Economist James Tobin first proposed a tax on cross-border currency transactions in the 1970s. The financial crisis has revived the idea of a “Tobin tax” and it was endorsed by Adair Turner, chairman of the Financial Services Authority, in Prospect’s September issue.
A Tobin tax would need to be applied more widely than merely on currency transactions, which could be easily disguised in derivatives trading. A recent study by the Austrian government estimated that a 0.05 per cent Tobin tax imposed on all financial trades in Britain would raise £100bn a year—even assuming a two-thirds drop in transactions. This is an enormous sum, more than 6 per cent of GDP.
But is a Tobin tax a good idea? It would have to be applied multilaterally, or transactions would move elsewhere. Arguments in favour are that it might lower asset price volatility and reduce socially wasteful activity so that clever people could be freed to do something useful. On the other hand, the tax might increase transactions costs, reduce the liquidity of markets and raise the cost of capital.
But I want to focus on another issue: who would pay this tax? Much of the discussion assumes that large sums can be collected from the financial services industry and used to close the budget deficit and much more.
Yet bankers wouldn’t end up paying the tax—they would pass the cost to their customers. So importers, who must trade extensively in foreign exchange markets, would pay more for doing so and pass the extra costs onto consumers. Pension funds would pay extra for their transactions and their investments would generate lower returns for pension holders.
The extent to which the cost of transactions in Britain would be shifted onto other countries—and vice versa—is unknown. But it seems likely that much of the tax collected by the British government will, effectively, be paid by British citizens.
One way or another, even this most cunning of taxes will be paid not by bankers, but by the general public. And, given the vast sums of money involved, they would probably notice.
DJG_WEIR
‘…much of the tax collected by the British government will, effectively, be paid by British citizens…And, given the vast sums of money involved, they would probably notice.’
I’m not quite sure what Stephen Nickell’s point is here. Of course some of the tax will ultimately be paid by UK citizens, whether they are consumers of imports, pension fund holders or even bank shareholders. The same is true of any tax. Even corporation tax has to come out of final incomes somewhere along the line.
The relevant question is whether the benefits outweigh that cost. The revenue raised by the tax is only part of the benefit and doesn’t need to be anything like the level Nickell suggests. More important is the fact that the impact of the tax will be much greater on very short-term, small margin, zero-sum speculative trades that add nothing to international asset markets but damaging instability. Longer-term trades for real investment or exchange of real goods and services need hardly feel a thing.