What is the Tobin Tax?

Tobin tax, definition and concept

In the last 10 years, the idea of ​​taxing financial transactions frequently enters and leaves the political scene of the countries of the European Union. In 1972, James Tobin, a Keynesian economist, sought to curb currency speculation worldwide, today the governments of the member countries develop their own rates Tobin to clean up the public coffers.

The initial idea of ​​the Tobin tax was to penalize and impose a tax on currency speculation in the short term, since he thought that this speculation caused massive movements of financial funds between the currency exchanges that could destabilize a nation’s currency.

In September 2011, the European Commission proposed the creation of a tax that would be levied on all operations or transactions carried out by financial entities, provided that one of the parties involved in the transaction (or both) was established in the EU. The Tobin tax would not apply directly to savers and small businesses, since it left out mortgages, loans, insurance and operations between individuals. Eleven countries, including Spain, approved the rate, which initially projected a 0.1% tax for each operation with shares or bonds, and 0.01% for derivative products.

How much would the Tobin tax cost?

Tobin proposed a rate of 0.5%. Subsequently, other economists have suggested tax rates ranging from 0.1% to 1%.

Although the rate proposed by Tobin is low, if all financial operations in the global financial markets were subject to the rate, billions could be raised, which would improve the economy.

Tobin argued that for the rate to have a stabilizing effect on exchange rates and the world economy, it had to be adopted uniformly internationally.

As stated, the Tobin tax would not affect long-term investments. It would only apply to the excessive flow of money that moves regularly in the short term in the foreign exchange markets. The tax would be paid by banks and financial institutions.

How has it been applied in Europe?

France It began to apply it in 2012, with a collection of around 5,000 million euros since then. Specifically, it applies 0.3% to the sale of shares of listed companies, with a capitalization of more than 1,000 million (about 150 companies). And the operations/transactions with CDS on bonds of EU countries at 0.01%.

Italy launched its rate in 2013, with a total collection that is close to 2,000 million euros. It applies 0.2% to the operations/transactions of listed companies with a market capitalization of more than 500 million (about 100 companies) and a variable rate on the CDS market.

The rate set in Spain would tax the 0.2% share purchases carried out by financial operators, if said actions are of listed companies with a capitalization greater than 1,000 million euros (about 65 companies, including all of the IBEX). Therefore, Spain excludes operations with shares of unlisted companies and SMEs, and those of listed companies with a market capitalization of less than 1,000 million. Nor does it tax the purchase of debt securities (neither public nor private), nor does it act on financial operations with CFDs, or other derivative markets on the stock market. This is how the Tobin tax would be considered in Spain (subject to the political situation).

Controversies surrounding the Tobin tax

The Tobin tax has been hotly contested since it was unveiled, sparking heated debates between critics of the tax and those who think it could be beneficial to the world economy.

Critics of this tax point out that the rate would serve to limit, if not eliminate, the potential benefits of the foreign exchange markets, since the application of the rate would reduce the volume of operations. It must be remembered that one of the advantages of the foreign exchange market, FOREX, is precisely its high trading volume. The fact of being the most liquid financial market in the world is precisely one of its attractions when it comes to trading.

Critics of the Tobin tax go further by arguing that the reduction in cross-currency transactions would have a negative effect on the growth of the global economy.

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