There’s been a lot of discussion about the need for concrete demands from the #AmericanAutumn #OccupyWallStreet protests.
I just want to toss up the wholly unoriginal idea of a tax on financial transactions, originally proposed by James Tobin (he focused on international transactions, but the distinction is no longer meaningul). I’ve seen a sign advocating this on one of the videos of the protest, but I think it deserves more attention, for a bunch of reasons
* It’s directed squarely at Wall Street
* It’s global in its orientation
* It doesn’t require complicated structural change, as would a return of Glass-Steagall
* There’s an existing global movement supporting it
* It’s on the elite policy table right now, with support from the EU
* It would potentially raise substantial revenue, while greatly reducing the volume of short-term financial transactions
Here’s a piece I wrote about not long ago in Politics and Society and an older article on the Tobin tax, and over the fold some notes I prepared for our Parliamentary Library a few years back.
1. The issues of whether volatility is excessive and of whether a tax is likely to reduce volatility are presented as separate, but in fact they are closely linked. Models of specualtion that imply that current levels of volatility are justified by changes in fundamentals also imply that a small tax will have very little effect on volatility. Conversely most models of excess volatility imply that a tax would reduce volatility. Although no final econometric resolution is likely, it is certainly true that volatility is far in excess of the levels anticipated by supporters of financial deregulation. In my view, the evidence favours the excessive volatility hypothesis and therefore the view that a tax would reduce volatility.
2. At different times leading economists have proposed taxes on different classes of financial transactions. For example, Stiglitz proposed such a tax on domestic security markets and Tobin on international currency transactions. Because of the ease with which one type of transaction can be substituted for another (for example, international interest rate futures for international currency transactions), the most effective and least distorting tax regime would be one which applied at a low rate to all financial transactions.
3. The effective tax base for such a tax is the financial services sector. On the broadest definition this covers around 12 per cent of GDP, but the component concerned with large-scale financial transactions is smaller (perhaps 4 per cent of GDP). Household transactions are already taxed through financial institutions duty etc. Exposing financial services to effective tax rates similar to those of the luxury manufactured goods sector (say an effective tax rate of 25 per cent) would imply a tax yield of around 1 per cent of GDP or up to $4 billion a year (in Australia). This estimate appears to be broadly consistent with estimates of around $100 bn/year for the world as a whole derived from the volume of transactions, after reductions in the volume of speculative transactions are taken into account.
4. The desirability of making a rapidly expanding sector of the economy (in the view of a significant group of economists, over-expanded) bear a reasonable share of the tax burden is an important argument for considering tax measures of this kind. On theoretical grounds a unit transactions tax is to be preferred to alternatives such as the imposition of a GST-style tax on bank margins.
This blog was first published on John Quiggin’s Blog