Tobin or not Tobin?

Given the huge volatility in the financial markets in the last 12 months, it is no surprise that the debate on Tobin taxes has been reignited.

In the 1970s, James Tobin, a Nobel-prize winning economist, first proposed introducing a tax on financial transactions to deter short-term currency speculation. The tax on currency trading would proposed to deter speculation in the wake of the collapse of the Bretton Woods system of pegging currencies. “This simple one-parameter tax would automatically penalise short-horizon round trips, while negligibly affecting commodity trade and long-term capital investments,” Tobin said, thus promoting greater economic stability.

More recently, in August of this year, arguing that such a tax might help to curb excessive pay, profit and activity in a “swollen” financial sector, Lord Turner, Chairman of the FSA, told Prospect magazine “If increased capital requirements are insufficient, I am happy to consider taxes on financial transactions—Tobin taxes,”.

Lord Turner asserts that the UK financial sector has grown too big; that some financial sector activity is worthless from a social perspective; that the sector is destabilising the British economy; and that new taxes may be required to curb excessive profits and pay in the sector.

On the other hand, Economics teaches us that taxes and other public interventions to correct distortions and other market failures should be targeted directly at the distortion or failure in question. It is not clear exactly what distortion a tax on financial transactions is targeting. Willem Buiter, writing in the Financial Times, agrees with Lord Turner that the UK financial sector – too large to fail and possibly also too large to save – has become a destabilising force for the UK, he strongly disagrees with the Tobin tax as a solution and discusses how other solutions instead could be more effective.

There are also issues of whether in such a globalised world of finance, with footloose capital, such a tax would simply threaten London’s future as a global business center.
Opponents argue it would drive financial business offshore, or that it would not prevent currencies from being overvalued, or being at the mercy of speculators.

And whilst Tobin never intended this as its original purpose, Turner also added that “Such taxes have long been the dream of development economists and those who care about climate change—a nice sensible revenue source for funding global public goods.” Around $912 trillion is traded annually on the world’s foreign exchanges and skimming a tiny proportion of that revenue into a fund to fight global poverty has long been a dream of campaigners. More recently, development campaigners have suggested a tax levied at .005% would raise between $30bn and $60bn a year – enough for the G7 countries to meet their commitment to double global aid. Indeed, a firm called Ethical Currency has already started to run with the idea.

In reality, Tobin taxes are unlikely to become a feature of the financial landscape (particularly given the global cooperation required to make them work), but Turner’s message is clear: these are uncertain and unprecedented times, and may call for unprecedented solutions.

Investment in Energy Infrastructure [23 May 2012]
Unit 2 Macro: Cyclical and Structural Economic Issues Facing the UK [23 May 2012]
Unit 2 Macro: Evaluation on Supply-Side Policies [21 May 2012]
Unit 2 Macro: The Current Account of the Balance of Payments [20 May 2012]
Unit 2 Macro: UK Trade in Services [20 May 2012]
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Q&A: What do we need to know about output gaps? [20 May 2012]
Revision notes on unemployment [20 May 2012]
Unit 1 Micro: Revision Presentation on Government Intervention [16 May 2012]
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Improving Evaluation Skills in Economics Exams [16 May 2012]
Unit 4 Macro: African Human Development Report 2012 [15 May 2012]
Unit 2 Macro: Revision Notes on Supply-side Policies [10 May 2012]
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F585: Recent Articles of Relevance [6 May 2012]
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Macro Revision - Key Statistics on the UK Economy [4 May 2012]
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Macro Revision: Putting Things in Context [29 Apr 2012]
Tullow Oil and African Development [25 Apr 2012]
Unit 4 Macro: The Euro Zone Crisis (Revision) [22 Apr 2012]
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Unit 4 Macro: Managing the Global Commons - Limits to GDP [15 Apr 2012]
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Unit 2 Macro: Skills Shortages Hold Back Recovery [12 Apr 2012]
Government Intervention in the Energy Market [11 Apr 2012]
Football Clubs to Pay for Negative Externalities [11 Apr 2012]
Unit 2 Macro: Globalisation and the Growth of Ports [10 Apr 2012]
2012 Economics Revision: Ways to Improve your Paper [9 Apr 2012]
Unit 2 Macro: The UK Balance of Payments in 2011 [4 Apr 2012]
Unit 2 Macro: Revision on Interest Rates and the Exchange Rate [3 Apr 2012]
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Unit 1 Micro: The Collapsing Price of Carbon [3 Apr 2012]
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Global Economy- the 2012 BRICS Summit [28 Mar 2012]
Life in the Slow Lane - UK Growth in 2011 Lags the Euro Area [28 Mar 2012]
Beyond the Bike - Monetary Policy in Africa [28 Mar 2012]
Unit 4 Macro: Evaluating 3 Years of Quantitative Easing [27 Mar 2012]
Evidence of the dangers of protectionism [9 Mar 2012]
Unit 2 Macro: Policies to Drive Economic Recovery [9 Mar 2012]
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Unit 2 Macro: Might Oil Prices Bring another Recession? [4 Mar 2012]
Unit 1 Micro: Highest and Lowest Paid Jobs in the UK [26 Feb 2012]
Unit 2 Macro: The Dash for Gas in Mozambique [17 Feb 2012]
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Unit 2 Macro: Is the UK Economy Turning a Corner? [15 Feb 2012]
Unit 4 Macro: King on the UK Economy [15 Feb 2012]
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Unit 4 Macro: Focus on India - Comparative Advantage [27 Jan 2012]
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Unit 1 Micro: Can the UK Computer Games Industry Grow [24 Jan 2012]
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Unit 4 Macro: Russia Joins the WTO [22 Jan 2012]
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Unit 2 Macro: Frontier Markets - the New BRICS? [15 Jan 2012]
Beyond the Bike - The Importance of Remittances [15 Jan 2012]
Unit 4 Macro: Time to Re-Boot the British Economy [14 Jan 2012]
Unit 4 Macro: Economics of Fiscal Deficit Reduction [12 Jan 2012]
Unit 4 Macro: Competitive Advantage in Trade (Some Videos) [12 Jan 2012]
Unit 4 Macro: UK Trade Patterns [11 Jan 2012]
Revision Presentation: Economics Evaluation Skills [10 Jan 2012]
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Unit 4 Macro: Natural Disasters and their Economic Impact [7 Jan 2012]
AS and A2 Economics - 10 Ways to Improve Evaluation [4 Jan 2012]
Unit 1 Micro: Prezi on the Economics of Negative Externalities [2 Jan 2012]
Unit 1 Micro: Low Cost Airlines Beat the Recession [1 Jan 2012]
Resources on Keynes and Hayek [27 Dec 2011]
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