The Tobin tax: Reason or treason?

  • FX turnover in the City of London reached over $1.8 trillion every day in 2010, accounting for 36.7% of the global total. The City is vital to Britain’s economic interests.
  • A Tobin tax is a proportional tax on all spot conversions from one currency into another. There are now calls for a Tobin tax to be introduced into Britain.
  • A sole implementation of a Tobin tax by the UK would be economic suicide. Almost 60% of trading volume of the 11 most actively traded Swedish shares migrated to London during Sweden’s attempted Tobin tax. The temptation, and indeed relative ease, with which capital flight and cross-border arbitrage can occur would spell disaster for the UK.
  • Sweden is the only country to have tried a “pure” Tobin tax, of 0.5%. It raised only one thirtieth of the proceeds predicted by its proponents and was scrapped after five years. The taxes sparked an exodus of financial activity from Sweden. By 1990 60% of the trading volume for the top 11 most traded Swedish stocks had moved to London. Trading for over 50% of Swedish equities had moved to London by 1990.
  •  There is a consistent lack of evidence that transaction taxes increase market stability. The UK’s experience with stamp duty suggests that the opposite is true. Numerous studies found a significant reduction in equity turnover following the stamp duty introduction, with a significant (-3.3%) fall in the FTSE All Share Index returns witnessed in the 1% rate rise in 1974.
  • A cross-study, consistent, empirically convincing causal link, either statistical or econometric, has yet to be found between an increase in transaction costs and a reduction in volatility. In both equity and foreign exchange markets, a large number of empirical studies reveal a positive relationship between increasing transaction costs and higher levels of volatility.
  • This is usually accompanied by significant declines in turnover, stock prices and a migration of trading activity. A Tobin tax could drive a significant proportion of the financial sector out of Britain.
  • The worst cases of speculation usually cited by Tobin tax advocates occur in emerging markets. However a Tobin tax would provide little deterrence to investors in these markets, where often short-term movements of 2% – 5% are expected. In the worst cases of currency crises and manias (i.e. where investors expect shortterm devaluations of over, say, 10%) a Tobin tax would be an almost irrelevant deterrence to speculators.
  • The claim by supporters of a “Robin Hood Tax” that £20 billion annually can be removed from the UK financial sector without causing significant disruption is ill-informed and reckless. This recklessness is augmented by the fact that we are emerging from one of the most accentuated cycles of boom and bust to date.
  • Employment in the UK financial services sector stands at over 1 million; 4% of the UK total. A Tobin-style tax would result in job losses both within the financial sector and also within supporting industries through employment spillover effects.