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RESEARCH REPORT Vol 2011 No 68 The Tobin Tax: A Review of the Evidence Neil McCulloch and Grazia Pacillo May 2011 About IDS The Institute of Development Studies is one of the world's leading charities for research, teaching and communications on international development. Founded in 1966, the Institute enjoys an international reputation based on the quality of its work and the rigour with which it applies academic skills to real world challenges. Its purpose is to understand and explain the world, and to try to change it – to influence as well as to inform. IDS hosts five dynamic research programmes, five popular postgraduate courses, and a family of world- class web-based knowledge services. These three spheres are integrated in a unique combination – as a development knowledge hub, IDS is connected into and is a convenor of networks throughout the world. The Institute is home to approximately 80 researchers, 50 knowledge services staff, 50 support staff and about 150 students at any one time. But the IDS community extends far beyond, encompassing an extensive network of partners, former staff and students across the development community worldwide. For further information on IDS publications and for a free catalogue, contact: IDS Communication Unit Institute of Development Studies at the University of Sussex Brighton BN1 9RE, UK Tel: +44 (0) 1273 915637 Fax: +44 (0) 1273 621202 E-mail: [email protected] Web: www.ids.ac.uk/ids/bookshop IDS is a charitable company, limited by guarantee and registered in England (No. 877338). IDS RESEARCH REPORT 68 IDS RESEARCH REPORT 68 The Tobin Tax: A Review of the Evidence Neil McCulloch1 and Grazia Pacillo May 2011 Institute of Development Studies at the University of Sussex Brighton BN1 9RE UK 1 Corresponding author: [email protected] 1 IDS RESEARCH REPORT 68 The Tobin Tax: A Review of the Evidence Neil McCulloch and Grazia Pacillo IDS Research Report 68 First published by the Institute of Development Studies in May 2011 Cover photo: Chris Stowers/Panos Photo caption: Taiwan, Taipei. Investors reflected in stock prices on TV screens at a Taipei securities trading house. © Institute of Development Studies 2011 ISSN 2040-0217 ISBN 978 1 85864 985 4 A catalogue record for this publication is available from the British Library. All rights reserved. Reproduction, copy, transmission, or translation of any part of this publication may be made only under the following conditions: • with the prior permission of the publisher; or • with a licence from the Copyright Licensing Agency Ltd., 90 Tottenham Court Road, London W1P 9HE, UK, or from another national licensing agency; or • under the terms set out below. This publication is copyright, but may be reproduced by any method without fee for teaching or nonprofit purposes, but not for resale. Formal permission is required for all such uses, but normally will be granted immediately. For copying in any other circumstances, or for re-use in other publications, or for translation or adaptation, prior written permission must be obtained from the publisher and a fee may be payable. Available from: Communications Unit Institute of Development Studies at the University of Sussex Brighton BN1 9RE, UK Tel: +44 (0) 1273 915637 Fax: +44 (0) 1273 621202 Email: [email protected] Web: www.ids.ac.uk/ids/bookshop Typeset by Barbara Cheney, Bath, UK. Printed by Nexus, Brighton UK. IDS is a charitable company limited by guarantee and registered in England (No. 877338). 2 IDS RESEARCH REPORT 68 Summary The debate about the Tobin tax, and other financial transaction taxes (FTTs), gives rise to strong views both for and against. Unfortunately, little of the popular debate refers to the now considerable body of evidence about the impact of such taxes. This review attempts to synthesise what we know from the available theoretical and empirical literature about the impact of FTTs on volatility in financial markets. We also review the literature on how a Tobin tax might be implemented, the amount of revenue that it might realistically produce, and the likely incidence of the tax. We conclude that, contrary to what is often assumed, a Tobin tax is feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions. However, it would be unlikely to reduce market volatility and could even increase it. Keywords: financial transaction; Tobin tax; volatility; revenue; incidence; payment systems; implementation Neil McCulloch is an economist at the Institute of Development Studies specialising in the analysis of poverty in developing countries and the linkages between poverty, and global and local economic reform. He has led research on the rural investment climate in Indonesia and has worked on the relationship between growth and poverty