Oct 10, 2011

Euro Tobin tax, FTT etc.

Years ago I used to find the idea appealing, and it is in some respects.
Now I am not so sure, even though I believe I have to think more about it.
I have the feeling it is not a good idea, not now, for Europe, not for Italy.
And I have two questions that I find crucial:
Who will ultimately pay it?
Isn't it just another tax, do we need more taxes?
Do we really need more taxes and a larger government in Italy?
Let's start getting an opinion...

Rogoff:
...while raising so much revenue with so low a tax rate sounds grand, the declining volume of trades would shrink the tax base precipitously. As a result, the ultimate revenue gains are likely to prove disappointing, as Sweden discovered when it attempted to tax financial transactions two decades ago. Worse still, over the long run, the tax burden would shift. Higher transactions taxes increase the cost of capital, ultimately lowering investment. With a lower capital stock, output would trend downward, reducing government revenues and substantially offsetting the direct gain from the tax. In the long run, wages would fall, and ordinary workers would end up bearing a significant share of the cost.



In Italy there is a group of economists who is pushing for the tax. Here Leonardo Becchetti explains their point (in Italian):
Our belief starts from the observation of 23 episodes in which similar taxes have been applied in a single market on important financial locations mostly belonging to high income countries that did not undermine those markets. And from the ascertainment that a survey of about 20 studies on transacion volume elasticieties with respect to taxes of similar entity seems small or at lest not able to generate, if applied at the proposed rate, particularly significant capital shifts.
(La nostra convinzione parte dall'osservazione dei 23 episodi di applicazione di tasse simili in un solo mercato su importanti piazze finanziarie prevalentemente di paesi ad alto reddito che non hanno messo in crisi tali mercati. E dalla constatazione che una rassegna di circa 20 studi sulle elasticità dei volumi di transazioni a tasse di simile entità appare contenuta o comunque non tale da generare, se applicata all'aliquota proposta, spostamenti particolarmente significativi di capitali.)

People from noisefromamerika do not quite agree (actually that of Becchetti was an answer to them):
But we, not very imaginatives, while sure that with the hang glider you can have fun we are not equally sure that you can go far away. In other words, the laudable intents may have different consequences that those imagined by those who created the proposals.
(Noi però, poco fantasiosi, mentre siamo sicuri che con il deltaplano ci si possa divertire non siamo altrettanto sicuri che ci si possa andare lontano. Detto altrimenti, gli intenti lodevoli possono avere conseguenze diverse da quelle immaginate da chi formula le proposte.)

Mark Thoma seems to agree with the tax, and I agree with some of his reasoning:
The tax would discourage short-term speculative activity, but much of this activity provides little social value. It pushes money around among winners and losers, and traders like it for that reason, but if this activity is discouraged through taxation it would have little effect on long-term investment decisions by firms. For example, one thing this would discourage is high frequency computer trading to exploit minute differences in prices. Does it really matter for long-term investment if these differences persist for a few seconds or minutes more?

And Paul Krugman agrees too:
And a financial transactions tax, by discouraging reliance on ultra-short-run financing, would have made such a run much less likely. So contrary to what the skeptics say, such a tax would have helped prevent the current crisis — and could help us avoid a future replay.

But I remain doubious on one point, maybe just because I do not know much about the subject:
Can we really identify speculators? And if we can, are we sure that short time speculative activity has so disruptive effects? Moreover how do we distiguish bad speculation, the one that undermines markets, from good speculation or arbitrage, which not only does not undermine the market, but it actually makes it efficient and competitive (I'd say that arbitrage is the law of one price in action).

And I am doubious because this tax is proposed as an answer to the crisis and the financial instability. Is the crisis due to speculators trading in the market? Not really, as I understood. The subprime thing was not a problem of speculators selling and buying things within the market, but a problem of bad people and bad regulations. A tax might have reduced the trading of those junk assets, but the problem is not that they were traded too much, the problem is that they were created without any control. More recently, are the national debt problems and the defaults a problem of bad speculators trying to kill states? Again not at all, for what I've seen. Greeks have cheated. Italy has a huge debt, it has not being growing for years and there is a tremendous political crisis. In Italy some gevernment people had the courage to talk of speculators, I cal that populism or the "I didn't do that" strategy. But then if you ask to people in the street "would you buy now an italian bond that gives you the same interest as the german one?" No one says "yes sure, I'll put all my savings in it". So where are the speculators? The speculators must be the people in the street as well. Weren't they hiding in Mordor and Isengard?

The globalization of financial markets has given financial capital an unfair advantage over other sources of taxation. A tax on financial transactions would redress the balance
(G. Soros)
Which is like saying "if one thing is taxed, then we need to tax all the rest" or more dramatically "killing your collegue has given you an unfair advantage for a promotion, killing you would redress the balance".

For the moment, although I agree with the humanity of Becchetti and others (whose task of solidariety I think has to be reached differently), I think I dislike the proposal of a tax on financial transactions. For the time being I agree with Alberto Mingardi and Istituto Bruno Leoni:
If the current crisis is mainly a national credibility crisis, a tax cannot give it back to member States nor to the Euripean Union. On the contrary, it is clear that the very same Merkel and Sarkozy's promise to push other European States to achieve a balanced budget is weakened by the proposal of taxing financial transacions. Making credible commitments and provide scapegoats are things that are rarely done at the same time. Usually the second serves to avoid the first. However irrational they are, markets know that and act consequently.
(Se la crisi attuale è soprattutto una crisi di credibilità degli Stati, una tassa non può restituirla né agli Stati membri né all'Unione europea. Anzi, è chiaro che la stessa promessa di Merkel e Sarkozy di spingere anche gli altri Paesi europei a raggiungere il pareggio di bilancio è indebolita dalla proposta di tassare le transazioni finanziarie. Prendere impegni credibili e indicare capri espiatori sono cose che di rado si fanno nello stesso momento. La seconda di norma serve a evitare la prima. Per irrazionali che siano, i mercati lo sanno e si comportano di conseguenza.)

But I may chnage my mind.

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