28 September 2011

Forget the Tobin Tax, What About a Panic Tax?

So the President Barroso of the EC has proposed a Financial Transactions (or Tobin) Tax. Bill Gates is leaning that way too.

If the arguments for and against such a tax are well known, the evidence is not.

Cue the IDS systematic review from McCulloch and Pallacio. This is the first serious review of the research literature on a Tobin Tax and tries to debunk some myths:

* Will a Tobin Tax Reduce Volatility? This was the original motive behind Tobin's proposal. But the empirical evidence suggests no decrease in volatility and in a few cases, even an increase.

* Is a Tobin Tax Workable? Although these questions are not easy, there is a large literature on these questions and the consensus is that a Tobin Tax could be successfully implemented

*How Much Money Would a Tobin Tax Collect? If a tax rate of 0.005 % was applied only to spot transactions it would raise $26 billion globally and $11 billion in the UK only

* Who Would be Affected by a Tobin Tax? Would this really soak the rich? Or would it simply be passed on to consumers? The evidence base is weakest here but the authors think a Tobin Tax would be more progressive than other forms of taxation.

The main reasons given for the UK being against the Tax are political (the French and the Germans are behind it!), economic (it will lead to the decimation of the UK financial sector because bankers will up sticks) and budgetary (what is the case for a ring-fenced tax -- although it is interesting that Barroso is not linking the Tax revenues to climate finance).

So the Tobin Tax might be a useful tool to bolster public finances, but it might not deliver much for climate or do much for price volatility.

The former is a massive challenge--how to raise funds for something that rates far down the public policy list in public opinion polls?

The latter--volatility--might be dampened by a Panic Tax, the Tobin Tax's first cousin.

The Panic Tax--also a Neil McCulloch idea although he calls it an Inductance tax--does not tax the level of financial transactions, but the speed at which they occur.

This gets at Tobin's original concern directly and deals with the dangers introduced by High Frequency Traders.

See here for the Panic tax paper.

17 comments:

Ugo Gentilini said...

Lawrence, no news that this is a highly inspiring and thought-provoking post. Thanks for this.

I suspect, however, that it may prove challenging for measures that introduce rigidities or relent transactions –- although both technically sound and "just" on ethical grounds –- to gain widespread traction. But I do hope I may be wrong.

At the same time –- and in the spirit of the story recounted by Sir Francis Bacon, “If the mountain will not come to Muhammad, then Muhammad must go to the mountain” –- I wonder if there might be scope for governments to engage more actively in the investors’ playfield.

And not just as residual players called-in for bail-outs, but as competitors.

In the particular case of food, the "financialization" of commodities implied that price movements only partially reflect 'real' supply and demand dynamics. Cue it'd be interesting to explore the viability and modalities for government to engage, in some way, in commodity markets themselves (e.g. buying shares in times of low prices), and in managing virtual food reserves throughout.

These measures could have a financial stabilization effect (depending on the value/quantities involved), they may relax and smooth panic-driven expectations, and ultimately serve as a rapid response mechanism. Since reserves would become ‘real’ or monetized in times of need, governments may find it effective, in addition to traditional safety net responses, to tap virtual reserves to cushion price-generated crises.

I am not saying that this definitely feasible or desirable. But I do think it deserves some more thinking and research. Both in terms of overall approach, and specific details.

All the best,
Ugo

tax debt loan said...

I’m impressed, I must say. Rarely do I discover a blog that’s both educative and entertaining, and let me tell you, you have hit the nail on the head. Your thoughts are outstanding

inheritance loan said...

I think Tobin tax is feasible because it is to penalize short-term financial round-trip excursions into another currency. I disagree with the panic tax though. I think that tax is unconstitutional.

property management perth said...

Panic tax is just a weird tax. I didn't think that they would tax you for a fast transaction.

payday loans said...

There has been much debate on introducing a financial transaction or 'Tobin Tax' to generate revenue for public goods or enhance market stability. But a better solution might be a Panic Tax - a simple mechanism to tax panics and manias rather than everyday trade - that promotes stability by dampening crashes and booms, providing policy space for more orderly adjustments in the financial markets.

bad credit car loans said...

It's one of those taxes that serve as a safety net for countries. An additional tax, yes, but has some grounds to it.

Anonymous said...

I think this wouldn't help us a lot especially for those in the import/export industry. Their tax would seem to sky rocket in no time.
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los angeles probate loan said...

I think barring the reasons UK have to oppose this Tobin tax, be it political, economic or budgetary, there is more than enough reason for the Parliament to oppose it. Guess what, we have enough taxes already! Stop it.

collection agencies los angeles said...

Would the Tobin Tax actually be a benefit in the market? Or revenue will decrease instead? For some reason I have a feeling that Panic Tax would be more effective creating stability in the market.

payroll philippines said...

I have a feeling that Panic Tax can help in increasing revenue for the market, unlike Tobin Tax which seems kind of shaky as of now.

Caroline Knight said...

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Geoff Granfield said...
This comment has been removed by the author.
Geoff Granfield said...

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http://www.tax-defense-network-tax-laws.com/tax-defense-network-sliced-bagel-tax/

Stew said...

I acquired an IRS notice labeled CP-11, but I didn't know just what exactly I was expected to use it and why the Internal Revenue Service will make corrections to my return leaving me with a tax debt. I believed it was executed deliberately and would definitely head to court regarding this until finally I found the computation the IRS remedied. Should you receive a CP-11 letter, take a look at return prior to deciding to make an effort to challenge the change. http://www.tax-defense-network-cpnotices.com/cp-notice/47-2/

Therence Sim said...

Tax Defense Network states the goal of a PPIA is to allow taxpayers with some ability to pay their tax debt an IRS program that they could benefit from.

Lisbette Maxwell said...

Tobin tax was not feasible to begin with. Many economists pointed out its fatal flaw: Derived from Romneyism Tax Laws. It does not exempt from r&d credits cuts.

Craig Berry said...

Bottom line is that both of it are just tax, nothing more nothing less. I just don't understand the difference of the two.