Appendices and References » APPENDIX 1: Contacts 60 » APPENDIX 2: Formulae 63 » APPENDIX 3: Speculation and Currency Crises 65 » APPENDIX 4: Spreads and volatility in specific market segments 69 » APPENDIX 5: Abbreviations 72 » REFERENCES 76 APPENDIX 1: Contacts I have contacted the following persons Anthony Clunies-Ross, Economics to discuss issues relating to the sub- Department, University of ject of this study. In part their views Strathclyde, Glasgow, Schott- have contributed significantly to the land. results of this report, and their help is very much appreciated. I take the op- Peter Cornelius, Director, World Ec o- portunity to thank all those who were nomic Forum, Geneva, Switzer- willing to support my endeavor. land. It goes without saying, however, that I Paul De Grauwe, Professor, Katho- am alone responsible for the content lieke Universiteit Leuven, and of this report and that no inferences Member of the Belgian Senate, should be drawn from its results on Brussels, Belgium. the position of the persons contacted. On the contrary: their view were often Harlem Désir, Mitglied des Europäi- distinctly incongruent with my own sches Parlaments, Intergroup, conclusions. France. Dietrich Domanski, Senior Economist, Bank for International Settle- Ehtisham Ahmad, Division Head, In- ment, Basel, Switzerland. ternational Monetary Fund, Wa- shington D.C., USA. Saul Escobar, Member of the Eco- nomic Cabinet, Mexico. Dean Baker, Center for Economic and Policy Research, W ashington David Felix, Professor Emeritus, D.C., USA. Washington University in St. Louis, USA. Ed Balls, Chief Economic Adviser to HM Treasury, London, United Ingo Fender, Economist, Committee Kingdom. on the Global Financial System (CGFS), Bank for International Hans F. Bauer, Bundesbankdirektor, Settlement, Basel, Switzerland. Deutsche Bundesbank, Frank- furt, Germany. Glyn Ford, Member of the European Parliament, Intergroup, United Peter Bofinger, Professor at the Uni- Kingdom. versity of Würzburg, Germany. Alan Frankel, Head of the Committee Claudio Borio, Head of Research and on the Global Financial System Policy Analysis, Bank for Inter- (CGFS), Bank for International national Settlement, Basel, Settlement, Basel, Switzerland. Switzerland. Hans-Jürgen Friederich, Head of Ruthanne Cecil, Center for Environ- Payment Systems, Deutsche mental Economic Development Bundesbank, Frankfurt, Germa- (CEED), USA. ny. Jacques-Chai Chomthongdi, Focus on the Global South, Thailand. Paul Bernd Spahn ® [email protected] On the feasibility of a tax on foreign exchange transactions ® APPENDIX 1 ® Page 60 Gabriele Galati, Head, Monetary Pol- Howell Lee, Head of Fiscal Policy, icy and Exchange Rates Re- International Monetary Fund, search and Policy Analysis, Washington D.C., USA. Bank for International Settle- ment, Basel, Switzerland. Robert Lindley, Deputy Head, Com- mittee on Payment and Settle- Peter M. Garber, Professor, Deutsche ment Systems, Secretariat Bank, New York, USA. Group, Bank for International Settlement, Basel, Switzerland. Vítor Gaspar, Director-General, Euro- pean Central Bank, Frankfurt, Sabrina Merz, Director, Settlement Germany. Currencies/Swap, BHF-Bank, Frankfurt, Germany. Wolfgang Glomb, Federal Ministry of Finance, Berlin, Germany. Philipp Nimmermann, Economics De- partment, BHF-Bank, Frankfurt, David Hale, Global Chief Economist, Germany. Zurich Financial Services, USA. Jeffrey Owens, Head Fiscal Affairs, Jörg Huffschmid, Professor, University OECD, Paris, France. of Bremen, Germany. Thomas Palley, Assistent Director of Jörg Isselmann, Direktor, Currency Public Policy for the AFL-CIO, Trading, BHF-Bank, Frankfurt, USA. Germany. Heiki Patomäki, Department of Inter- Bruno Jetin, Professor, Université national Studies, Nottingham Paris-Nord, Member of the Ac a- Trent University, United King- demic Committe of ATTAC, Pa- dom. ris, France. Helmut Reisen, Head of Research, Michael J. Johnston, Executive Vice- OECD Development Center, Pa- President, Capital Group Com- ris, France. panies Inc., USA. Robin Round, Halifax Initiative, Van- Inge Kaul, Director, United Nations, couver, Canada. New York, USA. Rodney Schmidt, Program Advisor, Peter B. Kenen, Professor, Princeton International Development Re- University, USA. search Centre, Vietnam. Ian Kinniburgh, Director, Division for Wolfgang Söffner, Head of the De- Development Policy Analysis, partment for Organization, Con- United Nations, New York, USA. trolling, Information Technology and Payments, Landeszentral- Gerhard Klein, Vice President, Global bank Hessen, Frankfurt, Ger- Relationship Banking, e- many. Business, Citibank, Frankfurt. Parthasarathi Shome, former Head of Michael Knorr, Global Product Mana- Fiscal Policy, International ger CLS, Citibank, New York. Monetary Fund, Washington D.C., USA. John Langmore, Director, Department of Economic and Social Affairs, United Nations, New York, USA. Paul Bernd Spahn ® [email protected] On the feasibility of a tax on foreign exchange transactions ® APPENDIX 1 ® Page 61 Janet Stotsky, Senior Economist, In- James