Aktuelles Stichwort: "Finanztransaktionssteuer" Interview with Hans-Werner Sinn (in German) 18.10.2010 Media Library of the CESifo Group
In the course of the worldwide financial crisis, touched off by the collapse of Lehman Brothers in September 2008, a discussion arose, particularly in Europe, on how to get the banks to shoulder some of the costs incurred by the state for the rescue of the banking system. One proposal was to introduce a so-called financial transaction tax.
A financial transaction tax is a tax on transactions in the financial markets. It would cover all transactions, for example, the selling of stocks, bonds, derivates, foreign currencies and options. Both banks and private investors would be taxed.
In addition to the generation of tax revenue for government budgets, the inventor of this tax, James Tobin, argued that financial transactions are to a large extent social zero-sum games, in which a disproportionate amount of young talent is involved that could have produced genuine economic gain in the real economy. With the transaction tax, participation in this zero-sum game could be made more unattractive and some of the unproductive labour caught up in this game could be released for better use in the real economy. His idea was to throw a bit of sand into the gears in order to reduce the attractiveness of financial trading for our best talent.
In the public discussion it is also argued that this tax can reduce speculation on the financial markets.
Since the liberalisation of the financial markets in the 1980s, both the number of financial innovations as well as the number of financial transactions has greatly increased. The focus has been on short-term profits and speculation. Only a small portion of the transactions goes to financing projects in the real economy.[1] Banks and other financial institutes employ enormous sums of money short-term and highly complex financial products, backed by small amounts of their own capital, in order to achieve high net yields at even small margins. The incentive to engage in extremely risky transactions is large because they hold out the promise of enormous profits, whereby the losses are shifted to the investors or taxpayers.[2] The danger is that the prices fluctuate and distance themselves from their equilibrium values in terms of the real economy. Ultimately they can cause currency and financial crises.
While most economists have proposed regulation measures, in particular the increase of capital requirements, to promote a more sustainable and stable banking system, there are also proponents of the tax solution. Michael Keen of the IMF has proposed targeted tax measures for the reduction of outside financing and for strengthening the incentive for forming equity capital (see Keen 2010). However, what he has in mind is a tax on value added in the financial industry and not a transaction tax.
The best known transaction tax is the so-called Tobin tax, which was developed by the US economist James Tobin in 1972. The tax rate, which should apply uniformly worldwide, would lie between 0.05% and 1.0%. For transfers such as direct investments or transactions pertaining to merchandise trade, this tax would be negligibly small since the costs incurred are not relevant in relationship to the profits made per transaction. With short-term arbitrage transactions, however, even this very low tax would prevent profits from arising.
A financial transaction tax that covers all financial transactions has not yet been introduced in any country (status: July 2010). The recent advance for a worldwide introduction of a comprehensive financial market transaction tax that was made by the European countries at the G20 summit on 26/27 June 2010, on the basis of the IMF proposals developed by Keen, failed because of the resistance of the US and the newly industrialised countries in particular. Up until 1991, Germany had a stock exchange transfer tax that taxed trading of public bonds at 0.1 percent of their market value and other fixed-interest securities and stocks at 0.25 percent.
The opinion voiced in the public discussion that we need a Tobin tax to dampen speculation finds little positive resonance among economists, because firstly speculation as a rule performs a price-stabilising function and is thus useful for the economy; secondly this policy instrument is not suitable for a targeted combating of destabilising speculation, especially that of short selling.
Speculation has a fundamentally stabilising effect on prices because a speculator buys an object when it is cheap and sells it when it is expensive. Speculators thus increase the price when it is low, and lower it when it is high.
It must also be kept in mind that the majority of financial transactions are for hedging with the help of which businesses in the real economy insure themselves. A transaction tax is a much too coarse an instrument for the targeted elimination of dangerous forms of speculation.
A problematic implication of the financial transaction tax is that it stimulates the vertical integration of financial institutions that service each other, and this lowers the volume of transactions. Since also in the financial sector specialisation is a source of efficiency improvements, the consolidation effect must be regarded as more of a disadvantage.
Another objection to the introduction of a financial transaction tax is that it is very difficult to implement in practice. There is no consensus on a worldwide introduction of the tax. Especially countries with strong financial centres oppose such a tax, and financial transactions will tend to shift to the countries that have not introduced the tax.
[1] According to data of the Austrian Institute for Economic Research (WIFO), the volume of financial transactions in 2007 was 73.5 times greater than the nominal world gross domestic product. [2] See Sinn (2010, 14) for the banks’ acting as “soldiers of fortune”.
Keen, Michael, "Taxing and Regulating the Financial Sector“, Richard Musgrave Lecture, held on 7 July 2010, at the University of Munich.
Schulmeister, Stephan, "Der Boom der Finanzderivate und seine Folgen“, Politik und Zeitgeschichte, supplement in Das Parlament, 26, 2009.
Sinn, Hans-Werner, Kasino-Kapitalismus. Wie es zur Finanzkrise kam, und was jetzt zu tun ist, completely updated first edition, Ullstein, Berlin 2010.
Tobin, James, “Proposal for International Monetary Reform”, Eastern Economic Journal 4(3–4), 1978, 153–159.
Sinn, Hans-Werner, “Good and Bad Speculation”, Ifo Viewpoint 109, Munich 2009. (Abstract)
Sinn, Hans-Werner, Risk-Taking, Limited Liability, and the Banking Crisis, Ifo Institute for Economic Research, Munich 2008.
„G-20-Gipfel in London: Ein Durchbruch zur Regulierung der Finanzmärkte?“, Beiträge von Rolf J. Langhammer, Doris Neuberger, Thorsten Polleit, Hermann A. Wagner, Irwin Collier, ifo Schnelldienst 62(11), 2009, 3–16. (Abstract / Download)
„Die neue Architektur der unternationalen Finanzwelt“, Georg Fahrenschon, Axel A. Weber, Theodor Weimer, ifo Schnelldienst 62(12), 2009, 6–10. (Abstract / Download)
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