The Tobin Tax: How it affects trading

The economic crises that have shaken the world economy in recent years have originated from the bursting of the famous financial bubbles.

The consequences of these economic crises have had a negative impact on the lives of millions of people. This negative impact has served as an argument for defenders of regulation and interventionism to promote policies or regulations that regulate financial markets.

That is why in recent years, you have surely heard of the Tobin Tax, but you are still not entirely clear: what is the Tobin tax? how affects? What consequences can it have on my trading? What about my investment? In this article I am going to explain what all this is about.

First of all, let’s start with the name, why is it called the Tobin tax? The Tobin tax owes its name to James Tobin, an American Keynesian economist who believed in state intervention in the economy in order to achieve its stability. He became known, in the early 1970s, for suggesting taxing capital flows. And this proposal is what we know today as the Tobin Tax. End. No, there’s more, we continue.

1. What is the Tobin Tax?

As I was saying, the Tobin tax proposed by James Tobin consisted of establishing a tax rate (tax or collection) of 0.5% on currency purchase and sale operations and thus try to curb speculation after the breakdown of the Bretton Woods agreements and the consequent termination of the Gold Standard.

The original idea of ​​this rate was raise money at the expense of speculators, pretending to give a social approach to be accepted. Although really, it already sought to curb fluctuations or volatility in the currency market during the crisis of the seventies, after abandoning the gold standard during the Richard Nixon government.

The proposal also proposed taxing the purchase or sale of shares with a rate of 0.1% and operations with derivatives with 0.01%.

2. Some historical background of the Tobin Tax.

The direct and immediate consequence of the application of the Tobin tax in the different countries where it has been implemented has been a drastic decline in trading volumes and migration of investors to other markets. Little joke.

With the implementation of the Tobin rate in countries like Sweden, there was a downward movement in trading volume of around 50%, in London an 85% drop in the bond market and 98% in the futures market .

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In the case of France, investors chose to avoid investing in the shares of the French giants or, failing that, they invested in derivative products that replicate the real price, but without being subjected to the imposition of the Tobin tax. The volume of the bag plummeted rapidly and the collection did not even reach half of what was planned.

3. The evolution of the Tobin Tax

During the crisis of the 1990s, the anti-globalization movements took up the idea of ​​applying the Tobin tax to increase its social acceptance, renaming it the Robin Hood Tax, turning it into one of their main demands by using it as a means of obtaining income for the fight against poverty globally.

These mobilizations led to the creation at the end of the 1990s of the Association for the Taxation of Transactions and for Aid to Citizens (ATTAC), in order to establish the Tobin tax as a global tax on transactions.

The financial crisis, which occurred a decade later, once again placed the application of a rate or tax that would pass on the costs of the crisis to financial institutions, since many of them were rescued with public money. .

As a consequence, the International Monetary Fund (IMF) prepared a report where it renamed the Tobin rate as Tax on Financial Transactions (ITF) and extends its scope of application to the purchase and sale of shares and other financial instruments. However, the conclusion of this report was that the application of this tax was not convenient, for two main reasons:

  • The entities could transfer the cost to consumers or end customers.
  • It had to be applied globally or, on the contrary, mechanisms could be generated to try to evade paying the tax.

In 2011 the European Commission proposed to the member countries the implementation of an ITF, but it was rejected. Years later, a Tobin tax was proposed again, which consisted of a rate between 0.1% and 0.25% for the purchase and sale of shares and derivatives of companies with a capitalization of more than 1000 million euros, in only 10 countries. : Germany, France, Spain, Portugal, Italy, Greece, Belgium, Austria, Slovenia and Slovakia. But the only ones that applied it unilaterally were: Belgium, Ireland, the United Kingdom, France, Greece and Italy

4. Tobin tax in Spain

In the Spanish case, the Spanish coalition government recently approved the implementation of a Tobin tax of 0.2% on the purchase of Spanish shares with a market capitalization of more than one billion eurosthat is, all the Ibex 35 companies and another important group of continuous market companies, including: Repsol, Santander, Telefónica, CaixaBank, Bankia, Endesa, Enagas, Aperam, Almirall, Corporación Financiera Alba, BME, Ebro Foods, Fluidra, Faes Farma, Catalana Occidente, Gestamp, Logista, NH Hotels, Prosegur Cash, Prosegur, Rovi, Dia, Sacyr, Unicaja.

Each year the Spanish Executive, through the Ministry of Finance, will publish the list of companies that must pay this tax. The publication of this list gives investors the possibility of knowing in advance which operations will be affected by this rate and which will not.

