Talk of Tobin taxes shows desire to make banks pay

ANALYSIS:A TOBIN tax, first proposed by US Nobel Prize-winning economist James Tobin in the early 1970s, was envisaged as a small charge on all foreign exchange transactions to curb speculation and reduce instability in the forex markets by throwing "sand in the wheels" of global finance. His suggestion has never been implemented, writes PAT McARDLE

It does, however, resurface from time to time, most recently as a form of punishment for the misdemeanours of banks and other financial institutions, and a means to make them share the costs of the financial crisis.

The original idea was that the proceeds of the tax would be used to fund projects for the benefit of less-developed countries; initially, the rate proposed was 1 per cent but this was subsequently reduced to one-tenth of 1 per cent.

Tobin sought to distinguish speculative from “genuine” transactions. This is, of course, impossible and, in any event, the ultimate burden of the tax would be borne not by the financial institutions but by their customers.

If it were imposed at a high rate it would seriously impair the normal operations of financial markets; if it were imposed at a low rate, it would not deter speculators who usually hope to make large gains. To be effective, it would have to apply in all countries and, last but not least, it was not obvious who would collect it. Would this be the individual countries or some supra-national body? If it were the latter, how could one ensure that it would be properly enforced?

In short, the Tobin tax is a nice academic idea but one that is totally impracticable.

You will search the recent G20 Pittsburgh Communique in vain for a reference to Tobin tax but it is there all the same. One of their conclusions tasks the IMF to prepare a report on the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions.

The IMF has had a change of heart. Previously, it was against a Tobin tax for all the usual reasons. More recently, Dominique Strauss Kahn, a former French economics professor and Socialist party minister of finance, who is now the managing director of the IMF, said it was “just fair” that the financial sector should pay to help mitigate the systemic risks for the global economy that its reckless actions had created. He did, however, emphasise that a Tobin tax as originally envisaged, was impracticable and simplistic.

Similar ideas have been suggested in Britain, Germany and France. Lord Turner, chairman of the UK Financial Services Authority, is highly regarded in the treasury, but his suggestion of imposing new global taxes on a sector struggling out of a deep hole was not well received.

Chancellor Alistair Darling also dismissed it, noting that if any one country was out of it, it would not work. Turner argued that parts of the financial industry have grown “beyond a socially reasonable size” and that London’s competitive position should not be defended at any cost.

Former German finance minister Peer Steinbrück proposed a 0.05 per cent tax on transactions by banks, insurance companies and investment funds to yield about $700 billion a year. This is 20 times less than the original Tobin proposal. Angela Merkel said it had “close to no chance of being agreed”.

In a recent article in the Financial Times, French foreign minister Bernard Kouchner proposed raising a levy of 0.005 per cent on international finance, which would raise €30 billion to “finance new initiatives, particularly to help Africa”. This is a very different proposal with a specific objective and a proposed rate which is one-tenth of the German one – as Kouchner put it: “this tax is painless: for a €1,000 transaction, 5 cent would be diverted for the common good”.

The individual proposals are all over the place. The one common theme is a desire to make financial institutions pay. Tobin died in 2002 but his idea lives on. It will be interesting to see what, if anything, the IMF comes up with.

Meanwhile, we in Ireland are ahead of the game. At the insistence of the Greens, the draft Nama legislation will include provision for a levy on the banks if Nama does not break even. It’s not quite a Tobin tax but it’s closer to it than anything the others have come up with so far.