Tobin back in vogue? by Ian Mulheirn

Posted in: PF blog

4:55 pm, 27 August 2009 | Ian Mulheirn

Lord Turner’s comments about a the benefits of a tax on financial transactions have generated a huge amount of interest. Originally advocated as a means to reduce currency volatility in the wake of the collapse of the Bretton Woods system, the Tobin Tax was unlikely to get a hearing in the era of ‘efficient markets’ hegemony of the past 30 years. During that time, it has instead been advocated by proponents as a revenue-raiser to fund development objectives. Now, with the prevailing macroeconomic theory of the past 30 years found badly wanting, could the original justification be back on the table?

The answer is almost certainly no. Most doubt whether a tax on transactions would decrease market volatility. Indeed by discouraging traders from hedging currency risk, it could actually increase it. The tax would be too small to prevent longer-term volatility such as the global imbalances that arguably caused the financial crisis. So despite the changing intellectual environment, it’s difficult to argue for the tax on financial stability grounds.

What of the revenue-raising objective? Well here the case might have some legs. Building up a war chest to avoid the taxpayer having to bail out the banks next time might be a worthy objective. But the ultimate incidence of the tax – who really pays – is unclear. As the levy filters through to marginally higher prices for imported goods, for example, it could be that domestic consumers ultimately foot the bill.

The only clear conclusion is that a tax unilaterally levied on transactions within the UK would shrink what Lord Turner describes as the “swollen” financial sector in the UK. Some business would inevitably go overseas: the UK would lose the lead in financial services, but it would also shed the risks that come with that territory.

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