Tobin Tax Debated at G-20 Meeting

November 10, 2009

G-20 officials met over the weekend to discuss aspects of the financial crisis, including ways to raise revenue for future bailouts—not even pretending this won’t be a regular job for future government. One idea is a Tobin tax—named after Nobel prize winning (1981) economist James Tobin—on global financial transactions. Proponents of the tax claim it would make short-term speculation more costly and fund future public services for investors in need.

While British Prime Minister Gordon Brown pushed for the transaction tax, Secretary of the Treasury Timothy Geithner and some others were not convinced.

Geithner responded that a “day-by-day” tax on speculation is “not something we’re prepared to support.”

…Bill Witherell, chief global economist at Cumberland Advisors Inc. in Vineland, New Jersey, countered that banks would circumnavigate it and that it would do more harm than good.

“The idea of trying to tax transactions is a populist measure that may appeal to those upset with banks, but would be short-sighted,” said Witherell.

As The Economist wrote a couple of months ago:

… it would be unworkable unless all governments signed up to it (and perhaps even if they did); and a levy would harm the liquidity of financial markets, making asset prices more volatile. Now there is a third, equally valid objection: that a Tobin tax is a poor solution to the problems in banking-too much leverage, too little care taken in assessing risks and banks that are deemed too big to fail.

So the tax is likely unworkable and would be ineffective at preventing financial crises. That is, as The Economist noted, “because trading volume is a poor guide to the size, risk-taking or complexity of banks.” And because investors can dodge them in foreign markets, the revenue raised is not likely to be impressive.

Calls for Tobin taxes are not new. It is sometimes an ojective for those in the “global justice” movement, like the anti-trade and anti-liberal ATTAC (Association for the Taxation of Financial Transactions for the Aid of Citizens); a seemingly perfect platform for a tax idea with indications of populism.


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