S omething happened in late August that I never
thought I would see in my lifetime. A leading policymaker in the
Anglo-American empire of finance actually came out in support
of a Tobin tax – a global tax on financial transactions.
The official in question was Adair Turner, the head of the
UK FSA, the country’s chief financial regulator. Turner, voicing his
concerns about the size of the financial sector and its frequently
obscene levels of compensation, said he thought a global tax on
financial transactions might help curb both.
Such a statement would have been unthinkable in the years
before the sub-prime mortgage meltdown. Now, however, it is an
indication of how much things have changed.
The idea of such a tax was first floated in the 1970’s by James
Tobin, the Nobel laureate economist, who famously called for
“throwing some sand in the wheels of international finance.” Tobin
was concerned about excessive fluctuations in exchange rates.
He argued that taxing short-term movements of money in and out
of different currencies would curb speculation and create some
maneuvering room for domestic macroeconomic management.
The idea has since become a cause-célèbre for a wide range
of non-governmental organizations and advocacy groups that see
in it the double virtue of cutting finance down to size and raising
a big chunk of revenue for favored causes –foreign aid, vaccines,
green technologies, you name it. It has also been endorsed by some
Comment
Dani Rodrik
The Tobin tax
lives again
Is a tax levied on foreign exchange
transactions the best remedy?
20
World Finance | Nov - Dec 2009
French (predictably) and other continental European leaders. But,
until Turner mentioned the idea, you would not have been able
to identify a single major policymaker from the United States or
the UK, the world’s two leading centers of global finance, with
anything nice to say about it.
The beauty of a Tobin tax is that it would discourage shortterm
speculation without having much adverse effect on longterm
international investment decisions. Consider, for example, a
tax of 0.25 percent applied to all cross-border financial transactions.
Such a tax would instantaneously kill the intra-day trading
that takes place in pursuit of profit margins much smaller than
this, as well as the longer-term trades designed to exploit minute
differentials across markets.
Economic activity of this kind is of doubtful social value,
yet it eats up real resources in terms of human talent, computing
power, and debt. So we should not mourn the demise of such
trading practices.
Meanwhile, investors with longer time horizons going after
significant returns would not be much deterred by the tax. So capital
would still move in the right direction over the longer term.
Nor would a Tobin tax stand in the way of financial markets punishing
governments that grossly mismanage their economies.
Moreover, it is undeniable that such a tax would raise a
great deal of money. Revenue estimates for a small tax on inter-
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