Remarks on “Optimal Financial
Transaction Taxes”
by Eduardo Davila
Eric Budish
University of Chicago
BFI Advances in Price Theory Conference
December 2015
Tobin on Tobin Taxes
• “Now after five to seven years of unclean floating [exchange rates] there
are many second thoughts.” …
• “I believe the basic problem today is not the exchange rate regime,
whether fixed or floating. Debate on the regime obscures and evades the
essential problem. That is the excessive international – or better, intercurrency – mobility of private financial capital.”
• “The basic problems are these. Goods and labor move, in response to
international price signals, much more sluggishly than fluid funds. Prices in
goods and labor markets move much more sluggishly, in response to
excess supply or demand, than the prices of financial assets, including
exchange rates. These facts of life are essentially the same whether the
exchange rates are floating or fixed.”
• “There are two ways forward. One is toward a common [global] currency
… however appealing, is clearly not a viable option. … I therefore
regretfully recommend the second, and my proposal is to throw some
sand in the wheels of our excessively international money markets.”
(“A Proposal for International Monetary Reform”, 1978)
Tobin on Tobin Taxes
• “The proposal is an internationally uniform tax on all spot conversions of
one currency into another, proportional to the size of the transaction.”
• “The tax would particularly deter short-term financial round-trip
excursions into another currency. A 1% tax, for example, could be
overcome only by an 8 point differential in the annual yields of Treasury
bills …”
• “I do not want to claim too much for my modest proposal. It will, I think,
restore to national economies and governments some fraction of the
short-run autonomy they enjoyed before currency convertibility became
so easy. It will not, should not, permit governments to make domestic
policies without reference to external consequences.”
• “I would hope that, relieved of the need to stay in lockstep in order to
avoid large exchange rate fluctuations, these governments might
approach the task of policy coordination with a longer-range and more
global view of their responsibilities.” (concluding sentence).
(“A Proposal for International Monetary Reform”, 1978)
Summers on Tobin Taxes
• “In the narrow sense of permitting trade to take place between
consenting adults, it is obvious that our financial markets have become
much more efficient over time. …”
• “There are, however, increasing concerns that financial markets may have
deteriorated over time in performing their social functions of spreading
risk and efficiently guiding the allocation of capital.”
• Quotes Wall Street executive: ‘The freeing of financial markets to pursue
their casino instincts heightens the odds of crises’
• Quotes Treasury Secretary: ‘We are headed in the wrong direction, when
so much of our young talent and so much of the nation’s resources are
aimed at financial engineering …’
(Summers and Summers, 1989, “When Financial Markets Work Too Well: A Cautious
Case for a Securities Transactions Tax”)
(Summers and Summers, 1989, “When Financial Markets Work Too Well: A Cautious
Case for a Securities Transactions Tax”)
Summers on Tobin Taxes
• Organizes his essay around three concerns
1. Stability. “Excessive volatility caused by destabilizing
speculation”. (Closest to Tobin argument)
2. Rent-seeking. “Diversion of human and capital resources
away from more socially profitable pursuits into the financial
sphere”
3. Short-termism. “The impact of rapid financial turnover on
the way in which corporate investment decisions are made”
(Summers and Summers, 1989, “When Financial Markets Work
Too Well: A Cautious Case for a Securities Transactions Tax”)
Politicians on Tobin Taxes
European Commission
Why has the Commission proposed a new tax on the financial sector?
For two main reasons:
• the financial sector would make a fair contribution to the cost of the
crisis after benefiting from very significant financial support from
governments since the beginning of the current crisis
• a coordinated framework at EU level would help to create a stronger
internal market for financial services by avoiding competitive distortions
and discouraging risky trading activities. It would also be a strong signal
to promote the introduction of such a tax at global level
Who will benefit and how?
• All citizens and enterprises would benefit from this tax through extra
public revenue which could be used for generating more economic growth
and prosperity in the EU.
Politicians on Tobin Taxes
European Commission
Who is most irritated by these taxation plans?
• The taxation plans are, of course, most irritating for high-frequency traders and
for fund and hedge fund managers whose business model is based on quick
successions of financial transactions and on frequent transactions with high profit
(and loss) potential. The more frequently that things are bought and then sold
again, the more short-term ‘bets’ are made with the same amount of capital, and
the higher the ‘bets’ are in nominal terms, the higher will be the gains and the
more the fees that are raked in.
…
• it will have a strong dampening effect on a deplorable practice, something that is
a great irritation to the actual buyers and sellers of securities, namely the fact
that a host of high-frequency traders and proprietary traders muscle in between
the actual buyers and sellers and even charge extra for doing so.
(European Commission, 2011, “Common Rules for a Financial Transaction Tax –
Frequently Asked Questions”)
Politicians on Tobin Taxes
Hillary Clinton
•
Over the course of this campaign, I will offer plans to rein in excessive risks on
Wall Street and ensure that stock markets work for everyday investors, not just
high-frequency traders and those with the best or fastest connections. I will
appoint and empower regulators who understand that too big to fail is still too big
a problem. We will ensure that no firm is too complex to manage or oversee.
(Economic policy speech on 7/13/2015)
•
Fourth, we need to ensure that everyday investors and consumers can trust that
our financial markets work for them -- and not just for insiders with the most
sophisticated, specialized and fastest connections. That is why we should impose
a tax on the high-frequency trading that makes our markets less stable and less
fair. And we should reform the rules that govern our stock markets to ensure equal
access to markets and information, increase transparency, and minimize conflicts
of interest. (Bloomberg editorial on 10/8/2015)
Politicians on Tobin Taxes
Bernie Sanders
•
At a time of massive income and wealth inequality, at a time when trillions of
dollars in wealth have left the pockets of the middle class and have gone to the
top one-tenth of one percent, at a time when the wealthiest people in this
country have made huge amounts of money from risky derivative transactions and
the soaring value of the stock market, this legislation would impose a Wall Street
speculation fee on Wall Street investment houses and hedge funds.
