The document summarizes the case for and against a financial transaction tax (FTT). It discusses whether an FTT would reduce market volatility, if it is feasible to implement, how much revenue it could raise, and who would bear the cost. While an FTT aims to increase stability, the evidence that it would reduce short-term volatility is weak. Implementing global coordination poses challenges but is not impossible. Estimates find it could raise significant funds, though much would likely be passed to capital owners. A panel discussion further debated the feasibility and impacts of an FTT.

1. Viable solution or impossible dream?The case for and against a financial transaction tax

2. Welcome and IntroductionsJean SaldanhaPolicy and Advocacy OfficerCIDSE

3. AnniPodimata MEP

4. Philip KermodeDirector of Direct Taxation, Tax Coordination, Economic analysis and EvaluationDirectorate General for Taxation and Customs Union (DG TAXUD)

5. Dr Neil McCulloch Research FellowInstitute of Development Studies

6. Financial Transaction Taxes – a Systematic Review Neil McCulloch 14 June 2011

7. Overview Why do a Systematic Review of Financial Transaction Taxes? Do FTTs reduce volatility? Theoretical approaches Evidence from similar taxes Are FTTs feasible? Substitution Migration How much money might a FTT raise? What is the incidence of a FTT? Conclusion

8. 1. The Tobin (or Keynes) Tax? “…an international uniform tax on all spot conversion of one currency into another, proportional to the size of the transaction.” “A Proposal for international monetary reform”, James Tobin, 1978. “The introduction of a substantial government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprises in the United States.” Keynes, J.M. The General Theory of Employment, Interest, and Money. New York, 1936

9. A fractious debate “The Robin Hood Tax is justice. The banks can afford it. The systems are in place to collect it. It won't affect ordinary members of the public, their bank accounts or their savings. It's fair, it's timely, and it's possible” Robin Hood Tax campaign “…the Tobin tax is a bad idea, since it would greatly increase both the costs and volatility of foreign exchange dealing and throw a huge spanner into the workings of the global financial economic system.” Prof. Charles Goodhart, LSE

10. A Systematic Review Protocol Search protocol FTTs & Volatility, feasibility, revenue, incidence Specified electronic and non-electronic sources Expert panel Authors who have written on FTTs Refining the results Almost 500 papers! Inclusion/Exclusion criteria Topic, rigour, post 1996 Reduces to ~200 papers Synthesize the results Draft sent for comment Finalise Review

11. 2. Does a Tobin Tax reduce Volatility? Theoretical models balance two opposing effects of a Tobin Tax: Reduction in volatility by reducing the number of speculators/ “noise” traders relative to “fundamentals” traders Increase in volatility due to the reduction in the liquidity of the market as a result of the tax

12. The Effect of a Tobin Tax on Volatility: Simulation Results

13. Volatility and a FTTThe Swedish Experience January 1, 1984 Introduction of a round-trip tax of 1% of the value of exchanged securities (i.e., taxes of 0.5% on both purchases and sales). July 1, 1986: The tax was increased to 2% 1991, Removed.

14. The Stamp Duty in UK The stamp duty is a tax on “change” in ownership which must be registered in UK. Its rate changed over time: 1694: introduction August 1963: lowered from 2% to 1% May 1974: increased from 1% to 2% April 1984: lowered from 2% to 1% October 1986: reduced to 0,5%. Saporta and Kan (1997)compare the performance of the UK stock market before and after the announcement of an increase or decrease of the Stamp duty. They find no significant effect of UK Stamp duty imposition on volatility of equity prices.

