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Tobin Tax for the United Kingdom and United States Essay (Critical Writing)

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Updated: Feb 26th, 2021

The effects of the Tobin tax on the direct and indirect financial intermediation

Tobin tax is a type of taxation that is commonly used to restrain speculative trading in order to raise revenues. The European Union has suggested the inclusion of a financial transaction tax in their countries. However, this is faced with opposition from fifteen countries, including the United Kingdom. The tax has both negative and positive outcomes. If implemented, the tax will play a major role in ensuring there is fiscal consolidation without having any direct impact on the economy. In addition, the tax can enhance long-term investing, hence contributing to the market constancy (Reisen 1).

On the other hand, financial services would not be exempted from any value-added tax, thus making sure there is a reduction in a competitive business. However, the Tobin tax would have a huge negative impact on the UK financial services. The reason is that the commission has put it clear that the financial transaction tax will not only be implemented to financial institutions that are within the FTT region. It will also be applied outside the FTT region in case the transaction is carried out with a counterpart, which headquarter is in the region (Reisen 1). In addition, financial investors are more likely to be affected by the tax. For example, invested vehicles that require constant trading will suffer from the highest tax strain.

The ability to hedge risks

The implementation of an FTT would lead to increased hedging risks and costs. The reason is that whenever an investor involves in a project using foreign currency, he/she/company is faced with an exchange rate risk. With the Tobin style of taxation, investors would be unwilling to sell their risks. Therefore, hedging will create insufficient risk allocation. Moreover, tax on derivatives will make it very expensive to hedge against any risk.

Effects on global bond, equity, and derivatives markets

Global bonds, equity, and derivatives markets will be negatively affected. MMFs will be required to incur tax on secondary markets since there may be an increase in operational costs. There will be a huge effect of FTT on money market funds. Investors who contribute to funds will be forced to pay double taxes (Food 1). The first way they will be paying tax will be through selling and buying units of a fund. The second way will be when the fund sells or buys securities that it uses to invest.

What the tax might mean for you?

The Tobin tax will mean a lot to me. According to my understanding, the Tobin tax makes those who are targeted by it more likely to avoid the levy. Small businesses will be left behind struggling. The likelihood of people losing jobs will increase. The financial trading will go up since banks will be trying to recapture the cost of doing business. An increase in the cost of doing business leads to losses in a business. A business will be forced to cut the cost through job losses. The main impact would be on small businesses.

Will it affect the US?

Tobin tax will not be introduced in the United States. The reason for this is that the United States of America was against its implementation globally, especially after the 2008 economic recession. The government of the United States insisted that the Tobin tax was not well-suited to the free movement of capital. Several other bodies, such as The Financial Services and the US Chamber of Commerce, have already raised their voices against the tax. The two bodies have already written a letter to the commission indicating their reasons for opposing the Tobin tax. Economists in the United States argue that the Tobin tax has never been tested anywhere else in the world.

Works Cited

Food, Chris. “‘Tobin tax’ push causes dismay”. Financial Times. 2013. Web.

Reisen, Helmut , “Tobin Tax: Could it work?” OECD Observer. 231/232(2002): n.pag. Web.

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IvyPanda. (2021, February 26). Tobin Tax for the United Kingdom and United States. https://ivypanda.com/essays/tobin-tax-for-the-united-kingdom-and-united-states/

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IvyPanda. (2021) 'Tobin Tax for the United Kingdom and United States'. 26 February.

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