What is the Tobin Tax?

Why are we talking about the Tobin Tax?
Lord Adair Turner, chairman of the FSA, has said in a magazine interview that he sympathises with the notion of introducing a so-called 'Tobin Tax' on all financial transactions conducted in the City of London. It would not only reduce the pot of money available for bankers' bonuses - a good thing, in his view - but the revenue would be "a nice sensible" source for "funding global public goods".

Who was Tobin?
James Tobin was an American economist. His outlook was Keynesian, in that he believed in government intervention to help avoid recessions and to oil the cogs of international finance. Born in 1918, he combined his professorship at Yale University with advisory roles in President John F Kennedy's administration and with the Federal Reserve. He died in 2002.

What was the need for a Tobin Tax?
Between 1944 and 1971 the stability of the world's currencies relative to each other was maintained by the Bretton Woods system, under which the US dollar was pegged to the value of gold. President Richard Nixon broke this link in 1971, leading to turmoil in world currency markets. Governments began to find it difficult to form economic policy because they were unable to predict with any certainty the value of their national currency from month to month. Many people thought a system was required to stabilise exchange rates.

What is the Tobin Tax?
The tax proposed by Tobin in 1972 was a 0.1-0.25 per cent levy on all foreign currency exchange transactions in order to "throw sand in the wheels of global finance". His aim was to make exchange rates reflect fundamental economic realities over the long-term, rather than the short-term shocks that allow currency speculators to manipulate and take advantage of exchange rates. This would "preserve and promote autonomy of national and macroeconomic and monetary policies", he wrote. Importantly, it would not discourage long-term investment.

What would the revenue be used for?
Tobin suggested that the revenue raised from the tax could be used to help Third World countries or fund the United Nations. More an aside than anything else, this concept of using the tax to fund the Third World was hijacked, much to Tobin's chagrin, by development activists in later years and pushed as the main benefit of the Tobin Tax.

Why was the Tobin Tax never adopted?
Besides those economists ideologically opposed to any policy that might be seen to interfere in the workings of a free market, there were many who queried whether the tax was high enough to deter foreign currency transactions.

Others said it would simply drive businesses offshore where they could trade with impunity. The zeitgeist was against Tobin with even the left-leaning Guardian weighing in as late as 2001 with this editorial:

"Currency speculators are an exceptionally useful lot, working day-in, day-out to supply a thing called liquidity. Without liquidity, markets dry up, prices become volatile and goods become difficult to shift. The net result is that everyone involved - producer, trader, buyer - becomes poorer, not richer."

How much would a Tobin Tax raise?
The tax would need to be levied worldwide for it to work - otherwise dealers would simply move to countries where it did not exist. A Tobin tax of 0.1 per cent just on the world's foreign currency exchanges - which amount to £560 trillion annually - would in theory net around £560bn. To put that in perspective, the G8 leaders pledged in 2005 to double aid to Africa to $50bn (£30bn) by 2010. More recently, development charities such as Stamp Out Poverty have argued for a more modest tax of 0.005 per cent which would net around £28bn a year. ·