15. Volatility and transaction costs in foreign exchange markets Aliber, R.Z., Chowdhry, B. and Yan, S. (2003) 'Some Evidence That a Tobin Tax on Foreign Exchange Transactions May Increase Volatility', European Finance Review 7: 481-510 Relationship between transaction costs, trading volume and volatility of futures prices of four currencies (£, DM, ¥, SF) 1977-1999 Transaction costs vary over time – so can use this to estimate relationship between transaction costs and volatility Average volatility is 11%. Increase in transaction costs of 0.02% => 0.5 percentage point increase in volatility

16. Volatility: Conclusion In theory, a Tobin like tax could reduce volatility – several theoretical models suggest that it should However, most empirical studies find a positive relationship between transaction costs and volatility, both in equity and forex markets However, these studies are heavily focused on intra-day volatility – this may not be the type of volatility that really matters Certainly no clear evidence that increasing transaction costs via a tax would reduce volatility

17. 3. Is the Tobin Tax feasible? “… a tax could not be practically enforceable given the multiple avenues for avoidance, and the consequently heavy regulatory and implementation costs such a tax would require.” (Ivan Lewis MP, Economic Secretary 2006) The Tobin tax “could be implemented relatively easily and cheaply, using existing market infrastructure and networks” (Kapoor, 2006)

20. Three challenges to implementation At what point in the system to levy the tax? What instruments to tax? How do you avoid migration to untaxed locations?

21. At what point in the system to levy the tax? There are thousands of dealers and intermediaries across many countries …but the same is true of retailers in countries who still manage to charge sales tax/VAT However one might be able to levy at settlement The Continuous Linked Settlement Bank (CLS Bank) settles 55% of global foreign exchange transactions (rest through High Value Domestic Settlement systems of individual countries) More than 60% of all sterling and euro transactions are settled in the CLS system. The majority of the remainder processed through the UK’s CHAPS and the ECB’s TARGET System for their respective currencies. A single clearing system, SWIFT and its affiliates, is used for all large-value financial transactions, allowing tracking of transactions

22. What instruments to tax? Foreign exchange spot? Forwards? Futures? Options? Swaps? All derivatives? They have dramatically different costs so you would have to tax at different rates (RHT propose 0.005% for forex and for bond and derivative markets; and 0.5% for equity) Financial markets are extremely innovative! This imposes a cost on tax authorities keeping up with avoidance

23. How do you avoid migration to untaxed locations? Migration risk is real Almost 60% of the trading volume of the 11 most actively traded Swedish shares migrated to London because of the Swedish tax!) Long-run effects are larger than short-run effects Shifts in institutional capacity and expertise take time. But Avoidance is harder than it used to be New centres have higher settlement risk (HERSTATT Risk) They must follow Basel III rules and comply with money laundering regulations which is expensive

24. Bottom line on Implementation Ideally Get everyone in the world to agree! Impose penalties on non-compliant states In practice “only” need agreement of 6 big players (UK, US, Euro, Switzerland, Hong Kong, Singapore) In theory could even go it alone. if you tax immobile resources …and the big players complied then can still raise revenue “The FTT should not be dismissed on grounds of administrative practicality” (IMF, 2010)

25. 4. How much money will a Tobin Tax raise? It depends on one’s assumptions about: Tax rate Reductions in trade Avoidance Scope of application

26. Meta analysis of revenue Constructing revenue estimates by taking median estimates of key parameters

27. Who pays the bill?

28. 5. Conclusions The objective of a Tobin Tax is a good one – financial markets are excessively volatile, so there could be strong gains from greater stability The evidence that a Tobin Tax would reduce volatility is weak – if anything it might increase it Implementing a Tobin Tax would be difficult … but certainly not impossible A Tobin Tax would raise significant revenue A significant share of the cost would likely be passed to owners of capital … but this is still more progressive than many other forms of tax e.g. VAT

29. The Systematic Review can be obtained from: http://www.ids.ac.uk/go/idsproject/assessing-the-tobin-tax http://www.ntd.co.uk/idsbookshop/details.asp?id=1180

30. Panel discussion: Can we make a FTT work? Who would end up paying a FTT?Rodney Schmidt, Chief Operating Officer and Director of Research, North-South Institute Is a FTT feasible?Ian Harrison, Managing Director, Association for Financial Markets in Europe Should the money be used for development?Michele Maynard, Policy and Advocacy Officer, Pan African Climate Justice Alliance Max Lawson, Head of Development Finance and Public Services, Oxfam GB

31. Closing RemarksJean SaldanhaPolicy & Advocacy OfficerCIDSE