Editing Tobin tax (section)

==Evaluating the Tobin tax as a Currency Transaction Tax (CTT)==
{{See also|Currency transaction tax|#Evaluating the Tobin tax as a general Financial Transaction Tax (FTT)}}

===Stability, volatility and speculation===

====The appeal of stability====
In 1972, Tobin examined the global monetary system that remained after the Bretton Woods monetary system was abandoned. This examination was subsequently revisited by other analysts, such as Ellen Frank, who, in 2002 wrote: "If by globalization we mean the determined efforts of international businesses to build markets and production networks that are truly global in scope, then the current monetary system is in many ways an endless headache whose costs are rapidly outstripping its benefits."<ref name="Frank">{{cite web|url=http://www.newint.org/issue342/surf.htm?amp;amp;utm_medium=email-html&amp;amp;utm_content=body&amp;amp;|title=Heavy surf & tsunamis|author=Ellen Frank|date=February 2002|publisher=[[New Internationalist magazine]]|access-date=23 February 2010}}{{Dead link|date=July 2018|bot=InternetArchiveBot|fix-attempted=no}}</ref> She continues with a view on how that monetary system stability is appealing to many players in the world economy, but is being undermined by [[Volatility (finance)|volatility]] and [[Exchange rate#Fluctuations in exchange rates|fluctuation in exchange rates]]: "Money scrambles around the globe in quest of the banker's holy grail – sound money of stable value – while undermining every attempt by cash-strapped governments to provide the very stability the wealthy crave."<ref name="Frank"/>

Frank then corroborates Tobin's comments on the problems this instability can create (e.g. high interest rates) for [[Developing country|developing countries]] such as Mexico (1994), countries in South East Asia (1997), and Russia (1998).<ref name="ex"/> She writes, "Governments of developing countries try to peg their currencies, only to have the peg undone by capital flight. They offer to [[United States dollar|dollarize]] or [[euro]]ize, only to find themselves so short of dollars that they are forced to cut off growth. They raise interest rates to extraordinary levels to protect investors against currency losses, only to topple their economies and the source of investor profits. ... IMF bailouts provide a brief respite for international investors but they are, even from the perspective of the wealthy, a short-term solution at best ... they leave countries with more debt and fewer options."<ref name="Frank" />

====Effect on volatility====
One of the main economic hypotheses raised in favor of financial transaction taxes is that such taxes reduce return [[volatility (finance)|volatility]], leading to an increase of long-term investor [[utility]] or more predictable levels of exchange rates. The impact of such a tax on volatility is of particular concern because the main justification given for this tax by Tobin was to improve the autonomy of macroeconomic policy by curbing international currency speculation and its destabilizing effect on national exchange rates.<ref name = "Tobin"/>

