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A currency transaction tax is a tax placed on the use of currency for various types of transactions. The tax is associated with the financial sector and is a type of financial transaction tax, as opposed to a consumption tax paid by consumers, though the tax may be passed on by the financial institution to the customer.
Currency transaction taxes have been proposed as taxes on domestic currency usage as part of the automated payment transaction (APT) tax and on international currency transactions, the Tobin tax and the Spahn tax.
The automated payment transaction (APT) tax was first proposed in Buenos Aires at the International Institute of Public Finance Conference by Edgar L. Feige in 1989 and an extended version of the proposal appeared in Economic Policy in 2000. [1] The APT tax proposal is a generalization of the Keynes tax [2] and the Tobin tax. [3] The APT tax consists of a small flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking or payments system. In order to assure that all cash transactions are also taxed, the APT system proposes to exact a tax on currency as it enters and leaves the banking system. In order to be an effective means of discouraging currency usage for tax evasion, the APT tax imposes a tax rate on currency higher than the rate automatically charged on cheque transactions. Since cash can be used multiple times between the time it enters into circulation and the time it is returned to the banking system, the APT currency transaction tax is set at a multiple of the rate charged for all other transactions using non cash payment methods.
A Tobin tax is a tax on all spot conversions of one currency into another. Named after the economist James Tobin, the tax is intended to put a penalty on short-term financial round-trip excursions into another currency. Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system effectively ended. [4]
In 1995, Paul Bernd Spahn suggested an alternative involving "a two-tier rate structure consisting of a low-rate financial transactions tax, plus an exchange surcharge at prohibitive rates as a piggyback. The latter would be dormant in times of normal financial activities, and be activated only in the case of speculative attacks. The mechanism allowing the identification of abnormal trading in world financial markets would make reference to a "crawling peg" with an appropriate exchange rate band. The exchange rate would move freely within this band without transactions being taxed. Only transactions effected at exchange rates outside the permissible range would become subject to tax. This would automatically induce stabilizing behavior on the part of market participants." [5]
On June 15, 2004, the Commission of Finance and Budget in the Belgian Federal Parliament approved a bill implementing a Spahn tax. According to the legislation, Belgium will introduce the Spahn tax once all countries of the eurozone introduce a similar law. [6] In July 2005 former Austrian chancellor Wolfgang Schüssel called for a European Union Tobin tax which he thought would base the community's financial structure on more stable and independent grounds. However, the proposal was rejected by the European Commission.
On September 19, 2001, retired speculator George Soros put forward a proposal, special drawing rights or SDRs that the rich countries would pledge for the purpose of providing international assistance, without necessarily dismissing the Tobin tax idea. He stated, "I think there is a case for a Tobin tax... (but) it is not at all clear to me that a Tobin tax would reduce volatility in the currency markets. It is true that it may discourage currency speculation but it would also reduce the liquidity of the marketplace." [7]
In 1994, Canadian economist Rodney Schmidt noted that "in two-thirds of all the outright forward and currency swap transactions, the money moved into another currency for fewer than seven days. In only 1 per cent did the money stay for as long as one year. While the volatile exchange rates caused by all this rapid movement posed problems for national economies, it was the bread and butter of those playing the currency markets. Without constant fluctuations in the currency markets, Schmidt noted, there was little opportunity for profit." [8]
"This certainly seemed to suggest the interests of currency traders and the interests of ordinary citizens were operating at cross-purposes." [8]
"Schmidt also noted another interesting aspect of the foreign- exchange market: The dominant players were the private banks, which had huge pools of capital and access to information about currency values. Since much of the market involved moving large sums of money (typically in the tens of millions of dollars) for very short periods of time (often less than a day), banks were perfectly positioned to participate. Among swap transactions, which represented a major chunk of the foreign exchange market, 86 per cent of the transactions were actually between banks." [8]
