate)
• Businesses (Growth and Trade)
• And even something for
• Banks (Credit Quality)

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Developing Countries?

• Substantial additional aid flows
• Increased stability would encourage investment
  and FDI
• Mitigate social costs and negative externalities
  (financial shocks)
• Reduce cost of doing business hence encourage
  trade and growth (1 decrease in volatility leads
  to a 2 increase in trade)
• Reduce opportunity costs of reserves

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Businesses?

• Decrease risk of cross border investment
• Opportunities with higher trade flows
• Decrease demand/supply shocks
• Decrease cost of hedging foreign exchange
  exposure
• Lower real interest rates would encourage growth
  and investment
• Corporate Social Responsibility

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But is it really worth it?

• Significant revenues 1/3 ODA flows
• Lower real interest rates
• Opportunity costs of holding reserves
• Crises and volatility are a tax on growth
• Trade and Investment benefits
• Confidence and other financial market benefits

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STT Sweden vs. Great Britain

• Introduced 1984 On Swedish Brokers
• Extended to Options, Money Markets
• Migration to offshore Stock Trading, Money
  Markets died Change in instruments Turnover
  reduced by 98
• SDRT is paid by purchasers (0.5)
• Tax on registration Highly Successful

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Miscellaneous Stuff

• Bank Profits Liquidity, Evasion, Feasibility
• Speculators leverage and cost
• Summers, Tobin, Stiglitz, Kapoor
• Beyond the Tobin Tax

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Questions, queries, further work, suggestions or
just a chat

• Sony Kapoor
• sonykapoor_at_aol.com
• Sony.Kapoor_at_neweconomics.org
• 44-7941884547