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Tobin makeover not quite what it seems

Finance Blogger: Ian Fraser Ian Fraser

Also read the companion blog post on the Tobin tax/Robin Hood tax by Anthony Harrington, and vote in our poll on the Robin Hood tax.

The campaign for a “Tobin” tax on global financial transactions, first proposed by the Nobel prize-winning economist James Tobin in 1971, has gained a new lease of life.

The idea was given fresh impetus by “Red” Adair Turner, chairman of UK regulator the FSA last summer. Yet, despite the public’s dislike of bankers, the proposal never really caught the public’s imagination. This probably had little to do with dire warnings issued by the City of London and London Mayor Boris Johnson that the proposed tax would cause London would lose its status as a global financial centre. It probably had more to do with the proposal’s seeming complexity and, possibly, the fact that Tobin shares his name with a well-known child murderer, Peter Tobin.

Now, two of the UK’s leading thespians have found a way round this problem and given the Tobin Tax a more populist edge. They have achieved this by renaming it the Robin Hood Tax, and producing a catchy and persuasive three-minute video (see below) in which the actor Bill Nighy plays a disgruntled banker, amid claims the tax could painlessly raise $250bn a year to invest in the developing world and renewable technologies. The campaign has strong support from a broad coalition of churches, charities, and trade unions who in early February beamed advertisements for their campaign onto the walls of the Bank of England.

In a further sign the tide has turned for a possible Tobin tax, it is also being championed at a global political level by UK prime minister Gordon Brown, who also has support of Germany and France. In a recent interview, Brown predicted the tax will be adopted worldwide, seeming confident that a global agreement can be reached at the G20 summit in Canada this June.

He told the Financial Times it is only fair that those with the “broadest shoulders” should pay more and that the IMF will deliver a methodology that will be “somewhat different” to the wholesale funding tax proposed by US president Barack Obama.

However, there remains deep skepticism about how a global financial transactions tax would work in practice—and about its possible repercussions for global liquidity and financial markets (see also Anthony Harrington’s recent blog post). Neil McCulloch, a fellow at the Institute of Development Studies at the University of Sussex who is leading a review of the economic evidence both for and against a Tobin tax, has warned that the tax may well prove harmful to ordinary savers and pensioners. In a recent letter to the Guardian, he wrote:

“Proponents of the tax argue that, by discouraging speculation, it would reduce the volatility of prices and perhaps help to prevent crashes. Unfortunately, empirical evidence suggests there’s a trade-off—dampening speculation also removes liquidity from financial markets, which can increase volatility … it isn't clear whether a Tobin tax is a more effective way of funding aid, climate action or public services, than other forms of tax.”

Before they ride the tide of populist revulsion, one hopes that Gordon Brown, German chancellor Angela Merkel, and French president Nicholas Sarkozy will at least make themselves familiar with McCulloch’s conclusions and familiarize themselves with the possible aftershocks of a Tobin tax.

Further reading for the Tobin tax

Tags: banking , financial transactions , Gordon Brown , IMF , Robin Hood tax , Tobin tax
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