The Tobin Tax

Posted by on Nov 8, 2011 in Blog | 72 comments

This WSJ editorial argues against the Tobin Tax on financial transactions,  based on the obvious fact that it falls apart unless all countries enact it (impossible).  It does little, however, to refute the overall desirability of reigning in pure speculative trading.  Proponents of the transaction tax argue that such a tax, by discouraging noise trading, will contribute to stock prices tracking fundamentals better.  They argue that this in turn leads to a more efficient capital allocation.  Interesting debate.


  1. Wow! That’s a really neat entry!

    • “It would be futile to deter eaucslptive behaviour that assists international trade in goods and services even though from a MMT perspective the benefits of trade are evaluated differently Solution: All governments should sign an agreement which would make all financial transactions that cannot be shown to facilitate trade in real good and services illegal. Simple as that. Speculative attacks on a nation’s currency would be judged in the same way as an armed invasion of the country – illegal.”The original argument in favour of speculation in any market is that it is desirable as a source of liquidity where it provides the other side of the trade to a party that seeks to hedge an underlying risk.There is a similar issue that is discussed sometimes with respect to credit default swaps. Some make the argument that one should not be allowed to buy a credit default swap unless there is an underlying “insurable interest”, which means that there is an underlying exposure to be hedged. E.g. bank X wants to “hedge” its credit risk on a loan to customer Y; so it buys a credit default swap that pays off in the event of Y’s failure. Of course, there is still the problem of why X got into the lending business in the first place, if it wasn’t prepared to assume the credit risk of its customers, as well as the problem of X requiring a counterparty to “write” or “sell” the credit default swap, thereby assuming the credit risk in what could be construed as a net eaucslptive position.It’s a slippery slope. Exporters and importers would still seem to require speculator counterparties in order to hedge their FX forward risk. Except that international banks provide liquidity to both sides of the market (export and import) by running “forward books” in FX that facilitate hedging by participants in both directions. Inevitability, it is impossible for banks to match up perfectly the positions arising from both sides of the market, so that they end up running limited term structure mismatches in forward FX positions as part of their FX liquidity provision to the trade sector. The ability to run mismatches is essentially to the continuity of the market making function.The key in all of this is the issue of risk limits for banks and other counterparties that provide a liquidity service to such markets. Any net risk exposure is technically a eaucslptive exposure ex post. It is a question of degree. Identifying the degree again is a slippery slope.My personal view on all it – this topic and any other connected with the credit crisis – is that the core answer lies in risk measurement, risk limits, and capital requirements. Any speculator can be stopped out from destroying the market by imposing top down regulatory capital requirements in such a manner that makes such net risk taking uneconomic. Such capital requirements would be included for fiends like the US mortgage brokers and investment banks that drove the assembly line of bad securitized housing debt.Perhaps capital requirements can be construed as analogous to a stock version of a Tobin tax, which in a sense is a sort of flow capital requirement.The biggest sources of failure in the credit crisis were Basle and the rating agencies. The banks and others were just trying to get away with what they could get away with in a poorly implemented regime of capital requirements.

      • The energy eciiffency tax credit is technically non-refundable which means at the end of the year, you can’t get back more in credits than you paid to the government in taxes throughout the year.

  2. My hat is off to your astute command over this topic-bravo Krishna Palepu

    • WSJ has got this essentially crorect as far as I can see as I follow developments in the US. Zero Hedge has been documenting this. ZH has only been in existence for ten months and has already received 30 million hits, with 500, 000 regular readers. This is becoming a big deal, and it’s now assumed that the WH and Congress are following ZH as temperatures rise in politics.This is definitely undermining not only trust in US markets, but also participation as well. The volume of trading in the equity markets recently is all high frequency trading by a few big players that are allegedly frontrunning and pumping the market. With the advent of ZH, this is no longer in the closet, and the Congress is finally getting motivated to act. Charles Schumer of NY is on the case, and he is a very powerful senator that usually can be counted on as supporter of Wall Street.A big push for a Tobin tax, in the US at least, seems to be coming from those who feel that market makers like Goldman are fleecing them, and that a Tobin tax would at least penalize HFT, since it is unlikely that legislation or regulation can bridle it in an environment where bribery is legal and the government is rented. The thinking is that HFT is extracting a hidden fee on every trade that the government may as well be getting. This is significant because a lot of the people pushing for a Tobin tax are libertarians vehemently opposed to taxation as a matter of principle.This is no longer simply an economic issue. Things are getting pretty emotional, and it’s becoming a political one. I don’t know that Wall Street can run away from this one.

      • Sometimes I am amazed at the iformation given out here.

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