A representative of a “pro Tobin tax” NGO argued as follows: "[The Tobin tax] is designed to reduce the power financial markets have to determine the economic policies of national governments. Traditionally, a country’s central bank buys and sells its own currency on international markets to keep its value relatively stable. The bank buys back its currency when a ‘glut’ caused by an investor selloff threatens to reduce the currency's value. In the past, most central banks had enough cash in reserve to offset any selloff or ‘attack’. However, this is no longer the case. Speculators now have more cash than all the world's central banks put together. Official global reserves are less than half the value of one day of global foreign-exchange turnover. Many countries are simply unable to protect their currencies from speculative attack." [9]
"By cutting down on the overall volume of foreign-exchange transactions, a Tobin Tax would mean that central banks would not need as much reserve money to defend their currency. The tax would allow governments the freedom to act in the best interests of their own economic development, rather than being forced to shape fiscal and monetary policies according to demands of fickle financial markets." [9]
In early November 2007, a regional Tobin tax was adopted by the Bank of the South in Latin America, after an initiative of Presidents Hugo Chavez from Venezuela and Néstor Kirchner from Argentina. [10]
A Tobin tax was originally defined as a tax on all spot conversions of one currency into another. It was suggested by James Tobin, an economist who won the Nobel Memorial Prize in Economic Sciences. Tobin's tax was originally intended to penalize short-term financial round-trip excursions into another currency. By the late 1990s, the term Tobin tax was being applied to all forms of short term transaction taxation, whether across currencies or not. The concept of the Tobin tax is being picked up by various tax proposals currently being discussed, amongst them the European Union Financial Transaction Tax as well as the Robin Hood tax.
The Association pour la Taxation des Transactions financières et pour l'Action Citoyenne is an activist organisation originally created to promote the establishment of a tax on foreign exchange transactions.
In finance, speculation is the purchase of an asset with the hope that it will become more valuable shortly. It can also refer to short sales in which the speculator hopes for a decline in value.
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of the euro.
The foreign exchange market is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.
Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents, on the purchase/sale of local currency by nonresidents, or the transfers of any currency across national borders. These controls allow countries to better manage their economies by controlling the inflow and outflow of currency, which may otherwise create exchange rate volatility. Countries with weak and/or developing economies generally use foreign exchange controls to limit speculation against their currencies. They may also introduce capital controls, which limit foreign investment in the country.
A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. A currency crisis raises the probability of a banking crisis or a default crisis. During a currency crisis the value of foreign denominated debt will rise drastically relative to the declining value of the home currency. Generally doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate, if it has any. The crisis is often accompanied by a speculative attack in the foreign exchange market. A currency crisis results from chronic balance of payments deficits, and thus is also called a balance of payments crisis. Often such a crisis culminates in a devaluation of the currency. Financial institutions and the government will struggle to meet debt obligations and economic crisis may ensue. Causation also runs the other way. The probability of a currency crisis rises when a country is experiencing a banking or default crisis, while this probability is lower when an economy registers strong GDP growth and high levels of foreign exchange reserves. To offset the damage resulting from a banking or default crisis, a central bank will often increase currency issuance, which can decrease reserves to a point where a fixed exchange rate breaks. The linkage between currency, banking, and default crises increases the chance of twin crises or even triple crises, outcomes in which the economic cost of each individual crisis is enlarged.
In economics, a speculative attack is a precipitous selling of untrustworthy assets by previously inactive speculators and the corresponding acquisition of some valuable assets. The first model of a speculative attack was contained in a 1975 discussion paper on the gold market by Stephen Salant and Dale Henderson at the Federal Reserve Board. Paul Krugman, who visited the Board as a graduate student intern, soon adapted their mechanism to explain speculative attacks in the foreign exchange market.
Foreign exchange risk is a financial risk that exists when a financial transaction is denominated in a currency other than the domestic currency of the company. The exchange risk arises when there is a risk of an unfavourable change in exchange rate between the domestic currency and the denominated currency before the date when the transaction is completed.
