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Misuse of the Term ‘Tobin Tax’

by | October 12th, 2011 | 12:51 pm
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The proposal for a financial transaction tax by the European Union has often been described as a “Tobin Tax.” What is being discussed is a tax rate of 0.1 percent on all financial transactions with the principal objective of raising revenue. Note the emphasis, because these details have created a misleading impression. When James Tobin first called for a new tax (Tobin 1974, 1978), he advocated a tax rate of perhaps 0.5 percent on changing one currency into another with the principal objective of discouraging short-term speculative transactions. What has been proposed by the European Commission (2011) [pdf] is thus quite different even though it is often described as a Tobin tax. The only similarity is that both aim at taxing some financial transactions.

The differences are far more important. Note first that the EU proposal envisages a far lower rate of tax: perhaps 20 percent of that envisaged by Tobin. This difference is important, although maybe not fundamental.

The second difference concerns the tax base. Tobin was quite clear in specifying that he was advocating a tax levied on currency conversions and nothing else. There was a discussion in the literature as to whether a tax only on spot transactions would not be circumvented, and whether it would therefore be necessary to include (for example) forward, swap, and future transactions (see chapter four in Haq, Kaul, and Grunberg 1966). But it is clear that Tobin did not envisage taxing purchases or sales of domestic shares or bonds, as is embodied in the current EU proposal.

But the most important difference is the third one.  To Tobin, the tax was primarily intended to remedy the excessive perfection (as he thought of it) of the international capital market. He was quite explicit in saying that his motivation was the reduction of speculation. There were those of us who believed that the very real problems of speculation were due to large movements of currency stocks and would be essentially unaltered by reducing the intra-day movements of currency. (We thought of the typical foreign exchange trader as someone who had a balanced book at the start of the day, undertook about a million dollars of trades during the day, and went home with a balanced book, and doubted whether making those trades more expensive—and therefore fewer—would reduce the tendency to speculate in the slightest.) But Tobin sought a reduction in speculation rather than increased revenue: Indeed, he was quite explicit in regarding increased revenue as at best a subsidiary objective (see the Prologue of Haq, Kaul, and Grunberg 1966). In contrast, raising revenue is the purpose of the tax proposed in Europe.

There are therefore a series of major differences between Tobin’s proposal and the proposal under consideration by the European Union. It would advance the cause of clarity if the latter were not described by the term “Tobin tax”; the term “financial transactions tax” is more descriptive and more accurate.

This is not the first time that a term has been used in a way counter to the intention of its creator. I happen to have created a term “Washington consensus,” which has been subject to a similar process. When I first used the term (Williamson 1990), it was used to describe a set of middle-of-the-road propositions that were regarded as motherhood-and-apple-pie by organizations such as the Organization for Economic Cooperation and Development (OECD) (and indeed that most self-proclaimed critics would be happy to endorse). Before I realized what had happened, its meaning had been transformed to the sort of economics advocated by Milton Friedman and implemented by Ronald Reagan and Margaret Thatcher. When told of this new interpretation, I initially went along with my informant in accepting that words mean whatever they are used as meaning and therefore that the mere fact that I had created the phrase gave me no special right to say what it meant. On reflection, more is at stake than ownership: The use of the term in this way has the effect of persuading many people that Washington-in-general subscribed to the same set of beliefs (the importance of low taxes, ignoring externalities, that the best government is the least government, the immorality of income redistribution, etc.) as Ronald Reagan. There is room for substantive debate on whether there is widespread agreement with these beliefs in Washington, but surely it is wrong to insinuate that there is such an agreement simply by the use of a term.

References

Haq, Mahbub ul, Inge Kaul, and Isabelle Grunberg. 1996. The Tobin Tax: Coping with Financial Volatility. New York: Oxford University Press.

Tobin, James. 1974. The New Economics One Decade Older (The Eliot Janeway Lectures on Historical Economics in Honour of Joseph Schumpeter). Princeton: Princeton University Press.

Tobin, James. 1978. A Proposal for International Monetary Reform. Eastern Economic Journal, 4 (July-October), 153-9.

Williamson, John. 1990. Latin American Adjustment: How Much Has Happened? Washington: Institute for International Economics.

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