The 2008 financial crisis brought quite a few ideas from the margins of financial thought into the limelight. Glass-Steagall’s ignominious death in 1999 came to be seen by many as a mistake, and the Volcker Rule arose to revive the restriction on prop trading for big banks. Now, it looks like another idea from the fringes is about to have its moment: taxes on financial transactions, sometimes called the Tobin Tax.
James Tobin’s name has become synonymous with the tax idea he popularized over 40 years ago: a tax on all foreign exchange conversions from one currency into another. More broadly, however, his name has been invoked in support of a broader measure: a tax on financial transactions themselves, regardless of currency. And after decades of discussion, it looks like some version may soon be arising in a European country near you. Reuters reports:
European Union finance ministers are expected to give their approval at a meeting in Brussels, allowing 11 states – Germany, France, Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia – to start preparations for imposing a tax on all financial market transactions…
Some believe that the tax could raise up to 20 billion euros a year, although estimates vary widely…
It is likely to suggest taxing stock and bond trades at the rate of 0.1 percent and derivatives trades at 0.01 percent.
Some are very unhappy with the idea – especially the UK, given the size of the finance industry in London. The Brits are definitely not signing on, but some form of the tax looks very likely in the 11 EU states discussing it.
So what will this mean for international markets? Right now supporters are billing it as a measure that will cut down on perceived high frequency trading abuses, by attaching a cost to the millions of trades they place every second. Whether or not this will work is one thing, but the unintended consequences are even harder to imagine. How will trading behavior be affected by the knowledge that every trade is going to lose some skin to the government?
Of course, if we know anything about financial companies, we’re likely to see a great deal of effort spent avoiding these taxes rather than paying them. This means more transactions moved beyond the borders of the countries signing on to the tax idea, potentially boosting trading volumes elsewhere.
In the long run, could this mean a Tobin Tax for the US? Probably not. US regulators still have their hands full sorting the mountains of Dodd-Frank regulations that have yet to be finalized (or written, in many cases). And past proposals for transaction taxes, as numerous as they’ve been, have never really gone anywhere. The CME group has always argued strongly against transaction taxes, saying they would hurt liquidity and move trading off-exchange, or to less-regulated exchanges. Now it looks like some EU members will give us a live experiment, and perhaps settle those arguments one way or another.