Time for Tobin

The Tobin tax is an idea named after a Nobel prize winner for economics. It was first mooted around the time that exchange rates moved from predominantly fixed to generally variable, around 1970. Its purpose then was to discourage wild flows of speculative money between currencies, and so generate stability.

Since then, the tax idea has received an airing every few years, but never come to pass. Most recently, Sarkozy and Merkel speculated about a Tobin tax as part of a solution for the current financial woes in Europe. Gordon Brown was also once a cautious advocate.

I love the idea. One reason is that increasingly financial services have become just like any other services, and a big part of the world economy, yet somehow free from transaction taxes. If I go to the barber, I receive a service and pay VAT. If I go to the bank, I pay VAT on the banker fees, but no tax on the transactions involved, which are the main outcome of the service. Firms whose business is buying and selling oil or cars pay tax on every transaction. Why shouldn’t firms whose business is buying and selling money? This is one massive global tax loophole – should we be surprised that so much global wealth ends up in this sector (which, incidentally, actually produces nothing)?

But the main reason I like it is very similar to the original proposal. One culprit for financial instability is the velocity of markets, driven mainly by technology and communications advances. It is simply too easy these days to transact. As a result, the whole herd moves at the slightest market signal, often via computer generated actions. I would extend the tax to all financial transactions, including buying and selling of equities and all derivatives. At a small rate of say 0,2%, this would not deter transactions, except for the most damaging, short-term kind, yet the tax would still generate massive revenue.

Of course, the tax has to be global, and this is one reason often quoted against it – by the way the same reason that we don’t pay tax on airplane fuel, another gross distortion. This is so manageable. Each of the G20 has a good reason to support the tax and a forum to instigate it. That covers 99% of all transactions, and rogue states outside would have to play ball or be limited to dealing among themselves. Tax havens still need financial trading partners.

On what to do with the revenue, there are some clear global goods such as the millennium goals or climate change research, but nowadays the financial world itself could do with some of it. Much as Norway has invested much of its oil wealth into a rainy day fund, the Euro could currently do with such a fund, and every other economy would benefit from the creation of that fund.

What really annoys me about Tobin is how the wealthy establishment and the financial community collude to make the subject undiscussable. Merkel and Sarkozy were duly ridiculed, though admittedly Tobin on its own would not solve the problems they should be solving and their ideas don’t do enough. As soon as the subject is raised, the finance lobby brings out its old arguments, including, sadly, my beloved Economist. And such is the power of finance over politics, and the overwhelming resources they control, that the tax never makes it to the policy table.

The two main arguments against strike me as tosh. One is that it would be hard to collect. Well, so is VAT, yet that works. There are far fewer institutions involved in financial transactions, monetary value is always clear, and most transactions go through regulated bodies, so the tax would be among most collectable of all. True, the scope of the tax would have to keep up with the ingenuity of traders to create new vehicles, but that should be achievable with goodwill.

The second argument is the one about tax havens, and that is just as much tosh. Sweden apparently imposed Tobin on its own in the 1960’s and, unsurprisingly, it backfired. The G20 is not Sweden.

Lots of other spurious stuff comes up, much of it thinly disguised populist gunk (the real goal of Merkel and Sarkozy is claimed by the Sun as getting Britain to pay to bail out the Euro). Read this executive summary: http://www.adamsmith.org/blog/tax-and-economy/executive-summary:-the-tobin-tax-%E2%80%93-reason-or-treason%3F/ , and especially the part where it claims to be a summary of arguments both for and against Tobin.

All in all, global politicians are as cowed on the topic of Tobin as British ones were on the subject of Rupert Murdoch. Well, last month that changed. What might tip the balance for Tobin?