Although the regulations establish that the tax must be paid or paid by the broker or financial intermediary, as you may be imagining, it is very likely that these have an impact on the cost of the final customer. These regulations exclude capital increases, IPOs, derivative products and debt issues, both public and private, from the tax.

Due to the difficulty of monitoring all the operations carried out throughout a session, the application of this tax for intraday trading was ruled out. Nevertheless, the tax for portfolio changes is maintained at the close of each session. This is so because the calculation of positions at the close of each session is easier, as well as identifying the holders of each type of asset.

The main objective of applying this rate is that the financial entities that received millions in aid from the government during the banking crisis, repay the favor to society. The goal of the Spanish Government is the collection of 850 million euros per year. We all know it will be less.

5. Criticism of the Tobin Tax

One of the main criticisms of the imposition of the Tobin tax is the difficulty in differentiating between speculative and non-speculative capital movements. Many classify this tax as an error that has nothing to do with the original idea proposed by James Tobin and others go further qualifying it as a populist measure.

As is logical, the implementation of the Tobin tax is not to the liking of the financial entities affected, such as, for example, Bolsas y Mercados Españoles (BME). Those principally affected by the measure fear that once again the trading volume, which has already been showing signs of a continuous decline, will accentuate its decline.

The main players in the Spanish financial market question the effectiveness of the tax to achieve the collection goal of 850 million euros per year.

Another criticism is based on the fact that for an effective application of the Tobin tax, it should be applied in all countries globally, but it is very unlikely that the most important markets will agree to its implementation. This is so because in an interconnected and global market, we can easily operate from a country where transactions are not subject to this tax.

6. How the Tobin Tax affects investors

Although this tax has been sold as a tax on large investors, in practice, this tax on financial transactions will fall mainly on small investors.

Normally, the fiscal criterion used is the location of the broker, that is, that the tax would only affect the trader who operated with a broker that was in Spain. On this occasion, this criterion has changed and the financial intermediary will be in charge of settling the tax regardless of the residence of the person or entities involved in the operation, that is, it does not matter the place of residence of the person who buys the shares or the place where they are traded.

If you are a long-term investor who trades very little, you may not even notice the impact. If you are a more active investor and rotate your portfolio on a weekly or monthly basis, you will notice it in your annual results.

Investors will most likely start looking towards other stocks and foreign stocks that are exempt from this tax. Although in reality the great attention of the investor tends to be in the US and not in the IBEX 35. Of course, the application of this tax will reduce, even more, the attractiveness of Spanish shares if it is not applied in a consensual manner in the rest of the European Union. And even so, as I told you, there is the United States.

With the application of the Tobin tax and adding the already existing commissions, if you invest 1,000 euros in the stock market, we must add 2 euros to the current commissions corresponding to 0.2% of the 1,000 euros invested, for a total commission of 5.95 euros that represents a 50% increase in commissions.

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According to Inverco figures and calculations, the application of this tax to variable income investment funds will reduce profitability by around 7.4% of these funds over the next 25 years. In the case of pension plans, it is estimated that the yield will be reduced by 5.6% in 25 years.

In summary, the four main consequences that we are likely to see will be: drop in contracting volume, outflow of capital abroad, decrease in total tax collection and an increase in interest rates as a solution to make up the profitability of financial institutions.

Again. History will tell us how the Spanish economy will be affected by the application of this tax and who will end up paying it in practice.

7. Alternatives without Tobin tax

If as a small investor you want to legally avoid paying the Tobin tax, these are two options:

  • Invest directly in shares with a capitalization of less than one billion euros. Most companies with a market capitalization of less than one billion euros are listed on the IBEX Small Cap, but you must bear in mind that due to the high volatility of these companies you must have good risk management.
  • you can invest in derived products exempt from this taxsuch as: Futures, Options, Warrants, CFDs…

8. Tobin rate for Forex and cryptocurrencies

If you are reading this, it is very possibly because you are a trader, so if you trade currencies (Forex) or cryptocurrencies you should not worry. This measure will not affect you.

Nor if you trade or invest as we have said in the American market, either through shares, indices or other instruments outside of Spain. Nor if you do scalping or intraday trading. Remember that derivatives are not affected by this measure.

With all this information we can say that if you are a trader surely this measure will affect you little. Neither if you are an investor who does not invest in the IBEX.

And now, with all this information, do you think this could mean another setback for the Spanish market? how do you think it will affect? I read you in comments.

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