=====Theoretical models=====
Most studies of the likely impact of the Tobin tax on financial markets volatility have been ''theoretical''—researches conducted laboratory simulations or constructed economic models. Some of these theoretical studies have concluded that a transaction tax could reduce volatility by crowding out speculators<ref>{{Cite journal|last=Westerhoff|first=F.|year=2003|title=Heterogeneous traders and the Tobin Tax|journal=Journal of Evolutionary Economics|volume=13|issue=1|pages=53–70|doi=10.1007/s00191-003-0140-5|s2cid=38621536}}</ref> or eliminating individual '[[Noise (economic)|noise]] traders'<ref>{{Cite journal|last=Palley|first=T.|year=1999|title=Speculation and Tobin Tax: why sand in the wheels can increase economic efficiency|journal=Journal of Economics|volume=69|issue=2|pages=113–126|citeseerx=10.1.1.588.3440|doi=10.1007/BF01232416|s2cid=16185048}}</ref> but that it 'would not have any impact on volatility in case of sufficiently deep global markets such as those in major currency pairs,<ref name="Erturk">{{Cite journal|last=Erturk|first=Korkut|year=2006|title=On the Tobin Tax|journal=Review of Political Economy|volume=18|issue=1|pages=71–78|doi=10.1080/09538250500354173|s2cid=153740324}}</ref> unlike in case of less liquid markets, such as those in stocks and (especially) options, where volatility would probably increase with reduced volumes.<ref>{{Cite journal|last=Davidson|first=P.|year=1997|title=Are grains of sand in the wheels of international finance sufficient to do the job when boulders are often required?|journal=Economic Journal|volume=107|issue=442|pages=671–686|doi=10.1111/1468-0297.00183|jstor=2957792}}</ref><ref>{{Cite journal|last=Davidson|first=P.|year=1998|title=Efficiency and fragile speculative financial markets: against the Tobin Tax and for a creditable market maker|journal=American Journal of Economics and Sociology|volume=57|issue=4|pages=639–666|doi=10.1111/j.1536-7150.1998.tb03383.x}}</ref> [[Behavioral finance]] theoretical models, such as those developed by Wei and Kim (1997)<ref>{{cite journal|author1=Shang-Jin Wei|author2=Jungshik Kim|name-list-style=amp|date=March 1999|title=The Big Players in the Foreign Exchange Market: Do They Trade on Information or Noise?|journal=Cid Working Papers |url=https://ideas.repec.org/p/wop/cidhav/5.html|publisher=Center for International Development at [[Harvard University]] in its series CID Working Papers with number 5.|access-date=2010-01-02|archive-url=https://web.archive.org/web/20090804105448/http://ideas.repec.org/p/wop/cidhav/5.html|archive-date=2009-08-04|url-status=live}}</ref> or Westerhoff and Dieci (2006)<ref>{{cite journal|last1=Westerhoff|first1=F|last2=Dieci|first2=R|year=2006|title=The effectiveness of Keynes–Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach☆|url=https://ideas.repec.org/a/eee/dyncon/v30y2006i2p293-322.html|journal=Journal of Economic Dynamics and Control|volume=30|issue=2|page=293|doi=10.1016/j.jedc.2004.12.004|access-date=2010-01-02|archive-url=https://web.archive.org/web/20090308013927/http://ideas.repec.org/a/eee/dyncon/v30y2006i2p293-322.html|archive-date=2009-03-08|url-status=live}}</ref> suggest that transaction taxes can reduce volatility, at least in the foreign exchange market. In contrast, some papers find a positive effect of a transaction tax on market volatility.<ref name="Kerbl2011">Kerbl S (2011) [http://www.oenb.at/Publikationen/Volkswirtschaft/Working-Papers/2011/Working-Paper-174.html "Regulatory Medicine Against Financial Market Instability: What Helps And What Hurts?"] {{Webarchive|url=https://web.archive.org/web/20150709165645/http://www.oenb.at/Publikationen/Volkswirtschaft/Working-Papers/2011/Working-Paper-174.html |date=2015-07-09 }} ''OeNB Working Paper''.</ref><ref name="Mannaro2008">Mannaro K, Marchesi M and Setzu A (2008) "Using an artificial financial market for assessing the impact of tobin-like transaction taxes." ''Journal of Economic Behavior & Organization'','''67(2)'''::445-462.</ref> Lanne and Vesala (2006) argue that a transaction tax "is likely to amplify, not dampen, volatility in foreign exchange markets", because such tax penalises informed market participants disproportionately more than uninformed ones, leading to volatility increases.<ref>{{Cite journal|last1=Lanne|first1=Markku|last2=Vesala|first2=Timo|title=The effect of a transaction tax on exchange rate volatility|journal=International Journal of Finance & Economics|date=2010 |volume=15 |issue=2 |pages=123–133|doi=10.1002/ijfe.399|ssrn=1018363|hdl=1814/3993|hdl-access=free}}</ref>

=====Empirical studies=====
{{See also|#Tobin tax proponents response to empirical evidence on volatility}}

In most of the available ''empirical'' studies however, no statistically significant causal link has been found between an increase in [[transaction cost]]s (transaction taxes or government-controlled minimum brokerage commissions) and a reduction in volatility—in fact a frequent unintended consequence observed by 'early adopters' after the imposition of a financial transactions tax (see Werner, 2003)<ref>{{Cite journal|last=Werner|first=Ingrid M.|year=2003|title=Comment on 'Some Evidence that a Tobin Tax on Foreign Exchange Transactions may Increase Volatility'|journal=European Finance Review|volume=7|issue=3|pages=511–514|citeseerx=10.1.1.459.5056|doi=10.1023/B:EUFI.0000022151.50261.40}}</ref> has been an ''increase in the volatility'' of stock market returns, usually coinciding with significant declines in liquidity (market volume) and thus in taxable revenue (Umlauf, 1993).<ref name="Umlauf, Steven R. 1993">{{Cite journal|last=Umlauf|first=Steven R.|year=1993|title=Transaction taxes and the behavior or the Swedish stock market|journal=Journal of Financial Economics|volume=33|issue=2|pages=227–240|doi=10.1016/0304-405X(93)90005-V}}</ref>