• More than 1,000 economists have endorsed a tax on Wall Street speculation and
today some 40 countries throughout the world have imposed a financial
transactions tax including Britain, Germany, France, Switzerland, China, India,
South Korea, Hong Kong, Singapore, Taiwan, and Brazil.
• My legislation would impose a Wall Street speculation fee of 0.5 percent on stock
trades (that’s 50 cents for every $100 worth of stock), a 0.1 percent fee on bonds,
and a 0.005 percent fee on derivatives.
• It has been estimated that this legislation would raise up to $300 billion a year.
(Statement on the “College for All Act”, May 2015)
Summary: Existing Arguments for Tobin Taxes
Original argument (Tobin and Summers)
1.
2.
3.
Stability. (“Excessive volatility caused by destabilizing speculation”)
Rent-seeking. (“Diversion of human and capital resources away from more
socially profitable pursuits into the financial sphere”)
Short-termism. (“The impact of rapid financial turnover on the way in which
corporate investment decisions are made”)
Recent Political Dialogue
4. Response to unfair HFT. (“insiders with the most sophisticated, specialized and
fastest connections”)
5. Redistribution. (“trillions of dollars in wealth have left the pockets of the middle
class and have gone to the top one-tenth of one percent”)
BCS on the Rent-Seeking Argument for Tobin
Taxes
•
•
Security x trades on an LOB. x is worth y, y is public info, Poisson jumps
Two kinds of trades
–
–
•
Benefits of a Tobin Tax
–
–
–
•
Makes fundamental trading more expensive too
For investors the costs > benefits.
For society, depends on treatment of tax revenue
Tobin Tax is a relatively blunt instrument to address rent-seeking
–
–
•
Makes sniping more expensive
This reduces rent-seeking, wasteful expenditure on speed technology
Helps liquidity (sniping is an implicit tax on fundamental investors)
Costs of a Tobin Tax
–
–
–
•
“Fundamental”: an investor shows up, wants to buy or sell some x
“Sniping”: after a jump in y, rent-seeking race to trade x at old price
Empirically: tax needs to be ~10 basis points to reduce arms-race by 90% (~50bps for 99%)
Theoretically: not precisely tailored to rent-seeking, because both rent-seeking and fundamental
trade get taxed. On net, fundamental guys are harmed (pre-redistribution).
Takeaway: for rent-seeking story, Tobin tax directionally correct but blunt
instrument. (Better: change market design to frequent batch auctions).
(see Section 8.1 of Budish, Cramton and Shim, 2015, QJE)
Davila’s Argument for a Tobin Tax
1.
2.
3.
4.
5.
6.
Stability.
Rent-seeking.
Short-termism.
Response to unfair HFT.
Redistribution.
Paternalism. Protect investors with incorrect beliefs from harming themselves.
–
–
•
•
•
Same beliefs -> no tax
Market design is one-shot Walrasian exchange: not the natural market design for studying many of
the other potential channels.
Altogether different rationale for a Tobin tax
– No relationship to Tobin’s initial argument, or the Summers follow-on to Tobin
– No relationship to the current political discussion of Tobin taxes
Once you see that it’s really a quite different rationale, it’s a nice analysis!
Main comment: write the paper so that it’s much more explicit that while you’re
studying Tobin’s proposed policy, your rationale for Tobin’s policy is quite different
from Tobin’s, and essentially all that has followed both academically and politically.
–
(Writing issue starts with opening sentence – “Should we set a financial transaction tax to curb
speculation generated by distorted beliefs?” (emph. mine) That’s not the literature’s question, that’s
your question.)
Questions re Davila Argument for Tobin Tax
1. How does this analysis of optimal tax relate to standard analysis of Pigovian taxes
(similar first-order / second-order intuition in e.g. alcohol tax)
2. Can you say more about who is helped/harmed by your optimal tax as a function
of
– Beliefs (how close / far from true beliefs)
– Fundamental desire to trade
– Etc.
– Context: Algo Traders likely have extremely accurate beliefs (at relevant
frequency), low fundamental desire to trade; individual investors likely
opposite extreme
3. In reality the least sophisticated investors (worst beliefs) should just buy index
funds.
– Not sure how to map your model to a world with both passive & active
investors. Or, even investors & trading firms. Market design is one-shot
Walrasian auctioneer which gives me pause.
– Policy should push least sophisticated to opt out and trade passively
– More generally: FTT not the only policy instrument in the world. How do you
think about your case for “optimal” FTT’s in a world with a richer set of policy
instruments?
Davila’s Argument for a Tobin Tax:
Implications for Policy
6.
Paternalism. Protect investors with incorrect beliefs from harming
themselves.
Result: optimal Tobin Tax is strictly positive, quite generally. Should society act
on this conclusion?
Reasons for caution
1. Generic concerns re paternalistic policy interventions
2. Concerns left out of the model, such as tax workarounds / avoidance
3. Alternative policy instruments
• Given prominence of FTT in policy circles, papers like this one that give us
new ways to think conceptually about FTT are useful
• Also valuable is empirical evidence (e.g. Maria Coelho jmp on France/Italy
FTT’s)