Spahn tax
Encyclopedia
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.
is attributed to James Tobin
in 1972, a concept now known as a Tobin tax
. On June 16, 1995. Bernd 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
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."
Parliament approved a bill implementing a Spahn tax. According to the legislation, Belgium
will introduce the Spahn tax once all countries of the eurozone
introduce a similar law.
In November 2004, Belgium submitted this law for an opinion to the European Central Bank
. The Bank provided both an economic and legal assessment. The summary of their economic assessment was as follows:
The summary of their legal assessment was:
Currency transaction tax
A currency transaction tax is a tax placed on a specific type of currency transaction for a specific purpose. This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers....
that is meant to be used for the purpose of controlling exchange-rate volatility. This idea was proposed by Paul Bernd Spahn
Paul Bernd Spahn
Paul Bernd Spahn is emeritus professor of public finance at the Goethe University, Frankfurt am Main, Germany.He was born in Darmstadt, Germany....
in 1995.
Early history
The initial idea for a transaction tax specific to currenciesCurrency transaction tax
A currency transaction tax is a tax placed on a specific type of currency transaction for a specific purpose. This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers....
is attributed to James Tobin
James Tobin
James Tobin was an American economist who, in his lifetime, served on the Council of Economic Advisors and the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities. He developed the ideas of Keynesian economics, and advocated government intervention to...
in 1972, a concept now known as a Tobin tax
Tobin tax
A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...
. On June 16, 1995. Bernd 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 Bernd Spahn, "Analysis has shown that the Tobin tax as originally proposed is not viable and should be laid aside for good." Furthermore, he said "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 June 15, 2004, the BelgianBelgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
Parliament approved a bill implementing a Spahn tax. According to the legislation, Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
will introduce the Spahn tax once all countries of the eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
introduce a similar law.
In November 2004, Belgium submitted this law for an opinion to the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
. The Bank provided both an economic and legal assessment. The summary of their economic assessment was as follows:
"...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."
The summary of their legal assessment was:
"...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 TreatyMaastricht TreatyThe Maastricht Treaty was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands. On 9–10 December 1991, the same city hosted the European Council which drafted the treaty...
.
See also
- Bank for International SettlementsBank for International SettlementsThe Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
- Central banks - which issue currency
- Credit crunchCredit crunchA credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...
- Currencies
- Currency crisisCurrency crisisA currency crisis, which is also called a balance-of-payments crisis, is a sudden devaluation of a currency caused by chronic balance-of-payments deficits which usually ends in a speculative attack in the foreign exchange market. It occurs when the value of a currency changes quickly, undermining...
- Currency transaction taxCurrency transaction taxA currency transaction tax is a tax placed on a specific type of currency transaction for a specific purpose. This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers....
- Exorbitant privilegeExorbitant privilegeThe exorbitant privilege is a term coined in the 1960s by Valéry Giscard d'Estaing, then the French Minister of Finance.This quote is generally misattributed to Charles de Gaulle, who is said to have had somewhat similar views....
- Financial markets
- Financial transaction taxFinancial transaction taxA financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
- Fluctuation in exchange rates
- Foreign exchange controlsForeign exchange controlsForeign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents.Common foreign exchange controls include:...
- Foreign exchange derivativeForeign exchange derivativeA Foreign exchange derivative is a financial derivative where the underlying is a particular currency and/or its exchange rate. These instruments are used either for currency speculation and arbitrage or for hedging foreign exchange risk. For detail see:...
- Foreign exchange marketForeign exchange marketThe foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
- Liquidity crisisLiquidity crisisIn financial economics, liquidity is a catch-all term that may refer to several different yet closely related concepts. Among other things, it may refer to Asset Market liquidity In financial economics, liquidity is a catch-all term that may refer to several different yet closely related...
- Money marketMoney marketThe money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
- Noise (economic)Noise (economic)Economic noise, or simply noise, describes a theory of pricing developed by Fischer Black. To Black, noise is the opposite of information. Sometimes it's hype, other times it's inaccurate ideas, other times it's inaccurate data; noise has many forms...
- Paul Bernd SpahnPaul Bernd SpahnPaul Bernd Spahn is emeritus professor of public finance at the Goethe University, Frankfurt am Main, Germany.He was born in Darmstadt, Germany....
- SpeculationSpeculationIn finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
- Speculative attackSpeculative attackA speculative attack is a term used by economists to denote a precipitous acquisition of something by previously inactive speculators. The first model of a speculative attack was contained in a 1975 discussion paper on the gold market by Stephen Salant and Dale Henderson at the Federal Reserve Board...
- Speculation in foreign exchange markets
- Spot marketSpot marketThe 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...
- Sudden stop (economics)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 stops are usually followed by a sharp decrease in output,...
- Tobin taxTobin taxA Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...
- Transfer taxTransfer taxA transfer tax is a tax on the passing of title to property from one person to another.In a narrow legal sense, a transfer tax is essentially a transaction fee imposed on the transfer of title to property. This kind of tax is typically imposed where there is a legal requirement for registration of...
- Volatility (finance)Volatility (finance)In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
- Volatility riskVolatility riskVolatility risk is the risk of a change of price of a portfolio as a result of changes in the volatility of a risk factor. It usually applies to portfolios of derivatives instruments, where the volatility of its underlyings is a major influencer of prices....
- Consequences of currency volatility
Related economic crises
- 1994 economic crisis in Mexico1994 economic crisis in MexicoThe 1994 Economic Crisis in Mexico, widely known as the Mexican peso crisis, was caused by the sudden devaluation of the Mexican peso in December 1994....
- 1997 Asian Financial Crisis
- 1998 Russian financial crisis
- Argentine economic crisis (1999–2002)
- Financial crisis of 2007–2010