For a recent evidence to the contrary, see, e.g., Liu and Zhu (2009),<ref name="Liu 2009">{{Cite journal|last1=Liu|first1=Shinhua|last2=Zhu|first2=Zhen|name-list-style=amp|year=2009|title=Transaction Costs and Price Volatility: New Evidence from the Tokyo Stock Exchange|journal=Journal of Financial Services Research|volume=36|issue=1|pages=65–83|doi=10.1007/s10693-009-0063-x|s2cid=154120891}}</ref> which may be affected by [[selection bias]] given that their Japanese sample is subsumed by a research conducted in 14 Asian countries by Hu (1998),<ref>{{Cite journal|last=Hu|first=Shing-yang|year=1998|title=The effects of the stock transaction tax on the stock market: Experiences from Asian markets|journal=Pacific-Basin Finance Journal|volume=6|issue=3–4|pages=347–364|doi=10.1016/S0927-538X(98)00017-1}}</ref> showing that "an increase in tax rate reduces the stock price but has no significant effect on market volatility". As Liu and Zhu (2009) point out, [...] the different experience in Japan highlights the comment made by Umlauf (1993) that it is hazardous to generalize limited evidence when debating important policy issues such as the STT [securities transaction tax] and brokerage commissions."

===Optimum Tobin tax rate===
When James Tobin was interviewed by ''[[Der Spiegel]]'' in 2001, the tax rate he suggested was 0.5%.<ref name="Reiermann"/><ref name="excerpt"/><ref name="Summaries"/> His use of the phrase "let's say" ("sagen wir") indicated that he was not, at that point, in an interview setting, trying to be precise. Others have tried to be more precise or practical in their search for the Tobin tax rate.

According to Garber (1996), competitive pressure on transaction costs ([[Bid–ask spread|spreads]]) in currency markets has reduced these costs to fractions of a [[basis point]]. For example, the EUR.USD [[currency pair]] trades with spreads as tight as 1/10 of a basis point, i.e. with just a 0.00001 difference between the [[Bid–ask spread|bid and offer]] price, so "a tax on transactions in foreign exchange markets imposed unilaterally, 6/1000 of a basis point (or 0.00006%) is a realistic maximum magnitude."<ref>Garber, Peter M. (1996). "Issues of Enforcement and Evasion in a Tax on Foreign Exchange Transactions," in: The Tobin Tax: Coping with Financial Volatility. Mahbub ul Haq, Inge Kaul, and Isabelle Grunberg, eds. (New York, Oxford: [[Oxford University Press]], 1996), p. 135.</ref> Similarly Shvedov (2004) concludes that "even making the unrealistic assumption that the rate of 0.00006% causes no reduction of trading volume, the tax on foreign currency exchange transactions would yield just $4.3 billion a year, despite an annual turnover in dozens of trillion dollars."<ref>Shvedov, Maxim (2004). Transaction Tax: General Overview. CRS Report for Congress, Order Code RL32266, p. 7.</ref>

Accordingly, one of the modern Tobin tax versions, called the [[#The Sterling Stamp Duty|''Sterling Stamp Duty'']], sponsored by certain UK charities, has a rate of 0.005% "in order to avoid market distortions", i.e., 1/100 of what Tobin himself envisaged in 2001. Sterling Stamp Duty supporters argue that this tax rate would not adversely affect currency markets and could still raise large sums of money.<ref name="Spratt" />

