18 August 2011
- European Commission’s proposal to introduce a financial transaction tax would drive a significant proportion of the financial sector out of Britain
- Tobin tax is unlikely to increase market stability and may even increase volatility
- Sweden is the only country to have introduced a pure Tobin Tax – it brought in less than one thirtieth of promised proceeds and was scrapped within 5 years
New research released today (Thursday) by the Adam Smith Institute (ASI) shows that the introduction of a Tobin Tax in the UK, as argued for by the ‘Robin Hood Tax Campaign’, would be disastrous for the financial services industry. If the Tobin Tax is introduced in the UK or across Europe (as proposed by the EC), it will be all too easy for financial services to relocate their activities to jurisdictions with lower taxes and less regulatory burdens.
The Robin Hood Tax campaign has argued that £20billion can be removed from the UK financial sector without causing significant disruption through a proportional tax on currency conversions. This is a reckless and ill-informed claim that ignores evidence to the contrary.
The ASI report, ‘The Tobin tax: Reason or treason?’, looks at Sweden, the only country to have previously introduced a ‘pure’ Tobin tax of 0.5%(1). It was a disaster, raising only one thirtieth of the proceeds predicted by its proponents and being scrapped within five years. In an attempt to avoid the tax, 60% of the 11 most actively traded Swedish shares migrated to London and over 50% of Swedish equities had moved to London by 1990.
Many proponents of the Tobin Tax argue that the tax would increase market stability. However there is no consistent, empirically convincing evidence to support this claim. The UK’s experience with stamp duty suggests the opposite is true, whilst in both equity and foreign exchange markets, a large number of empirical studies reveal a clear relationship of higher transaction costs being linked to higher levels of volatility.
In reality the Tobin Tax would lead to significant decline in turnover, stock prices and a migration of trading activity. This would lead to job losses in a sector employing over 1 million people in the UK. London is currently the world’s leading centre for foreign exchange, with twice as many US dollars being traded on the UK foreign exchange market than in the US itself. It’s enviable status as a financial centre would be devastated if a politically motivated but economically flawed Tobin Tax was introduced.
Sam Bowman, Head of Research, adds: “When something seems too good to be true, it usually is. The “Robin Hood Tax” is as vague as it is economically illiterate, and would cripple Britain’s financial sector, which is already on the ropes. We can’t tax our way out of this economic depression.
“Brussels wants a fiscal union to save the euro. A Europe-wide Tobin tax would bind Britain into the first real EU-wide tax and be a massive step towards a fiscal union. When Sweden tried a Tobin tax it was a colossal failure – why does anybody pretend this time would be different?”
ENDS A tax of 0.5% was placed on the purchase of all equity securities (and stock options) in Sweden in 1984. They also implemented a 0.003% tax levied on 5year bonds. Despite this tax being considered low at 0.003%, trading volumes dropped by 85% alone in first week after implementation. Futures trading fell by 98%, and the options market was virtually non-existent.
Notes to editors
- Economist James Tobin proposed the Tobin Tax: a tax on all spot conversions of one currency into another to manage exchange-rate volatility. However the term is often used interchangeably with a specific currency transaction tax (CTT) and general financial transaction tax (FTT).
- One of the main proposals of the Robin Hood Tax Campaign is to introduce a financial transaction tax on stocks, bonds, foreign currency and derivatives. This proposal has gained support in Europe where both Barroso and Semeta are publicly in favour, and Germany and France are promoting the tax. Support for an FTT is also high in the UK, where 65% of respondents to a recent Robin Hood Tax Campaign survey were in favour of the tax. Their campaign is focused primarily on raising funds from a tax on banks to tackle poverty and climate change.
- Author Adam Baldwin is a financial analyst based in the City of London.
- Read the full report here