Treasurers should keep a close eye on Tobin and inward capital tax proposals.
The global economic crisis spawned a number of proposals meant to sprinkle grit in the gears of the financial markets. For example, the UK Treasury last week revived the idea of a Tobin tax on financial transactions. Meanwhile, Brazil, Taiwan, Russia and Thailand have instituted, or soon plan to, taxes on inward portfolio capital flows. None of these taxes are Draconian enough to cause treasurers much pain now, but they should be watched closely nonetheless.
The Tobin tax supporters say it would reduce what US risk specialist Richard Bookstaber calls the close linkages among financial products and markets. These allow crises to rapidly spin out of hand, the way a small problem during a space shuttle launch can quickly become catastrophic because there’s no way to stop the process and fix it. However, the financial services industry is unanimous in its opposition to such a measure, and many economists believe it is unworkable—two reasons the G20 shot down the UK’s proposal for a Tobin tax at its summit in November.
More tangible are the inward capital flow taxes being levied by countries whose currencies are in danger of overheating. Take Brazil. It implemented a 2 percent tax on portfolio (but not FDI) investments in late October. Carry trades funded in ZIRP currencies like the dollar and yen are pushing many emerging markets currencies up, threatening their exports.
These issues post different risks for treasurers. A Tobin tax could certainly increase the cost of capital, although its supporters say it will help companies by making secondary market movements less volatile and making bear attacks more expensive. In any case, its chances of passage appear small.
The inward capital flow taxes could, on the other hand, take some of the juice out of cash investments in attractive emerging markets like Brazil, just when treasurers’ risk appetites are rebounding. If the carry trade bubble is as pervasive as some commentators believe, these countries might be forced to take more drastic actions, further narrowing the field of attractive investments for MNC cash.
Related link:
UK Treasury discussion document on Tobin tax