The same rate of 0.005% was proposed for a currency transactions tax (CTT) in a report prepared by Rodney Schmidt for The North-South Institute (a [[Canadians|Canadian]] NGO whose "research supports global efforts to [..] improve international financial systems and institutions").<ref>{{cite web|url=http://www.nsi-ins.ca/english/about/default.asp|title=Overview|archive-url=https://web.archive.org/web/20090612010011/http://www.nsi-ins.ca/english/about/default.asp|archive-date=2009-06-12|url-status=dead|access-date=2010-02-27}}</ref> Schmidt (2007) used the observed negative relationship between [[bid–ask spread]]s and transactions volume in foreign exchange markets to estimate the maximum "non-disruptive rate" of a currency transaction tax. A CTT tax rate designed with a pragmatic goal of raising revenue for various development projects, rather than to fulfill Tobin's original goals (of "slowing the flow of capital across borders" and "preventing or managing exchange rate crises"), should avoid altering the existing "fundamental market behavior", and thus, according to Schmidt, must not exceed 0.00005, i.e., the observed levels of currency [[transaction cost]]s (bid-ask spreads).<ref name="Schmidt-10">{{cite web|url=http://www.globalpolicy.org/images/pdfs/10rate.pdf|title=The Currency Transaction Tax: Rate and Revenue Estimates|author=Schmidt, Rodney|date=October 2007|publisher=[[The North-South Institute]]|access-date=9 February 2010|archive-url=https://web.archive.org/web/20090806071843/http://www.globalpolicy.org/images/pdfs/10rate.pdf|archive-date=6 August 2009|url-status=live}}</ref>

The mathematician [[Paul Wilmott]] has pointed out that while perhaps some trading ought to be discouraged, trading for the hedging of derivatives is generally considered a good thing in that it can reduce risk, and this should not be punished. He estimates that any financial tax should be at most one basis point so as to have negligible effect on hedging.<ref name="Wilmott">{{cite web|url=http://www.wilmott.com/blogs/paul/index.cfm/2011/11/11/Taxation-To-Slow-Down-HighFrequency-Speculation-While-Not-Affecting-Hedging-Activity|title=Taxation To Slow Down High-Frequency Speculation While Not Affecting Hedging Activity|author=Paul Wilmott|date=November 2011|archive-url=https://web.archive.org/web/20160421202708/http://www.wilmott.com/blogs/paul/index.cfm/2011/11/11/Taxation-To-Slow-Down-HighFrequency-Speculation-While-Not-Affecting-Hedging-Activity|archive-date=2016-04-21|url-status=dead|access-date=2018-12-09}}</ref>

Assuming that all currency market participants incur the same maximum level of transaction costs (the full cost of the bid-ask spread), as opposed to earning them in their capacity of [[market maker]]s, and assuming that no untaxed substitutes exist for spot currency markets transactions (such as currency [[Futures contract|futures]] and [[Exchange-traded fund#Currency ETFs or ETCs|currency exchange-traded funds]]), Schmidt (2007) finds that a CTT rate of 0.00005 would be nearly volume-neutral, reducing foreign exchange transaction volumes by only 14%. Such volume-neutral CTT tax would raise ''relatively little revenue'' though, estimated at around $33 bn annually, i.e., an order of magnitude less than the "[[carbon tax]] [which] has by far the greatest revenue-raising potential, estimated at $130-750 bn annually." The author warns however that both these market-based revenue estimates "are necessarily [[Speculation|speculative]]", and he has more confidence in the revenue-raising potential of "The [[International Finance Facility]] (IFF) and International Finance Facility for Immunisation (IFFIm)."<ref name="Schmidt-10"/>

===Is the tax easy to avoid===

====Technical feasibility====
Although Tobin had said his own tax idea was unfeasible in practice, [[Joseph Stiglitz]], former Senior Vice President and [[World Bank Chief Economist|Chief Economist]] of the [[World Bank]], said, on October 5, 2009, that modern technology meant that was no longer the case. Stiglitz said, the tax is "much more feasible today" than a few decades ago, when Tobin recanted.<ref name="Edmund Conway">{{cite news|url=https://www.telegraph.co.uk/finance/financetopics/financialcrisis/6262242/Joseph-Stiglitz-calls-for-Tobin-tax-on-all-financial-trading-transactions.html|title=Joseph Stiglitz calls for Tobin tax on all financial trading transactions|author=Edmund Conway|date=5 Oct 2009|access-date=17 March 2010|publisher=[[Telegraph Media Group]]|location=London|archive-url=https://web.archive.org/web/20100218160103/http://www.telegraph.co.uk/finance/financetopics/financialcrisis/6262242/Joseph-Stiglitz-calls-for-Tobin-tax-on-all-financial-trading-transactions.html|archive-date=18 February 2010|url-status=dead}}</ref>

