Tobin taxes?

So the Green’s want a Tobin tax do they (ht Frog Blog and Stephen). Ok, so I’m hoping they aren’t justifying it on externality grounds – this leaves us with the conclusion that they must believe that it is the most efficient means available to make a certain level of government income.

They do seem to follow this point of view when they quote from a Guardian article:

Set at a lower level it would raise considerable sums of money. If a levy of just one basis point (one hundreth of 1%) was placed on all currency deals, governments would find themselves with an additional $70bn a year. At a time when they are chucking vast amounts of taxpayers’ money at the banks, that would be a nice little earner, and might help assuage the concerns that the public are going to pay for the folly of financiers.

I find it interesting that they see the money appearing out of thin air – if $70bn of tax is raised, it must come from some value somewhere. This is the same issue I have with people who like the financial transactions tax (furthermore, the assumption that capital/trade flows would not change when you tax them – even a little bit, is silly, as a result this over-estimates the associated revenue).

If we introduce this tax without cutting other taxes, it will just add additional distortions to the economy – this is what they seem to be implying. The funding for new spending schemes does not come for free – a Tobin Tax does not raise money out of thin air. As a result, we do have to ask whether as a society we are willing to increase our tax burden to fund the spending on third world countries that the Greens are after. The current policy makes it sound like a trade-off does not exist which is disappointing.

Now to be fair they say the tax would have to be in conjunction with everyone else – this is a good point, as if one country did it by themselves, they would lose a fair amount of “marginal capital” given the assumption that capital is relatively mobile.

As a result, the income that is raised will come from a “shared” decrease in economic efficiency – rather than just completely messing up New Zealand economic growth.

What about if we do cut other, distortionary taxes, and introduce a Tobin Tax to replace them?

Well, then we have to go back to our old friend “elasticity” in order to see what sort of deadweight loss the Tobin tax creates. If everyone introduces the tax, then how elastic will the supply and demand of capital be? I don’t know – but it would be a good question to answer in order to evaluate the policy.

My feeling is that a Tobin tax is a very broad tax on ALL types of international currency flows (trade, speculation, and capital) and as a result, the deadweight loss associated with it will be a lot lower than taxes on specific industries or types. However, I also fear that some activities may be especially sensitive to a tax – this would imply that a “broad tax” in this sense does not satisfy the Ramsey principle – and is inefficient. I would be interested in hearing what you guys have to think about all this.

  • Bren

    The feeling I got from the Greens was that behaviour would change with the introduction of the tax – that would be the point of it. It is there to provide a disincentive for currency speculation.

  • “It is there to provide a disincentive for currency speculation.”

    But that is ridiculous – why would you want to provide a disincentive to aggregating information. While their at it why don’t they shut down Statistics New Zealand and tax all economists 😛

    Furthermore, currency speculators make the dollar move based on economic outcomes – helping to smooth the domestic economic cycle (at least for exporters). When commodity prices rise they push up the dollar limiting the extent of of the gains to exporters and shifting some of the benefit to everyone else, but when commodity prices fall they knock down the dollar helping to protect exporters and force the rest of society to take on some of the cost.

  • Matt’s points remind me of the evidnence that attempts to manipulate prediction markets actually improve their accuracy.

    Not too keen on taxing economists!

  • goonix

    I’m already taxed high enough thanks. 😛

  • I reckon economists should be on flat tax rate:P

  • “Now to be fair they say the tax would have to be in conjunction with everyone else”

    Hmmm. Anyone want to put a bet on when that would happen?

    Can the Greens please stop putting up economic policies that they know are never going to fly. Otherwise they will forever be seen as a jumped up lobby group. Besides, with Winston “Economics is for facists” Peters, I have enough to laugh at without the Greens distracting me.

  • “I’m already taxed high enough thanks”

    Really, I’m not so sure – we will need to discuss that this weekend.

    “I reckon economists should be on flat tax rate”

    Flat at 60%?

    “Can the Greens please stop putting up economic policies that they know are never going to fly”

    I agree, I find that irritating as well. However, I am glad that they realise the limitations of some of there policies – it is better than some parties 😛

  • the original point of the Tobin tax, at least as I understand it, was not to raise income but rather to deter speculative currency transactions (i.e. the type of hot money flows which made the Asian Crisis what it was). These tend to involve (IIRC) large amounts of money but small margins. And money that stays within borders for short periods of time. Therefore, such funds are potentially easily deterred even by modest taxes while theoretically being easy to target by virtue of their short term nature (this is how the Chilean’s managed to impose capital controls that differentiated between real investment and speculative cash).

    As for distorting market signals, the trouble with this sort of speculation is that it’s rarely directly linked to fundamentals (except tangentially) but rather based on expectations on what other investors will do, irrational exuberance etc. I see no trouble in distorting this to be honest.

    I oppose a 60% flat tax on economists though. My preferred plan is to index peg set all economist’s salaries to the median wage.
    [attempted troll complete. shuffles off]
    😉

  • Stephen

    Thanks for the props, though i’m sure GreensWatch TVHE would have seen it eventually.

    “Can the Greens please stop putting up economic policies that they know are never going to fly”

    To be fair, frog puts up a lot of stuff in the name of discussion, which is indeed the case this time.

  • LOL, GreensWatch.

    I’ll admit that the greens have received a lot of coverage on the blog this week, it’s a purely a temporary phenomenon.

    I definitely disagree with a 60% flat tax rate:P

  • “the original point of the Tobin tax, at least as I understand it, was not to raise income but rather to deter speculative currency transactions ”

    Indeed. However, this isn’t the reason I would support such a tax – thereby why I have gone hunting for other justifications.

    “As for distorting market signals, the trouble with this sort of speculation is that it’s rarely directly linked to fundamentals (except tangentially) but rather based on expectations on what other investors will do, irrational exuberance etc. I see no trouble in distorting this to be honest.”

