The Tobin tax lives on – part two | FT Alphaville

The Tobin tax lives on – part two

Yesterday the Merkozy plan for a Financial Transaction Tax caused some hefty damage for London-listed exchanges and brokers.

Not a surprise really. The analysts at Adam Smith Institute were hopping mad on Thursday:

London is the world’s leading centre for foreign exchange trading. In 2010, foreign exchange turnover in the UK reached over $1.8 trillion daily, accounting for 36.7% of the global total. Strong relationships with hedge funds, prime brokerage and the capital markets result in twice as many US dollars being traded on the UK foreign exchange market than in the US itself, and more than twice as many Euros being traded in London than in the whole of the Euro-areas combined. Approximately half of European investment banking activity is conducted through London, with over 80% of Europe’s Hedge fund assets being managed in London.

The bottom line: the City matters.

It’s interesting to note that the Swedes introduced the tax in the 1980s and it caused 60 per cent of its 11 most actively traded stocks to migrate to London. By 1990 50 per cent of Swedish equities had followed.

France and Germany should abandon the “economically illiterate proposals” because the tax has the potential to make markets more volatile rather than stable, says Reuters.

The ASI also cites a large number of empirical studies that reveal a positive relationship between increasing transaction costs and higher levels of volatility as well as significant delcines in turnover, stock prices and a migration of trading activity.

Of course, maybe the best-known advocate of a FTT is the “Robin Hood Tax” campaign, who have argued that it would be a low-cost means of deterring speculators. The ASI’s counter-points are worth noting though:

The worst cases of speculation usually cited by Tobin tax advocates occur in emerging markets. However a Tobin tax would provide little deterrence to investors in these markets, where often short-term movements of 2% – 5% are expected. In the worst cases of currency crises and manias (i.e. where investors expect short-term devaluations of over, say, 10%) a Tobin tax would be an almost irrelevant deterrence to speculators.

The call for a full-blooded FTT – shares, derivatives, currency – was slammed by the IMF, the Financial Times (mostly by omission), and many commentators.

The Robin Hood Tax claim is this, though:

A tiny tax on the financial sector can generate £20 billion annually in the UK alone.

But the point is, £20bn might be a decent sum for government coffers, but it’s also a lot to take out of the economy at a tricky moment in the UK’s business cycle.

Does it still sound like a good idea?

Related links:
Tobin tax: a desperate measure – Lex
Devil in the Tobin tax detail – FT Trading Room