The following outline is provided as an overview of and topical guide to finance:
The Automated Payment Transaction (APT) tax is a small, uniform tax on all economic transactions, which would involve simplification, base broadening, reductions in marginal tax rates, the elimination of tax and information returns and the automatic collection of tax revenues at the payment source. This proposal is to replace all United States taxes with a single tax on every transaction in the economy. The APT approach would extend the tax base from income, consumption and wealth to all transactions. Proponents regard it as a revenue neutral transactions tax, whose tax base is primarily made up of financial transactions. It is based on the fundamental view of taxation as a "public brokerage fee accessed by the government to pay for the provision of the monetary, legal and political institutions that protect private property rights and facilitate market trade and commerce." The APT tax extends the tax reform ideas of John Maynard Keynes, James Tobin and Lawrence Summers, to their logical conclusion, namely to tax the broadest possible tax base at the lowest possible tax rate. The goal is to significantly improve economic efficiency, enhance stability in financial markets, and reduce to a minimum the costs of tax administration.
Paul Bernd Spahn is emeritus professor of public finance at the Goethe University, Frankfurt am Main, Germany.
A financial transaction tax (FTT) is a levy on a specific type of financial transaction for a particular purpose. The tax has been most commonly associated with the financial sector for transactions involving intangible property rather than real property. It is not usually considered to include consumption taxes paid by consumers.
A Spahn tax is a type of currency transaction tax that is meant to be used for the purpose of controlling exchange-rate volatility. This idea was proposed by Paul Bernd Spahn in 1995.
The Robin Hood tax is a package of financial transaction taxes (FTT) proposed by a campaigning group of civil society non-governmental organizations (NGOs). Campaigners have suggested the tax could be implemented globally, regionally, or unilaterally by individual nations.
The proposed bill Let Wall Street Pay for the Restoration of Main Street Bill is officially contained in the United States House of Representatives bill entitled H.R. 4191: Let Wall Street Pay for the Restoration of Main Street Act of 2009. It is a proposed piece of legislation that was introduced into the United States House of Representatives on December 3, 2009 to assess a tax on US financial market securities transactions. Its official purpose is "to fund job creation and deficit reduction." Projected annual revenue is $150 billion per year, half of which would go towards deficit reduction and half of which would go towards job promotion activities.
A bank tax, or a bank levy, is a tax on banks which was discussed in the context of the financial crisis of 2007–08. The bank tax is levied on the capital at risk of financial institutions, excluding federally insured deposits, with the aim of discouraging banks from taking unnecessary risks. The bank tax is levied on a limited number of sophisticated taxpayers and is not especially difficult to understand. It can be used as a counterbalance to the various ways in which banks are currently subsidized by the tax system, such as the ability to subtract bad loan reserves, delay tax on interest received abroad, and buy other banks and use their losses to offset future income. In other words, the bank tax is a small reimbursement of taxpayer funds used to bail out major banks after the 2008 financial crisis, and it is carefully structured to target only certain institutions that are considered "too big to fail."
This article is a list of all notable reaction to James Tobin's 1972 proposal of what is now known as the Tobin tax.
The European Union financial transaction tax is a proposal made by the European Commission to introduce a financial transaction tax (FTT) within some of the member states of the European Union (EU).
A bank transaction tax is a tax levied on debit entries on bank accounts. In 1989, at the Buenos Aires meetings of the International Institute of Public Finance, University of Wisconsin–Madison Professor of Economics Edgar L. Feige proposed extending the tax reform ideas of John Maynard Keynes, James Tobin and Lawrence Summers, to their logical conclusion, namely to tax all transactions. Feige's Automated Payment Transaction tax proposed taxing the broadest possible tax base at the lowest possible tax rate. Since all transactions must ultimately be paid for by a final means of payment, namely via a transfer from a bank account or by settlement with currency, Feige proposed collecting his tax by levying the tax automatically on the debit and credit entries to bank accounts, thereby splitting the tax between the buyer and seller of every transaction. The APT tax is a uniform flat-rate tax on all transactions, assessed and collected automatically whenever there is a debit or credit entry to a bank account. As such, it can be viewed as a bank transaction tax. Since financial transactions account for the greatest component of the APT tax base, and since all financial transactions are taxed, the proposal eliminates substitution possibilities for evasion and avoidance. The goal of the APT tax is to significantly improve economic efficiency, enhance stability in financial markets, and reduce to a minimum the costs of tax administration. The Automated Payment Transaction tax proposal was presented to the President's Advisory Panel on Federal Tax Reform in 2005. It can be automatically collected by a central counterparty in the clearing or settlement process.
