The Tobin Tax A false good idea

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The Tobin Tax ?A false good idea

• Group 10 E1
• Cyrille Bender, Qing Chen, Marco Hinic, Akash
  Lal, and Adam Nowak

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What serious economists say about it
to be honest, I do not know how it could
practically be implemented. Joseph Stiglitz,
Economics Nobel Laureate, Le Monde, 01/2003
A Tobin Tax would be very much a second best
solution to currency speculation within the
European Union, for example, no-one has seriously
suggested it as an alternative to Economic and
Monetary Union. Economic Affair Publications,
European Parliament
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Honourable purpose but questionable premises
1. To reduce exchange-rate volatility by reducing
currency speculation
Tax on Short-Term Speculative Transactions
2. To make national economic policies less
vulnerable to external shocks
3. To raise revenue for international
organisations
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1. Short-Term Capital Inflows are not necessarily
speculative

• 1990s saw decline in volatility in currency
  markets
• Despite rise in trading volumes from USD 600B to
  USD 1.5 T
• Only 5 of exchange transactions linked to trade-
  however
• The rest are stabilizing transactions and Hot
  Potato Trading
• Long-Term Capital is not less volatile
• Property Markets in HK, Tokyo and Mumbai
• Existence of Transaction Costs does not reduce
  volatility
• Property Markets again
• Speculation is stabilising
• Buy Low, Sell High approximation to Fundamental
  Value

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2. The Tobin Tax will not reduce volatility or
speculation

• Makes search for risk spreading more expensive,
  increasing volatility and reducing depth in the
  market
• a two-way tax
• Exchange Rate volatility depends on monetary and
  fiscal volatility
• Governments should be exposed to international
  exchange and financial markets
• Misalignments built up by governments
• Sterling in 1992
• Tax Unable to deter speculators unless it is too
  high
• Tequila Crisis would have required tax of 23
• Traders have to hold higher positions
• exacerbates the problem

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3. The Tobin Tax will be impossible to implement

• Which Transactions should be exempt and how to
  identify them?
• Central Bank interventions, etc. Do Central Banks
  never utilise their FX reserves for speculation?
• No means of distinguishing speculative trades
  from stabilising arbitrage trades
• Which Transactions to Tax?
• Forwards, Swaps, Futures, Options, Money Markets
• Coordinated International Implementation a
  virtual impossibility
• the City will shift to the Caymans?
• Tax Evasion and Accounting Gimmicks
• Who will handle the revenues?
• corruption, auditing issues

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The Tobin Tax ? A false answer to real problems
Focus should be on stabilising banking sector,
reforms and transparency in economic affairs