A Spahn tax is a type of
currency transaction tax that is meant to be used for the purpose of controlling exchange-rate volatility. This idea was proposed by
Paul Bernd Spahn in 1995.
Early history
The initial idea for a
currency transaction tax is attributed to
James Tobin
James Tobin (March 5, 1918 – March 11, 2002) was an American economist who served on the Council of Economic Advisers and consulted with the Board of Governors of the Federal Reserve System, and taught at Harvard University, Harvard and Yale Uni ...
in 1972, a concept now known as a
Tobin tax. On 16 June 1995 Spahn, in his analysis of the original idea, concluded that the concept was not viable and suggested an alternative solution to the problem of managing exchange-rate volatility.
Concept
According to Spahn, "Analysis has shown that the Tobin tax as originally proposed is not viable and should be laid aside for good." Furthermore, he believes that "it is virtually impossible to distinguish between normal liquidity trading and speculative 'noise' trading. If the tax is generally applied at high rates, it will severely impair financial operations and create international liquidity problems, especially if derivatives are taxed as well. A lower tax rate would reduce the negative impact on financial markets, but not mitigate speculation where expectations of an exchange rate change exceed the tax margin."
In 1995, Spahn suggested an alternative, involving "a two-tier rate structure consisting of a low-rate financial transactions tax, plus an exchange surcharge at prohibitive rates as a piggyback. The latter would be dormant in times of normal financial activities, and be activated only in the case of speculative attacks. The mechanism allowing the identification of abnormal trading in world financial markets would make reference to a 'crawling peg' with an appropriate exchange rate band. The exchange rate would move freely within this band without transactions being taxed. Only transactions effected at exchange rates outside the permissible range would become subject to tax. This would automatically induce stabilizing behavior on the part of market participants."
Proposals
On 15 June 2004 the
Belgian Parliament approved a bill implementing a Spahn tax.
According to the legislation,
Belgium
Belgium, officially the Kingdom of Belgium, is a country in Northwestern Europe. Situated in a coastal lowland region known as the Low Countries, it is bordered by the Netherlands to the north, Germany to the east, Luxembourg to the southeas ...
will introduce the Spahn tax once all countries of the
eurozone
The euro area, commonly called the eurozone (EZ), is a Monetary union, currency union of 20 Member state of the European Union, member states of the European Union (EU) that have adopted the euro (Euro sign, €) as their primary currency ...
introduce a similar law.
[ ECB (2004)]
Opinion of the European Central Bank (CON/2004/34)
/ref>
In November 2004, Belgium submitted this law for an opinion to the European Central Bank
The European Central Bank (ECB) is the central component of the Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's Big Four (banking)#International ...
, which provided both an economic and legal assessment. Its summary stated:
"...the ECB concludes that the economic and monetary usefulness of a tax, such as envisaged by the draft law, is highly questionable, given the uncertainty of its claimed benefits and the likely welfare costs arising from distortions in the working of financial markets. This assessment is reinforced by the difficulties expected with respect to its implementation."
It continued:
"...the ECB is of the opinion that the introduction by a euro area Member State of a tax, such as envisaged by the draft law, is incompatible with the Treaty
A treaty is a formal, legally binding written agreement between sovereign states and/or international organizations that is governed by international law. A treaty may also be known as an international agreement, protocol, covenant, convention ...
."
See also
* Bank for International Settlements
The Bank for International Settlements (BIS) is an international financial institution which is owned by member central banks. Its primary goal is to foster international monetary and financial cooperation while serving as a bank for central bank ...
* Central banks - which issue currency
* Credit crunch
A credit crunch (a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit crunch generally ...
* Currencies
A currency is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use wi ...
* Currency crisis
A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. A currency crisis raises the probability of a banking crisis or a default crisis. During a currency crisis the value of foreign denominated deb ...
* Currency transaction tax
* Exorbitant privilege
* Financial markets
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial marke ...
* Financial transaction tax
* Fluctuation in exchange rates
* Foreign exchange controls
Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents, on the purchase/sale of local currency by nonresidents, or the transfers of any currency across national b ...
* Foreign exchange derivative
A foreign exchange derivative is a financial derivative whose payoff depends on the foreign exchange rates of two (or more) currencies. These instruments are commonly used for currency speculation and arbitrage or for hedging foreign exchange ...
* Foreign exchange market
The foreign exchange market (forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. By trading volume, ...
* Liquidity crisis
In financial economics, a liquidity crisis is an acute shortage of ''liquidity''. Liquidity may refer to market liquidity (the ease with which an asset can be converted into a liquid medium, e.g. cash), funding liquidity (the ease with which borrow ...
* Money market
The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less.
As short-term securities became a commodity, the money market became a compo ...
* Noise (economic)
Economic noise, or simply noise, describes a theory of pricing developed by Fischer Black. Black describes noise as the opposite of information: hype, inaccurate ideas, and inaccurate data. His theory states that noise is everywhere in the economy ...
* Paul Bernd Spahn
* Speculation
In finance, speculation is the purchase of an asset (a commodity, good (economics), goods, or real estate) with the hope that it will become more valuable in a brief amount of time. It can also refer to short sales in which the speculator hope ...
* Speculative attack
In economics, a speculative attack is a precipitous selling of untrustworthy assets by previously inactive speculators and the corresponding acquisition of some valuable assets ( currencies, gold). The first model of a speculative attack was conta ...
* Speculation in foreign exchange markets
* Spot market
The spot market or cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market, in which delivery is due at a later date. In a spot market, s ...
* Sudden stop (economics) A sudden stop in capital flows is defined as a sudden slowdown in private capital inflows into emerging market economies, and a corresponding sharp reversal from large current account deficits into smaller deficits or small surpluses. Sudden stop ...
* Tobin tax
* Transfer tax
A transfer tax is a tax on the passing of title (property), title to property from one person (or entity) to another.
In a narrow legal sense, a transfer tax is essentially a transaction fee imposed on the transfer of title to property from one ...
* Volatility (finance)
In finance, volatility (usually denoted by "sigma, σ") is the Variability (statistics), degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns.
Historic volatility measures a t ...
* Volatility risk
Volatility risk is the risk of an adverse change of price, due to changes in the volatility of a factor affecting that price. It usually applies to derivative instruments, and their portfolios, where the volatility of the underlying asset is a ...
* Consequences of currency volatility
Related economic crises
* 1994 economic crisis in Mexico
The Mexican peso crisis was a currency crisis sparked by the Mexican government's sudden devaluation of the Mexican peso, peso against the United States dollar, U.S. dollar in December 1994, which became one of the first international financial ...
* 1997 Asian financial crisis
The 1997 Asian financial crisis gripped much of East Asia, East and Southeast Asia during the late 1990s. The crisis began in Thailand in July 1997 before spreading to several other countries with a ripple effect, raising fears of a worldwide eco ...
* 1998 Russian financial crisis
The Russian financial crisis (also called the ruble crisis or the Russian flu) began in Russia on 17 August 1998. It resulted in the Russian government and the Russian Central Bank devaluing the Russian rouble, ruble and sovereign default, defau ...
* 1998–2002 Argentine great depression
The 1998–2002 Argentine great depression was an economic depression in Argentina, which began in the third quarter of 1998 and lasted until the second quarter of 2002. It followed fifteen years of Economic history of Argentina#Stagnation (197 ...
* 2008 financial crisis
The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
References
External links
Currency Transaction Taxes - Library of links to legislation, proposals, reports, articles and archives - from Global Policy Forum
{{DEFAULTSORT:Spahn Tax
Foreign exchange market
Financial transaction tax
International taxation