Tax on Currency Trades

Question: Why do we have a VAT rate of 17.5% on many ordinary goods and a tax rate on petrol / tobacco of over 50% – yet when people propose a tax of 0.01% on currency transactions it is denounced as unfair and economically damaging?

At the G20 summit, Gordon Brown, proposed a version of a Tobin Tax; he mentioned a tax on speculation. Yet, his proposals were quickly dismissed.

The original Tobin Tax proposed a tax of 1% on all currency transactions. The idea was that such a tax would increase the marginal cost of currency trades and so reduce speculation.

Such a tax could have two very significant benefits.

  1. Reduce speculation
  2. Raise Revenue. Many have suggested the revenue from a Tobin Tax could be used to finance projects in developing countries and so reduce global inequality. Even a very low tax (0.01%) on Sterling currency trades could raise £2bn a year. Alternatively, the revenue could be used to deal with the financial crisis, caused by speculation.

It is true a Tobin tax could have some limitations

  • Difficult to collect as investors try to create new markets to avoid the tax
  • It could reduce ‘hedging’ – a way to insure against exchange rate movements rather than speculation
  • Difficult to administer.
  • A tax could make markets more illiquid.

When the speculative tax was dismissed by ministers from Canada and US, the arguments used were rather feeble. – ‘We’re not in the business of raising taxes.’ ‘ not something we could support’

But, a Tobin tax does not have to raise overall revenue. Raise revenue from speculative taxes and other taxes could be lowered. Why should financial markets be immune from taxes?

I feel the main reason countries don’t want to introduce a Tobin tax, is the free rider problem. Countries are fearful that if they introduce a tax there will be some tax haven which will become the dominant financial market and they will just lose business. Therefore, no one wants to introduce it unless they are certain that it will be unilateral.

If true, this suggests that the rejection of a Tobin tax is a deadweight welfare loss for global society. If every country, placed a tax on speculative trades, the global economy would benefit. But, because we can’t be certain of international co-operation it is never introduced.

The other reason could be that financial interests hold powerful sway over political decisions – despite the global economic crisis.

Personally, I’m in favour of a tax on currency trades and other speculative future trades. It would be a good way to raise revenue for development projects and for the World Bank to help finance bailouts.

It is unfortunate that it is unlikely to happen.

More on Tobin Tax

2 thoughts on “Tax on Currency Trades”

  1. There are all sorts of reasons that this has been nixed – the hazard that a fund for bailouts encourages rash behavior – not the least.
    Ultimately, it comes down to a simple formula: Wall St pays top-dollar for its Administration officials, Europe doesn’t (yet).
    In the round, someone’s got to be brave and ignore the so-called competitive disadvantage fairy tale.

  2. Your arguements are “speculative.” There are so many holes i don’t know where to begin. You say it could have “some limitations” as if those things are just liitle pesky problems that should not be allowed to get in the way. In reality each one you listed is reason enough that this tobin tax nonesense should be ignored forever. How about we let markets work and realize what a disaster the bailouts and tinkering with the system have been. Where is your proof that speculation caused the global financial crisis? God help the world if we keep thinking trying the same central planning and more government power will end up with different outcomes that have over and over again been the real “deadwieght welfare loss”


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