Would a 'Tobin tax' really calm the markets?
The problem of wild speculation by financial institutions, that is. According to Lord Turner, Chairman of the Financial Services Authority, charging a tax on financial transactions would help curb the sort of excesses that led to the current crisis.
If we can't clip institutions' wings by increasing their capital requirements, Lord Turner would consider levying a small percentage on purchases and sales, a so-called 'Tobin tax'.
Tobin tax
The idea was first mooted in 1972 by Yale economist, and later Nobel laureate, James Tobin. His suggestion was to charge a tax on foreign exchange transactions, following the breakdown of the Bretton Woods system of fixed exchange rates. The aim was to "throw sand in the wheels of global finance", damping down speculative cash movements and protecting currencies.
But of course the idea can be extended to financial transactions in general, as a means of making short-term trades less attractive, and supposedly reducing volatility in the markets. Lord Turner envisages the tax being applied globally, so it would not disadvantage any particular country.
Revenue generator or behaviour modifier?
Tobin's original objective was to use this tax to influence people's behaviour, rather than to raise revenue. The idea of a Tobin tax has subsequently been adopted by many campaigns as a new and fun way to finance their respective causes -- combating climate change, ending global poverty, or whatever -- but this was not Tobin's intention.
Lord Turner, in his interview with Prospect magazine last week, appears to embrace the dual functions of such a tax: "Such taxes have long been the dream of the development economists and those who care about climate change -- a nice sensible revenue source for funding global public goods."
Would it work?
But even if we just focus on the political intent of calming the market and reining in the banks, would such a tax really work? A 0.5% stamp duty on shares didn't prevent the technology bubble 10 years ago. Neither did the tiered system of Stamp Duty Land Tax prevent the bubble in property prices more recently.
These taxes raise a very significant amount of revenue, but they are small in percentage terms relative to the potential gains to be made in any of these markets. The duties may influence the way in which some people take a position (using spread bets, for example), but I don't think they were ever high enough to make equities or property unattractive during the euphoria of their respective booms.
A Tobin tax would be a drag on the returns of individuals, institutions, and pension funds, but how high would it have to be to actually alter their behaviour?
Speculators
Speculation is seen as the enemy, with 'hot' money rushing into and out of various asset classes, causing bubbles and crashes. To some extent it depends on how we define speculation, but it could be argued that most investment, except perhaps the regular and long-term purchase of trackers, is speculation; we're speculating that the market is wrong to sell us something so cheaply.
Taking the narrower view that speculation involves only short-term positions, the sort of positions that a Tobin tax seeks to discourage, I'm still not convinced that it's such a bad thing. Yes, at peaks and troughs it can accentuate the mis-pricing of assets, but at any point in time who is to decide that an asset is mis-priced? I may have opinions on the lunacy or otherwise of prices, but they are merely my opinions versus those of the market.
As it happens, short-term 'speculating' is not particularly my thing, but should we really attempt to discourage investors, traders, speculators and gamblers from putting their resources where they think is most suitable? And if their opinion is different tomorrow, should they have to pay a penalty to reverse that decision?
Will this solve the problem?
I realise that Lord Turner, whose proposals I've criticised in the past, and also Lord Myners, are just trying to create a better system, but I can't help thinking that there's a desperate need to be seen to be doing something -- a need to show that we've learned some lessons, and that it won't all happen again in another form, and that our human propensity for getting things wrong will finally be legislated away.
And perhaps there are changes to be made, but an additional tax on transactions should not be one of them.
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