Tuesday, December 1, 2009

Recent proposals for a Tobin Tax

Recently, the UK government proposed the levying of a ‘Tobin tax’ or a financial transactions tax to recover the cost of bailouts in recession situations. The proposal has not won many supporters; indeed, India is one of the countries which has opposed the tax. Despite initial rejections of the idea, the IMF is said to be considering the implications of such a tax.

Named after the economist James Tobin, the Tobin tax was initially conceived of as a tax on international trade of currency. The idea has gradually expanded to mean a tax on all banking financial transactions. The UK government sees the tax as a way of ensuring that the costs of future bailouts are borne by players in the financial sector, rather than by all taxpayers.A similar idea was proposed by John Maynard Keynes during the Great Depression. James Tobin then picked it up and developed it further in the 1970s. Neither of those efforts actually saw widespread acceptance for the idea. But, has the time for the Tobin Tax finally arrived?

Perhaps the main argument against the imposition of such a tax is that it would be unworkable in practice. As the UK government itself admitted, the tax would achieve its objectives only if it is imposed internationally. Politically, that seems to be unlikely. Nonetheless, economists have argued that the tax needs to be seriously considered. Paul Krugman, for instance, argues:

Why is this a good idea? The Turner-Brown proposal is a modern version of an idea originally floated in 1972 by the late James Tobin, the Nobel-winning Yale economist. Tobin argued that currency speculation — money moving internationally to bet on fluctuations in exchange rates — was having a disruptive effect on the world economy. To reduce these disruptions, he called for a small tax on every exchange of currencies... Such a tax would be a trivial expense for people engaged in foreign trade or long-term investment; but it would be a major disincentive for people trying to make a fast buck (or euro, or yen) by outguessing the markets over the course of a few days or weeks. It would, as Tobin said, “throw some sand in the well-greased wheels” of speculation…

Krugman’s article goes on to address some of the concerns voiced by opponents of the tax. Modified proposals have also been put forward to address concerns with the tax. [One of these is Paul Spahn’s two-tiered version of the tax which contemplates a minimal underlying transaction tax along with an exchange surcharge that is triggered only “in times of exchange-rate turbulence and on the basis of well-established quantitative criteria”.] While economically the tax might appear to have justifications, translating these into political consensus is bound to be problematic.

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