Currency transaction tax

A currency transaction tax is a tax placed on the use of currency for various types of transactions. The tax is associated with the financial sector and is a type of financial transaction tax, as opposed to a consumption tax paid by consumers, though the tax may be passed on by the financial institution to the customer.

Currency transaction taxes have been proposed as taxes on domestic currency usage as part of the automated payment transaction (APT) tax and on international currency transactions, the Tobin tax and the Spahn tax.

The automated payment transaction (APT) tax was first proposed in Buenos Aires at the International Institute of Public Finance Conference by Edgar L. Feige in 1989 and an extended version of the proposal appeared in Economic Policy in 2000. The APT tax proposal is a generalization of the Keynes tax and the Tobin tax. The APT tax consists of a small flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking or payments system. In order to assure that all cash transactions are also taxed, the APT system proposes to exact a tax on currency as it enters and leaves the banking system. In order to be an effective means of discouraging currency usage for tax evasion, the APT tax imposes a tax rate on currency higher than the rate automatically charged on cheque transactions. Since cash can be used multiple times between the time it enters into circulation and the time it is returned to the banking system, the APT currency transaction tax is set at a multiple of the rate charged for all other transactions using non cash payment methods.

A Tobin tax is a tax on all spot conversions of one currency into another. Named after the economist James Tobin, the tax is intended to put a penalty on short-term financial round-trip excursions into another currency. Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system effectively ended.

In 1995, Paul Bernd 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."

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