reduction in this country. He has published numerous academic papers of the movement into and out of poverty and the effectiveness of different anti-poverty policies. Grazia Pacillo is currently a DPhil student at the University of Sussex with research interests in development economics, agricultural economics and international trade. Her current research studies the role of agriculture in economic growth and poverty reduction in Ghana, focusing on crop diversification, small farmers’ participation in global chains and the role of biofuels. She has worked on various projects on finance, development and agricultural economics for the Institute of Development Studies, the UK Department for International Development and the Overseas Development Institute. Prior to her current research studies, she was awarded a Laurea Specialistica (Honours) and a Laurea Triennale at the University of Bologna. She also achieved the status of Junior Expert in Management of EU Projects and International Cooperation, from Regione Puglia (regional government), Mediterranean Sector. 3 IDS RESEARCH REPORT 68 4 IDS RESEARCH REPORT 68 Contents Summary, keywords, author notes 3 Acknowledgements 6 Acronyms 7 Executive summary 9 1 Introduction 15 2 The impact of financial transaction taxes on volatility 17 2.1 Theoretical models 18 2.1.1 Traditional theoretical debates 18 2.1.2 Beyond traditional theoretical approaches 19 2.1.3 Heterogeneous agent models 19 2.1.4 Zero intelligence agent models 24 2.1.5 Game theoretical approaches 25 2.1.6 Laboratory experiments 26 2.2 Empirical evidence 28 3 Is a financial transaction tax feasible? 33 3.1 Which instruments should be taxed? 33 3.2 Should the tax rate be uniform for all instruments? 35 3.3 Should taxation be national or market-based? 36 3.4 At what point in the system should the tax be imposed? 37 3.5 Do all countries have to act together? 41 4 How much money would a FTT collect? 43 4.1 Empirical estimates of transaction costs 47 4.2 Empirical estimates of elasticities 53 4.3 A meta-estimate of revenue from a financial transaction tax 54 5 What would be the incidence of the Tobin tax? 57 6 Summary and conclusions 64 References 67 Figures Figure 3.1 V- and Y-shaped message flows in settlement systems 39 Figure 4.1 Tax rates and volume reduction assumptions 47 5 IDS RESEARCH REPORT 68 Tables Table ES1 Meta-estimate of revenue from a financial transaction tax 13 Table 2.1 Results from selected theoretical and simulation models 27 Table 3.1 Transaction taxes around the world 40 Table 4.1 Estimated revenues from worldwide application of a Tobin tax 44 Table 4.2 Estimated revenues from unilateral and regional application of a Tobin tax 48 Table 4.3 Empirical estimates of transaction costs in the foreign exchange market 52 Table 4.4 Empirical estimates of transaction costs in other markets 53 Table 4.5 Empirical estimates of elasticity of forex volume with respect to transaction costs 54 Table 4.6 Empirical estimates of elasticity of equity volume with respect to transaction costs 55 Table 4.7 Meta estimate of worldwide revenue from the imposition of FTTs 56 Acknowledgements We are grateful to the participants of workshops at the Centre for the Study of Financial Innovation and the University of Göteborg for useful comments and suggestions. In addition, we received comments from a large number of authors and practitioners including: Viral Acharya, Dean Baker, Geert Bekaert, Francis Bismans, Zsolt Darvas, Randall Dodd, Paul De Grauwe, Lieven Denys, Thierry Foucault, Jeffrey Frankel, Ken Froot, Stephany Griffith-Jones, Harald Hau, Chris Heady, Thomas Hemmelgarn, Cars Hommes, Charles Jones, John Kay, Peter Kenen, Michael Kirchler, Thomas Palley, Robert Pollin, Helmut Reisen, Philip Saunders, Paul Spahn, Dietrich Stauffer, George Wang, Frank Westerhoff and Alan Winters. We are grateful to them all. Althea Rivea helped with the construction of our reference database and Stacey Townsend has also provided excellent and tireless administrative and research support – we are grateful to both. We gratefully acknowledge financial support from the UK Department for International Development for the research undertaken in this paper. 6 IDS RESEARCH REPORT 68 Acronyms ABS Automated Bond System ADR American Depositary Receipts AMEX American Stock Exchange ARMA Auto Regressive Moving Average ASE Athens Stock Exchange BIS Bank for International Settlements CBOE Chicago Board Options Exchange CDS credit default swaps CfD contracts for difference CHAPS Clearing House Automated Payment System CIT corporation income tax CLS Continuous Linked Settlement CME Chicago Mercantile Exchange DvP delivery-versus-payment EBTD European Bank for Reconstruction and Development Forex foreign exchange FTT
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