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Tobin, or not Tobin, that is the question

Well at least it is in France, as reports seem to confirm that its finance minister is enthusiastically pushing ahead with a unilateral Tobin-style tax on equities, bonds and derivatives trading. It’s a shame that the proponents of such a tax don’t seem to have done even a basic amount of homework. The original idea introduced by Nobel Laureate economist James Tobin was conceived as a tax on all spot conversions of one currency into another. The idea was to discourage speculators by making it less efficient to trade one currency against another. This was a sensible and considered reaction to a problem caused by the abandonment of fixed exchange rates a year earlier, but it was never intended to be a retroactive punishment on one sector of the global economy. The notion that the world’s problems were singly caused by the banks and/or that politicians are, de facto, better than anyone else at redistributing wealth is an over-simplification at best.

Even if the idea of such a tax were a good one, have they thought through how it will work in practice in the equity markets (let alone other asset classes)? Reports suggest that France will go it alone even if it cannot co-opt Germany into its plan. But, around 40% of the trading in the CAC 40 and DAX now occurs outside of Paris and Frankfurt (as the charts below show) with most of this liquidity residing on London-based (and FSA-regulated) MTFs such Bats/Chi-X and Turquoise.

So, even if the French can extend their jurisdiction, it seems unlikely that the City of London will support such a tax, especially as any revenue raised will stay in French (and possibly German) pockets.

Looks like it’s time that European governments recognised that, in equities trading at least, the go it alone nationalistic approach went on the scrapheap the moment the chaps at MiFID mansions first got their pens out. Maybe I should drop a note directly to Monsieur Baroin at the French Finance Ministry …


Comments: (4)

A Finextra member
A Finextra member 31 January, 2012, 17:15Be the first to give this comment the thumbs up 0 likes

Whilst I take the early point about missing the point of the original Tobin idea, I fail to see the conclusion that the UK will not join because 'any revenue raised' will stay in others pockets ?  Its looks a little like a knee jerk from France, but is that any worse than paralysis and the rabbit in the headlights approach elsewhere?

This might be a case of try it and see. Lets not be held to ransom by the city.  I am not even sure they know why they oppose it (supposedly, Banks will relocate - but perhaps not to the winebars of France)

A Finextra member
A Finextra member 01 February, 2012, 09:25Be the first to give this comment the thumbs up 0 likes

I think most politicians miss the point. Unless a market is totally domestic it's unworkable to levy a tax. What if two non European banks buy and sell a commodity or currency over a US owned broker based in London. Who do the politicians think will pay a tax here?

A Finextra member
A Finextra member 01 February, 2012, 12:58Be the first to give this comment the thumbs up 0 likes

Thanks for both comments. Assuming that the UK does not sign up to such a tax (as seems the case) then any unilateral tax will only benefit the country of origin. The problem is that equities trading now takes place very much on a pan-European basis (as the charts show), and so any unilateral tax will just push liquidity away onto other venues.

A Finextra member
A Finextra member 01 February, 2012, 14:33Be the first to give this comment the thumbs up 0 likes

I'm afraid you are talking riddles to me. So you are saying that a France only tax will simply drive transactions to, say, originate in the UK.  Isn't that the point of striving for a pan-European (or further) tax on these transactions, so that there is less ability to avoid?  I sense that a short term financial transaction tax for all is better than a rise in income tax, VAT or fuel duty which simply hits the man/woman in the street.  I don't think the traders need to worry - won't affect their bonuses.

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