Posted October 21, 2008on:
So the Green’s want a Tobin tax do they (ht Frog Blog and Stephen). Ok, so I’m hoping they aren’t justifying it on externality grounds – this leaves us with the conclusion that they must believe that it is the most efficient means available to make a certain level of government income.
They do seem to follow this point of view when they quote from a Guardian article:
Set at a lower level it would raise considerable sums of money. If a levy of just one basis point (one hundreth of 1%) was placed on all currency deals, governments would find themselves with an additional $70bn a year. At a time when they are chucking vast amounts of taxpayers’ money at the banks, that would be a nice little earner, and might help assuage the concerns that the public are going to pay for the folly of financiers.
I find it interesting that they see the money appearing out of thin air – if $70bn of tax is raised, it must come from some value somewhere. This is the same issue I have with people who like the financial transactions tax (furthermore, the assumption that capital/trade flows would not change when you tax them – even a little bit, is silly, as a result this over-estimates the associated revenue).
If we introduce this tax without cutting other taxes, it will just add additional distortions to the economy – this is what they seem to be implying. The funding for new spending schemes does not come for free – a Tobin Tax does not raise money out of thin air. As a result, we do have to ask whether as a society we are willing to increase our tax burden to fund the spending on third world countries that the Greens are after. The current policy makes it sound like a trade-off does not exist which is disappointing.
Now to be fair they say the tax would have to be in conjunction with everyone else – this is a good point, as if one country did it by themselves, they would lose a fair amount of “marginal capital” given the assumption that capital is relatively mobile.
As a result, the income that is raised will come from a “shared” decrease in economic efficiency – rather than just completely messing up New Zealand economic growth.
What about if we do cut other, distortionary taxes, and introduce a Tobin Tax to replace them?
Well, then we have to go back to our old friend “elasticity” in order to see what sort of deadweight loss the Tobin tax creates. If everyone introduces the tax, then how elastic will the supply and demand of capital be? I don’t know – but it would be a good question to answer in order to evaluate the policy.
My feeling is that a Tobin tax is a very broad tax on ALL types of international currency flows (trade, speculation, and capital) and as a result, the deadweight loss associated with it will be a lot lower than taxes on specific industries or types. However, I also fear that some activities may be especially sensitive to a tax – this would imply that a “broad tax” in this sense does not satisfy the Ramsey principle – and is inefficient. I would be interested in hearing what you guys have to think about all this.