International Financial Flows and Transactions Taxes: Survey and Options

IMF Working Papers, June 1, 1995

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International Financial Flows and Transactions Taxes: Survey and Options

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Bibliographic details

• Authors: P. Bernd Spahn
• Published: June 1, 1995
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451847994.001

Overview and research question

• Author: P. Bernd Spahn
• Publication date: June 1, 1995
• Publication type: IMF Working Paper (Working Paper No. 1995/060, Issue: 060)
• Pages: 62
• DOI: https://doi.org/10.5089/9781451847994.001
• ISBN: 9781451847994
• ISSN: 1018-5941
• Core question: Can a tax on international financial transactions (the Tobin tax) control exchange rate volatility without unacceptable side effects?

Key findings

• The Tobin tax as a pure transaction tax is not viable.
• A pure transaction tax would:
  • Impair financial operations.
  • Create international liquidity problems.
  • Be unlikely to deter speculation.
• An alternative two-tier rate structure is proposed:
  • Consists of a low-rate transaction tax plus an exchange surcharge.
  • The exchange rate could move freely within a “crawling” exchange rate band.
  • Overshooting the band would trigger a tax on an “externality,” defined as the discrepancy between the market exchange rate and the closest margin of the band.
• The proposed scheme is inspired by the European Monetary System.
  • Difference from EMS: exchange rates would be kept within the target range through a tax, not through interest policy or central bank sterilization and, eventually, the depletion of international reserves.

Policy implications and recommendations

• Do not implement a pure Tobin-style transaction tax because of operational and liquidity risks and limited effectiveness against speculation.
• Consider a two-tier structure combining:
  • A low-rate uniform transaction tax to limit distortions to normal financial operations.
  • An exchange surcharge applied when the market exchange rate overshoots a predefined crawling band, taxing the “externality” between the market rate and the nearest band margin.
• Use the tax mechanism, rather than interest-rate policy or sterilization, to enforce adherence to the exchange-rate band, recognizing that this shifts the enforcement mechanism from monetary operations to fiscal/tax measures.

Subject areas and keywords

• Subjects: Currencies, Currency markets, Exchange rates, Financial markets, Financial transaction tax, Foreign exchange, Money, Taxes, Transaction tax
• Keywords: cost of capital, Currencies, Currency markets, equalization tax, Exchange rates, exchange surcharge, Financial transaction tax, foreign exchange, Global, interest rate, rate of return, round-trip tax, spot market, stamp tax, tax discrimination, tax loophole, tax rate, Tobin tax, Transaction tax, transactions tax, uniform transaction tax, WP

Source: P. Bernd Spahn, "International Financial Flows and Transactions Taxes: Survey and Options", IMF Working Papers 1995, 060 (1995), June 1, 1995.