Tobin or not Tobin Premium

Constant repetition of an idea does not make it right. Lord Turner, the UK’s chief financial regulator, caused a storm in August when he backed a “Tobin tax”, or levy on financial transactions. Several European countries are pushing the idea. UK prime minister Gordon Brown’s weekend volte-face at the G20 finance ministers’ meeting in favour of a global levy might seem to give the idea some momentum. Indeed, it appeared in part an attempt to retake the leadership on international financial issues that Mr Brown briefly held during the global banking rescue a year ago. But while France agreed, the US and Canada were right to slap down the idea.

The Tobin tax has, in reality, gone through several mutations. Its author, James Tobin, conceived of a small levy on currency transactions in 1971 to reduce exchange rate volatility. It was meant to “throw sand in the wheels” of short-term speculation, not as a revenue-raising exercise. Development economists later seized on the idea of a financial transaction tax to raise money to alleviate poverty. Lord Turner suggested it could shrink an over-large financial sector, curbing excess profits and bonuses. Mr Brown proposed it as one of four potential options to build up funds for future financial bail-outs, though his talk of strengthening the “social contract” between banks and society echoed Lord Turner. The UK prime minister made explicitly clear that to work, such a measure must be adopted globally.

Getting all the world’s financial centres to sign up, however, seems highly unlikely. Transactions will then migrate to places where the tax is not imposed; creative financial minds are likely to find ways around it in any case. As Mr Brown himself noted, there are huge technical hurdles, even in a world of multinational trading platforms. If the primary purpose is to fund future bank rescues, other options suggested by Mr Brown – such as charging banks insurance fees – are more deserving of consideration. The Tobin tax should remain a curiosity of economic history.

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