Instruments

Negative side of Tobin tax

By tightening liquidity, tax may

Increase volatility

If the Tobin tax worked as its proponents claim, and reduced foreign-exchange turnover, this would automatically also reduce market liquidity. In lower total turnover, each

transaction would trigger stronger exchange-rate movements than

before. This effect would probably be particularly relevant for the

currencies of developing countries and emerging markets as the trading

volume in these cases is already relatively small. In essence, the

situation is comparable with the stock market: the large blue chips are

more liquid and therefore less volatile than “smaller“ stocks.

Tax can encourage herd behavior

Another consideration is that, in a “Tobin world“, market participants

would probably read more into foreign-exchange transactions. Anyone

who concluded a market-moving transaction despite the tax and despite

lower market liquidity would be suspected by other players of having

pertinent information that no one else had. Other market participants

would be impelled to follow suit. This would result in more pronounced

herd behaviour than if there were no Tobin tax, and would thus also

lead to higher exchange-rate volatility.

Foreign-exchange transactions

Migrate to offshore markets

There would be an incentive to execute

foreign-exchange transactions at a centre where the tax is either not

imposed at all or at a lower rate. The tax would therefore have to be

introduced at a uniform rate at all trading centres in order to prevent

this type of circumvention strategy. It seems unlikely that this would

happen, however, owing to the different national interests of different

countries and problems in international policy coordination. Certainly,

more than half (56%) of all foreign-exchange trading takes place in the

three major financial centres, the UK, the USA and Japan. But a

considerable proportion is still conducted at smaller financial centres

and offshore centres. If just one of these trading centres were to decide

not to introduce the tax, or were to impose a lower rate, a large volume

of foreign-exchange transactions would be diverted to that market.

While the trading centres in offshore markets could not be expanded

overnight, and expansion would also involve substantial fixed costs,

avoidance by migration would be very much simpler if – as would

probably be the case – a trading centre of the stature of the USA or

the UK did not introduce the tax. There would, for example, be little

point in introducing a Tobin tax in countries belonging to the European

Economic and Monetary Union (EMU) in order to moderate normal

fluctuations in the euro if a great percentage of euro trading took place

in London and New York anyway. For emerging markets the problem

would be even more acute as a much larger proportion of trading in

their national currencies is conducted outside the domestic economy.

Policymakers can only react after

Creation of new financial

instruments

And even if the tax did apply to all foreign-exchange transactions, it can

be taken as certain that the financial markets, with their innovative

instincts, would develop new, substitutive financial instruments that

were not, initially, subject to the tax. The policymakers can, of course,

respond by imposing the tax on these transactions, too. But one can

be pretty sure that the financial markets would always be one step

ahead of the politicians.7 Both the process of substitution and the

development of new financial instruments give rise to costs, so the

scale of avoidance through substitution would depend on the tax rate.

Nonetheless, this additional expense would mean unnecessary costs

for the market players, and would consequently reduce the efficiency

of the foreign-exchange markets.

Дата добавления: 2015-10-29