    Hmm, this is the fundamental value judgment where our opinions differ methinks. The aggregation of information is the entire purpose of such speculation – any tax to distort speculation will reduce the strength of information dissemination.

    Ultimately, when people see the NZ dollar flying around they often view it as a bad thing – when it actually provides one hell of a stabilisation policy for economic activity, and the cost involved (risk) can be insured against relatively cheaply. Large movements in commodity prices and large movements in our currency tend to go together – speculators help to stabilise economic activity in the face of this, a pretty essential thing for a trade exposed country like NZ.

    “i’m sure GreensWatch TVHE would have seen it eventually.”

    To be fair we try to criticise everyones policies – the Greens are releasing them so we start complaining 😛

    Also they released policies during this weird period where four authors were actively involved in the blog – as a result there was a lot more posting activity than usual 😉

    Note that I hold all political parties in relative contempt in terms of “economic honesty” – some of the other commentators might prefer one party to another, but I find myself strangely drawn to none 😛

    “To be fair, frog puts up a lot of stuff in the name of discussion, which is indeed the case this time.”

    A policy release as a discussion item? This seems a bit unusual- surely you have the discussion and public debate before putting it on your list of party policies?

    My concern with the way the Greens do things like this is that they take impractical policies, act as if they are possible, and then act like other parties are “wrong” because they are ignoring these options – this smells of politicing rather than useful debate.

    As I have said in the post though – I felt that the Greens did understand the limitations of parts of this policy, which is a lot more than can be said for other parties e.g. most parties tax plans. Also I (and the rest of the authors here, I think) agree with there push for a switch away from income tax to externality taxes.

  • “I definitely disagree with a 60% flat tax rate:P”

    You don’t think there is a significant negative externality from the manner with which we practice economics 😛

  • if we are going to talk externalities I should be receiving a subsidy:D

  • “if we are going to talk externalities I should be receiving a subsidy”

    What, what social benefits do you provide?

  • Don’t be so hard on agnito there Matt. I find him amusing. Mind you, if you were to ask me to put a monetary value on it….

  • “Don’t be so hard on agnito there Matt. I find him amusing. Mind you, if you were to ask me to put a monetary value on it….”

    I was just more interested in finding out what social value he thinks he provides – I’m pretty sure I don’t add any social value, I’m just hoping I don’t have a higher social cost 😛

  • haha, Matt isn’t being hard on me, he just has an enquiring mind!

    I think you provide a social service Matt:)

    lol, I hope you mean amusing in a good way!

  • StephenR

    “A policy release as a discussion item? This seems a bit unusual- surely you have the discussion and public debate before putting it on your list of party policies?”

    Er yes, it is policy, you’re right. Totally impossible at the moment, but they often put up ideas on that blog that people accuse them subscribing to – this one is out there so I think I just mentally filed it in the ‘not happening’ category!

    And I think the coverage of the Greens is justified, should’ve put a 😀 somewhere in the last.

  • I think just for laugh if I/we do another post on the Greens the title will be:

    GreensWatch:”insert subject here”

  • “but they often put up ideas on that blog that people accuse them subscribing to”

    I enjoy going to their blog because it gives me things to write and think about – so I do enjoy this element of what they do. Even if I don’t agree with things I like seeing people actually put there cards on the table.

    “I think just for laugh if I/we do another post on the Greens the title will be:”

    Is anyone else going to release policy soon – it gives us so much to write about.

  • Matt – You like shooting fish in a barrel?

  • “Matt – You like shooting fish in a barrel?”

    I find it hard to trust my own judgment unless I put it up for scrutiny – even if the thing I am criticising seems “obviously” wrong. Knowledge can only be gained by putting arguments out there and making yourself vulnerable – seeing other people put things out there gives me new idea about how I can stick my neck out 😛

  • The aggregation of information is the entire purpose of such speculation – any tax to distort speculation will reduce the strength of information dissemination.

    Why’s this a problem? or, to put it differently, what’s the value of the information and was it really worth the Asian Financial Crisis?

    FWIW I don’t think it’s a difference in value judgements between us – we’re both utilitarians after all, and it is only at this level (and, even then, only partially) where value judgements come into economics. At all other levels it’s wrong or right, or contestable based on current data.

    As best I can tell, I think the difference between thus:

    I see a world much further removed from the ideal of perfect competition with perfect information (the world of Arrow-Debreu, if I remember it right) than you do. And so, in principal, I’m not as worried as you about taxes messing such a world up. (In practice, I do want to know the empirical impact of course.)

    Or, to put it another way, distorting the already distorted doesn’t worry me so much.

    BTW – I’m still really enjoying the blog; lots of interesting comment.

  • “Why’s this a problem? or, to put it differently, what’s the value of the information and was it really worth the Asian Financial Crisis?”

    Depends if you believe speculation was the cause of the Asian Financial Crisis – personally I think it was the result of agents not taking risk into regard because of poor institutional structure 😛

    “Or, to put it another way, distorting the already distorted doesn’t worry me so much.”

    Even if we don’t have perfect markets, the distribution of information and the relative prices gives us a situation that it preferable to a situation with distortions. Even though agents can not ensure that they are maximising ex post payoffs ex ante there is a cost associated with distorting there ex ante choices – the cost is simply some distribution, which could go negative, but has a positive mean.

    Thats probably how I feel about it, maybe 😛

  • I see the Greens are at it again – this time asking for a suspension of dividends from the Aussie-owned banks.

  • “I see the Greens are at it again – this time asking for a suspension of dividends from the Aussie-owned banks.”

    I’ve heard a good prisoners dilemma argument for suspending dividends at the moment – however, I don’t think that is the reason is it 😛