However, on November 7, 2009, at the [[G20]] finance ministers summit in Scotland, [[Dominique Strauss-Khan]], head of the [[International Monetary Fund]], said "transactions are very difficult to measure and so it's very easy to avoid a transaction tax."<ref name="Lukewarm"/>

Nevertheless, in early December 2009, economist [[Stephany Griffith-Jones]] agreed that the "greater centralisation and automisation of the exchanges and banks clearing and settlements systems ... makes avoidance of payment more difficult and less desirable."<ref>{{cite news|url=https://www.theguardian.com/commentisfree/2009/dec/07/tobin-tax-climate-change-investment|title=Now let's tax transactions|author=Stephany Griffith-Jones|date=December 7, 2009|work=The Guardian|access-date=2010-01-13|location=London|archive-url=https://web.archive.org/web/20130908180023/http://www.theguardian.com/commentisfree/2009/dec/07/tobin-tax-climate-change-investment|archive-date=September 8, 2013|url-status=live}}</ref>

In January 2010, feasibility of the tax was supported and clarified by researcher Rodney Schmidt, who noted "it is technically easy to collect a financial tax from exchanges ... transactions taxes can be collected by the central counterparty at the point of the trade, or automatically in the clearing or settlement process."<ref name="Schmidt Feasibility">{{cite web|url=http://www.imf.org/external/np/exr/consult/2009/pdf/Comment84.pdf|title=Notes on the Feasibility and Impact of a General Financial Transactions Tax; Civil society consultation with the IMF on 28 January 2010|author=Rodney Schmidt, Principal Researcher, [[The North-South Institute]], Ottawa|date=28 January 2010|publisher=[[International Monetary Fund]]|access-date=24 June 2010|archive-url=https://web.archive.org/web/20111102011155/http://www.imf.org/external/np/exr/consult/2009/pdf/Comment84.pdf|archive-date=2 November 2011|url-status=live}}</ref> (All large-value financial transactions go through three steps. First dealers agree to a trade; then the dealers' banks match the two sides of the trade through an electronic central clearing system; and finally, the two individual financial instruments are transferred simultaneously to a central settlement system. Thus a tax can be collected at the few places where all trades are ultimately cleared or settled.)<ref name="Schmidt Feasibility"/>

Based on digital technology, a new form of taxation, levied on bank transactions, was successfully used in Brazil from 1993 to 2007 and proved to be evasion-proof, more efficient and less costly than orthodox tax models. In his book, ''Bank transactions: pathway to the single tax ideal'', Marcos Cintra carries out a qualitative and quantitative in-depth comparison of the efficiency, equity and compliance costs of a bank transactions tax relative to orthodox tax systems, and opens new perspectives for the use of modern banking technology in tax reform across the world.<ref name="pathway">{{cite journal|author=Marcos Cintra|date=July 2009|title=Bank transactions: pathway to the single tax ideal. A modern tax technology;the Brazilian experience with a bank transactions tax (1993-2007)|journal=Mpra Paper |url=https://ideas.repec.org/p/pra/mprapa/16710.html|publisher=University Library of Munich, Germany in its series MPRA Paper with number 16710. [[Research Papers in Economics]]|access-date=28 June 2010|archive-url=https://web.archive.org/web/20101024163802/http://ideas.repec.org/p/pra/mprapa/16710.html|archive-date=24 October 2010|url-status=live}}</ref>

{{See also|Currency transaction report|Money Laundering Control Act|Bank Secrecy Act|Suspicious activity report|Money laundering|Structuring|Electronic trading}}

====How many nations are needed to make it feasible?====
In the year 2000, "eighty per cent of foreign-exchange trading [took] place in just seven cities. Agreement [to implement the tax] by [just three cities,] London, New York and Tokyo alone, would capture 58 per cent of speculative trading."<ref name="Round" />