Does a Tobin Tax Make Sense?
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Lecture given at IDS on 11 March 2010 on the idea of a Tobin Tax. Includes analysiss of Robin Hood Tax campaign, evidence from previous tax models and idea of Inductance Tax.
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Does a Tobin Tax Make Sense?
- 1. Does a Tobin Tax Make Sense? Neil McCulloch Sussex Development Lecture Chichester lecture theatre 11 March 2010
- 7. The much feared Black Swans
- 14. The Effect of a Tobin Tax on Volatility: Simulation Results AUTHOR(S) RESULTS Hanke (2006) Increase or decrease depending on market size Shi and Xu (2009) Increase or decrease depending on the effect on the number of noise traders Westerhoff (2003) and Westerhoff and Dieci (2006) Decrease Ehrenstein (2002, 2005) Decrease, as long as the tax rate is not too high to affect the liquidity Mannaro et al. (2008) Decrease, but only in presence of noise traders in the market Kaiser et al. (2007) Decrease Bianconi et al. (2006) Decrease but depending on market size
- 25. Structure of the Foreign Exchange market FOREIGN EXCHANGE MARKET REPORTING DEALERS 43% OTHER FINANCIAL INSTITUTIONS 40% NON FINANCIAL CUSTOMERS 17% mutual funds, pension funds, hedge funds, currency funds, money market funds, building societies, leasing companies, insurance companies, other financial subsidiaries of corporate firms and central banks smaller commercial banks and securities houses non-financial end users, such as corporates and governments. INTERBANK -WHOLESALE MARKET RETAIL MARKET Large commercial and investment banks; large securities houses
- 29. Click to add title Click to add text Only 27% to 28% of the Ericsson , Sweden’s most actively traded company, took place in Stockholm between 1988 and 1991. After the abolition of the tax it increases to 41%.
- 32. Author(s) Tax rate Year of Daily turnover Geographical coverage Elasticity Reduction of volume Total Annual Revenue ($ bn) Tobin 0,50% 1995 Worldwide 1500 Spahn (1995) 0,02% 1995 Worldwide none 50 Felix and Sau (1996) 0,25% 1995 Worldwide 0,5% to 1% 300.2 to 393.4 Frankel(1996) 0,10% 1995 Worldwide 0,32% 166 Spahn (2002) 0,10% 2001 EU and Switzerland (including the UK) none 15% 16 UN (General Assembly, 2001) 0.1% 2001 Worldwide 132 Paul and Walhberg (2002) 0,05% 2001 Worldwide but no US$ and other major currencies none 50% 38 Bruno Jetin and Lieven Denys (2006) 0,10% 2004 Worldwide 1% 67% 125 Spratt (2006) 0,005% 2005 UK (sterling) 0.11% 5% 3 Schmidt (2008) 0,005% 2007 Only dollar, Pound, Euro and Yen 0.43% 33.41
- 33. Who pays the bill?
Editor's Notes
- The auction mechanism has intelligence in the sense that matches the buys and the sells let the pricing converging to the equilibrium point.
- Hanke (2006) simulates 2 continuous double auction markets, denoted LEFT and RIGHT on which a foreign currency (Taler) can be traded for the home currency (Gulden). They analyse the effect of the imposition of the transaction tax (0.5% of the transaction value) on one and then on both markets. In order to capture long lasting effect of the imposition of a Tobin tax they also consider a scenario where the tax is abolished again after its introduction. Shi and Xu (2009). A main assumption is that informed traders's unconditional expectation of excess return depends on the noise component of the market, which does not affect noise traders' expectations, causing an “asymmetric expectation effect” on the gross benefits of entry. The noise component is the ratio on noise entrants to informed entrants, An increase in the noise component increase market volatility. Westerhoff (2003) and Westerhoff and Dieci (2006) developed a simulation model of heterogeneous interactive agents in which rational agents apply technical and fundamental analyses for trading in two different markets. The technical analysis is based on past price trends, whereas fundamental analysis predicts a convergence towards fundamentals. The agents are free to trade and so they have several options, which are chosen depending on their relative fitness, where the fitness is given as a weighted average of current and past profits. Ehrenstein (2002, 2005) augmented ZI agents model based on the percolation theory of Cont and Bochaud (2000) with the introduction of a Tobin Tax. The percolation theory describes the behavior of connected clusters in a random graph. Agents random form clusters. They take decision to buy, sell with probability (a), called “activity”, whose maximum value is calculated to be 0.5, or remain inactive with probability (1-2a), “inactivity”. Aggregate excess of demand, i.e. the sum of all the orders, is the only force influencing the determination of prices. Ehrestein (2005) used this model to evaluate the impact of Tobin tax on volatility, market distortions and government revenue, according to the introduction of different heights of the tax (from 0 to 1%), different curvatures of the price function (g=0, g=0.19, g=0.4) and a different percentage of producers in the market. Mannaro et al. (2008) propose a multi-agent simulation model for analyzing the effects of introducing a transaction tax on one and then on two related stock markets from a structural and behavioural perspective. The microstructure of the market model is composed of four kinds of traders (Raberto et al., 2003): Random traders, who trade at random; Fundamentalists, who pursue the “fundamental” value; Chartists, trend-followers who are divided into: Momentum traders, who follow the market trend; Contrarian traders, who follow the opposite of the market trend. Kaiser et al. (2007) gives an example of the game theoretical approach applied to asset market with or without the introduction of a Tobin tax. They used an experimental market inspired by a discretized double auction which is modified from the traditional Vernon Smith’s one, to reach a game – theoretical solution. The experiment was divided into 2 scenarios: untaxed and taxed, where the tax’s height varied in order to analyse the elasticity of volatility to the imposition of such a tax. They carried experiments on 96 subjects, mostly students from the University of Bonn. They analysed 6 sessions for the taxed scenario and 6 sessions for the untaxed one. Each session lasted 2 hours. Differently from the traditional measure of volatility, they use a variance which measures absolute difference between prices and their average. Bianconi et al. (2006) analyze theoretically the impact of the imposition of a transaction tax (Tobin tax) on the volatility of the exchange rate in a GCMG model. The first effect of the tax is to increase the profit threshold for speculators, discouraging them from trading because of the reduction of the strategy score. Furthermore, the effect of the imposition of a tax depends on the position of the market with respect to a critical zone where the information efficiency of the market is reached. If it is far to the left, the tax has mild effect on volatility and information efficiency. If the market is within the critical zone and volatility is high, only a sufficiently large tax will have impact on volatility. Moreover, the impact on volatility is found to be very dependent of the market size. Hence, since volatility decreases with the size of system, the effect of a Tobin tax would be much stronger in a small system than in bigger ones. Finally, in a market of evolving agents composition a tax can reduce volatility only if the change in the composition is slow.
- In the same year, the Stamp duty reserve tax (SDRT) applies to transfers of beneficial ownership which were previously not subject to stamp duty, electronic, paperless transactions that are made through a stockbroker. In 1990, the government announced the abolition of the stamp duty, subject to the introduction of a new equity settlement system, TAURUS. However, its collapse leads stamp duty to remain alive.
- Perhaps the problem is that we confound the term of holding (short-term vs long-term) with whether it is stabilising or destabilising. But short-term trades could be stabilising. What you want is not to tax trade – but to tax panic!
- Similar ideas to the Inductance Tax have been proposed before. For example, Spahn has already proposed a two-tier Tobin Tax, where the tax rate would rise if market volatility rose above a certain threshold. But the Inductance Tax has the advantage that it would not require the specification of arbitrary thresholds between the lower and upper tier tax rates.