The Swedish Tobin Tax

Magnus Wilberg writes in the Financial Times:

Europe is making a mistake. In February, the European Commission published a proposal for a financial transaction tax – also called a Tobin or “Robin Hood” tax – in the EU. Eleven states have been granted the right to impose a minimum 0.1 per cent tax on equity and debt transactions and a minimum 0.01 per cent charge on derivatives transactions. If the experience of Sweden’s use of such a tax is anything to go by, this move is extremely unwise.

Why do some people advocate for a FTT?

One aim of the proposed tax is to improve the efficiency of financial markets by reducing speculation. Another is to generate tax revenues. Those were also the reasons why Sweden introduced a transaction tax in 1984.

If an FTT actually worked, and it was used to lower income tax rates, then it could be worth considering as part of a policy of broad base and low rates. But do they work?

Initially, the tax rate was 0.5 per cent in connection with the purchase and sale of shares. In mid-1986, the rate was doubled and the tax base was broadened to cover share options and convertibles. The trading volume on the Stockholm stock exchange changed dramatically when the tax was increased. Average turnover fell 30 per cent during the second half of 1986 and throughout 1987. The turnover in the 11 most traded shares fell 60 per cent. It seems unlikely that this sharp decrease reflected a decline only in speculative trading.

Later, in 1989, the tax base was broadened to include bonds. This, in turn, led to an 85 per cent reduction in bond-trading volume and a 98 per cent reduction of trading volume in bond derivatives. The increase in tax revenues resulting from the broadening was less than 5 per cent of what had been expected.

By 1990, shortly after the last vestiges of the currency controls were abolished in Sweden, more than 50 per cent of the trading in Swedish shares had moved to London. Conversely, once the tax was abolished in December 1991, trading on the Stockholm stock exchange recovered.

We live in an increasingly mobile and borderless world. Companies can decide where to locate, where to pay tax, and where to do financial transactions. The best way to have a good tax base is to have low rates.

This conclusion is reinforced by studies on the effects of the Swedish tax, which suggest that it reduced market liquidity but not volatility. Since increases in speculative trading tend to be associated with more volatility, this also suggests that the tax had little substantial effect on speculative trading.

So it didn’t even achieve its main aim.