Tobin, Professor Emeritus, ternational Monetary Fund, Wa- Yale University, New Haven, shington D.C., USA. USA. Emil Sunley, Assistant Director, Inter- Bogdan Vanden Berghe, Broederlijk national Monetary Fund, Wash- Delen, Brussels, Belgium. ington D.C., USA. Dirk Wegener, Managing Director, Vito Tanzi, former Director, Fiscal Af- Head of Foreign Exchange fairs Department, International Sales, Deutsche Bank, Frank- Monetary Fund, Washington furt, Germany. D.C., USA. Rainer Widera, Head, International Teresa Ter-Minassian, Director, Fiscal Financial Statistics, Information Affairs Department, International Statistics, and Administration, Monetary Fund, Washington Bank for International Settle- D.C., USA. ment, Basel, Switzerland. Steve Tibbett, War on Want, London, Charles Wyplocz, Professor, Gradu- United Kingdom. ate Institute of International Studies und International Center for Monetary and Banking Stud- ies, Genf, Switzerland. Paul Bernd Spahn ® [email protected] On the feasibility of a tax on foreign exchange transactions ® APPENDIX 1 ® Page 62 APPENDIX 2: Formulae The differential impact of a Tobin tax on short-term and longer-term financial transac- tions can be described as follows: If t is the proportional tax rate on currency exchange transactions that is levied on both sides of a speculation trade, h is the duration of the holding period of an open position (h=52 = one week, h=12 = one month, h=0,2 = five years, etc.), i* is the yearly interest rate of an investment in foreign currency (and ih* the corresponding interest rate for the holding period) and I the comparable interest rate of a domestic investment, the follow- ing equation must hold for arbitraging: h (1) [(1 - t)(1 + ih*)] (1 - t) = (1 + i). The expression in square brackets signifies the after-tax amount for a single transac- tions of one euro into foreign currency at the time of its repatriation s+1/h (in years), whereby s represents the time of the investment; the amount is taxed a second time when repatriating the investment. It is assumed that there is no real exchange rate risk. In order to calculate the yearly interest rate that is required to render a foreign invest- ment as profitable as a domestic investment, the following formula can be deducted from (1). 1 é (1+ i) ùh (2) 1+ i * = h ê 1+h ú ë(1-t ) û The corresponding yearly rate i* is then (1 + i ) (3) i * = - 1 (1 - t )1+h Formula (3) was used to calculate the gross return before tax that is required for a for- eign investment to compete with the domestic return on capital. The formula illustrates that this return varies inversely with the holding period of the foreign investment. If one wants to establish a relationship between the income tax rate t and the transac- tions tax rate t, the following holds (Zee 2000, p.7.): (4) t = t/{(1+i*)1/h - 1}. For a foreign interest rate of 10 percent, a transactions tax rate of one percent, and a holding period of 5 years, the transactions tax exhibits only a small income tax burden of 1.6 percent. The confiscatory income tax rate of 100 percent will be exceeded for a holding period of 39 (of 365) days. If the transactions tax rate were only 0.1 percent, the holding period could be shortened to 3-4 days before reaching a confiscatory level. Chart 7 of Chapter 5 is based on a simple maximization model for a financial institution (Felix and Sau 1996, p. 228ff) whose invers e demand function can be described by p = p(V, Y, i, f), whereby p is the “price”, i.e. the charge on a transaction. The independent variables are V, the volume of currency transactions, Y the value of world trade, and i and f are vectors of which the first represents interest rates, the sec- ond inflation rates between the two currencies areas. Felix and Sau consider these variables as exogenous (except for V) and then derive a gross return curve Paul Bernd Spahn ® [email protected] On the feasibility of a tax on foreign exchange transactions ® APPENDIX 2 ® Page 63 (5) R = gVa, with 0 < a <1, and a transactions cost curve (6) C = (t+t)Vb, with b > a. The net return (profit) is then P = R – C . In these formulae, a, b, g and t are parameters whereby the latter represents (for b=1) the transactions costs of one unit traded. t is the Tobin tax rate. From this model one can derive the marginal conditions for maximizing profit and the elasticity of a variation in the volume of currency transactions with regard to a change in transactions costs including the Tobin tax (see Felix and Sau 1996, p. 230). These re- sults were not used for this study however. It is interesting that Felix and Sau vary the parameters b as a function of V and D, whereby D represents the weighted average of the maturity dates of currency transac- tions. Thereby is ¶ b/¶ V < 0, and ¶ b /¶ D > 0. Since the tax induces a reduction in the trading volume and a lengthening of holding periods, it then follows that the reduction of the trading volume during a (phased-in) introduction of the tax will be mitigated with regard to consecutive increases of the tax rate, i.e.