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Home > Blogs > Ian Fraser > Tobin becomes fashionable

Tobin becomes fashionable

Finance Blogger: Ian Fraser Ian Fraser

It was recently suggested that the US economist James Tobin renounced his commitment to a globally implemented tax on financial transactions just a few months before he died in March 2002.

Tobin first proposed the idea, which he believed would curb speculation on foreign exchange markets, in 1971. In the wake of the recent financial crisis, the proposal has been gaining some traction in the chancelleries of Europe, with the International Monetary Fund recently grudgingly agreeing to investigate whether such a tax could work in practice.

In a letter to the Financial Times, London-based hedge-fund manager David Beddington said “even Tobin gave up the idea.”

However, this was too much for Edward Sussex, who fired off another letter to the FT to rubbish such notions. He pointed to an interview that Tobin, a Nobel prize-winning economist, gave to the German magazine Spiegel in 2001. In the interview, Tobin distanced himself from the anti-globalization movement but not from the tax itself. Asked whether a Tobin tax would ever be introduced, he said: “No hope, I’m afraid. The crucial people in international finance are against it.”

Well, eight years on, that may be changing. In the US, 200 economists including Dean Baker, chairman of the Centre for Economic and Policy Research, and James K. Galbaith, a professor at the University of Texas, recently came out in favor of such a tax. They wrote:

“The cost of trading financial assets has plummeted over the last three decades as a result of computerization. This has led to an enormous explosion in trading volume, with most trades having little economic or social value and redistributing disproportionate resources to the financial sector … A set of modest financial transactions taxes, which would just raise trading costs back to the level of two or three decades ago, would have very limited impact on trades that have real economic value. Such taxes could both reduce the volume of speculation in financial markets and provide substantial revenue for either important public purposes and/or deficit reduction.”

The economists and other supporters believe that a financial transaction tax would discourage reckless risk-taking and mean the wealth generated by investment banks on Wall Street or in the City to be re-channeled towards needier projects in renewables and in the less developed economies. However, any such policy would need international backing for it to become effective, given the globalized nature of markets. It has controversially been endorsed by Lord Turner, chairman of the Financial Services Authority in London.

Stephany Griffiths-Jones of Columbia University’s initiative for policy dialogue said in a recent comment piece: “Preliminary studies show that the largest burden of a financial transactions tax would be borne by a very small group of very rich people, who make large investments in institutions such as hedge funds, which trade currencies frequently … This is a win-win proposal … It would show that governments can design and adopt rational solutions that favor their citizens. If the financial sector supports such a proposal, it will improve significantly its rather battered image, given the harm it is seen to have caused.”

UK prime minister Gordon Brown has also thrown his weight behind the tax. In an astonishing display of entente cordiale, he and French president Nicholas Sarkozy co-authored an opinion piece in the Wall Street Journal calling for “examination” of a financial transactions tax, among other measures to contribute to climate change response and the achievement of millennium development goals.

Yet there are still plenty of fervent opponents of the proposal out there, including US Treasury secretary Tim Geithner. In an earlier article in the Economist, denounced the proposed tax as “wacky.” Bankers and hedge fund managers warn that it would stifle wealth creation and slow down job creation. The IMF’s Strauss-Kahn has warned that it would be “very difficult” to implement, “in fact it is impossible.”

It remains to be seen if this is what the IMF will conclude when it submits its report in April 2010.

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Tags: EU , tax , Tim Geithner , Tobin tax
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