Examination of Witnesses (Questions 75-79)|
TUESDAY 30 APRIL 2002
Chairman: Professor Spahn, we need to
say thank you very much for having come to give evidence to this
Committee. We are extremely grateful to you. The Tobin Tax is
one of those concepts which we all think we know something about
but I suspect we are not always as confident that we know as much
about it as we think we know about it. What we would like to do
this afternoon with you and Steve Tibbett is explore the Tobin
Tax, its collection and impact, and then your two-tier variant
which should be very interesting, and then the Euro, and other
innovative sources of financing and capital controls. Bob, would
you like to start off
75. I looked through the papers that both Professor
Spahn and Steve Tibbett have submitted to us and one of the things
they might like to develop at some stage is where Professor Spahn
suggests a one basis point tax whereas the War on Want paper talks
up as high as a ten basis point tax. There is a magnitude of ten
times difference in terms of what the effectiveness would be.
I would like to concentrate, first of all, on some of the practical
aspects of it in terms of how this tax on currency transactions
could be collected. Would not the transactions which take place
in the conventional spot market simply move into derivatives,
and if they move into derivatives and we want to tax those, how
would you tax a futures contract where the cash settlement was
a tiny proportion of the exposure involved? The same thing would
apply in options where enormous volumes go on. Swaps and other
bits of financial engineering are incredibly complex transactions
across financial centres. My first question is about that. It
follows onto the second part as to how would you avoid the transactions,
assuming you had identified them and got a satisfactory way of
collecting the tax, moving out of the jurisdiction of the tax
(Professor Spahn) This is a full programme
and let me just begin with the derivatives. It is my view that
we have to distinguish between two objectives of the Tobin Tax.
Tobin originally proposed a tax to stabilise the exchange rates.
Recently we have had a second objective which is raising money
for some funding, for instance for development policies. We have
to distinguish clearly between these two aspects. I shall start
with the objective of revenue raising because I do not think the
Tobin Tax can cope with the stabilisation function. This is why
I invented my two-tier tax and we may be discussing this later.
If I go for revenue, we have to understand that the total number
of transactions is enormous in this market and, as you said, they
consist of spot transactions with a declining trend and swap transactions
with an increasing trend and other innovations such as options.
I think personally that if you go for such a tax it should be
tailored to the conditions of the market. This is very important
because you can do a reporting system at each trade desk which
will be an administrative nightmare and will probably cost you
more than the whole exercise is worth, or you can do the tax collections
at the end of the chain when the trade is settled. I have personally
come to the view that you should do the latter because the payment
system is extremely concentrated. We now have about 20 large traders
that are market makers and we will have a further concentration
in the future and, of course, we have the national central banks
settling these claims. Around these settlement systems we have
large wholesaling instruments. I would go by implementing some
software into the settlement and clearing software. That has a
bearing on your question because if I do it at the end of the
chain I cannot possibly distinguish the underlying business, whether
it is an option, whether it is a spot, whether it is a swap transaction.
I simply go for the pure cash transactions including forward transactions
up to one month because it is very difficult to draw a line and
I say simply the standardised product of one month should be included
and everything else should be left out. This is my proposition,
which reduces the tax base, yes, but it makes it practicable and
avoids the very onerous reporting system which some other authors
76. What you are suggesting then is that you
would not be in any way capturing the speculation, what you are
suggesting is just capturing the final cash transaction?
(Professor Spahn) As I said, I have another
instrument to capture speculation, indeed, yes.
77. Okay. What about transactions moving out
of your tax base?
(Professor Spahn) This is a concern often
raised. I do not share this concern. We have to realise that the
City of London has about 30 per cent or even more of the whole
market. It is the most prominent financial centre in the world
as far as currency exchange is concerned. There will be a specialised
bank in London, the CLS Bank, the Continuous Link Settlement Bank,
which is likely to start operating this year, so it will be the
world's centre for international transactions. There are satellite
centres in Europe like Frankfurt and Zurich, which is an important
financial centre outside of the European Union. To my understanding
we have to think in terms of time zones. A trade in London is
not the same thing as a trade in New York because it is in a different
time zone. So it is unthinkable that a trade would move out of
the time zone just because of a small tax. I am proposing, as
you said correctly, one basis point, which is about the spread
on the most liquid of all transactions, the dollar and euro transactions.
So that is more or less the margin we have in liquidity trading
and it is totally inconceivable that a desk will move out of a
time zone into some other place just because of that tax. This
is due to the high concentration of the market and the network
of sophisticated products that are based on the underlying transactions.
A big institutional investor like an insurance firm will purchase,
say, $50 million or $500 million. This is not abnormal. Then,
of course, the financial institution will immediately want to
close the open position it holds and it cannot wait for New York
to open, it will do it right now, in this time zone, and it will
do it in the most prominent place which is London. So there is
no threat of these transactions moving out of London. It is just
inconceivable because on this transaction there may be somebody
forming options, somebody forming swaps and this is all inter-connected
and you cannot move that out to some other place. It is important,
and I stress that, that we have to make a co-ordinated effort
within the time zone because Zurich could of course be a competitor.
If Zurich is out and London has a tax or the European Union has
a tax then there may be some shifting into Zurich. So we have
to co-ordinate within the time zone. This is my firm conclusion.
78. Which leads me on to my second questionalthough
I would love to develop that first bit with youwhich is
are you suggesting, therefore, that in the European time zone
that we could introduce this kind of tax unilaterally with it
not happening in the Asian markets or the North American markets?
(Professor Spahn) I made a study for
the German Government and the question was could we do it unilaterally?
I was even more specific, I said could we do it on one leg of
the transaction only, which is the euro leg? I stress again, all
financial centres have to co-operate but I left out the British
pound sterling and the Swiss franc, and I said just the euro leg
could be taxed. Of course, we can include these other two important
currencies, which would give a different tax base, but my approach
was a unilateral one, if you wish. There is room for the Americans
to tax the dollar leg if they wanted to. This is also the reason
why I go for a very low tax rate because if the Americans ever
tax the dollar leg they can do it without harming this part of
the trade. So it is perfectly possible to do it unilaterally,
Mr Walter: Interesting. As I say, I would
love to develop the point. I would just remind you of the development
of the euro-dollar market which was simply a tax avoidance measure
in the late 1950s/1960s where the entire market moved from New
York to Europe simply to avoid tax.
(Professor Spahn) Many factors explain that movement.
79. Steve, is there anything you would like to
add to what has been said already?
(Mr Tibbett) To pick up on the ten basis
versus one basis point headline and the difference between War
on Want's and Professor Spahn's proposal. Of course, we are thinking
more about a global tax and we are thinking more in campaigning
terms and it is easier to explain a tax at a simple rate. In fact,
what we propose is a tax rate which will vary according to the
spread between each currency. The proponent of the settlements-based
collection of tax is now suggesting that you look at the rate
as a percentage of the bid-ask spread, so rather than having one
simple tax rate, which is of course easier to explain in campaigning
terms, you have this percentage of bid-ask spread which is probably
a better way of levying the tax and accounts for the different
markets. Professor Spahn is looking at the euro versus dollar
market which is, as you know, a very small spread. If we look
at the developing countries' economies and their currencies, the
spreads are much larger so you can have a larger tax. So we go
for 0.1 for campaigning reasons.