Tobin Tax – My interview on the BBC

I was on the BBC World Business Report yesterday, talking about proposals for a Tobin Tax (a tax on financial market transactions with the revenues allocated to poverty reduction).  David Hillman from Stamp Out Poverty discussed the issue with me.  I said I could not see the logic of linking measures to reduce capital market volatility with financing aid.

The World Business Report podcast is here.  The discussion about the Tobin Tax was in the edition for October 7th, 2009 – it will be there for a few days.  Alternatively you can download just the relevant part of the programme here.

The presenter, Mike Johnson, introduces the discussion by saying that James Tobin (a Nobel prize winning economist) proposed the tax as a way to finance efforts to combat poverty and disease. That isn’t true: James Tobin proposed the tax as a possible way to reduce speculative transactions.  The idea of linking the tax to development spending is a subsequent embellishment by campaigners against global poverty.  James Tobin said in an interview in Der Spiegel in 2001:

Ich habe nicht das Geringste gemein mit diesen Anti-Globalisierungs-Revoluzzern.

(My translation: “I have nothing at all in common with these anti-globalisation revolutionaries.”)

4 thoughts on “Tobin Tax – My interview on the BBC”

  1. Greetings,

    Well, I am of the opinion that tax is a way to finance efforts to combat poverty and disease, only if fair, legal, and efficient tax system is guaranteed.

    We need to understand that thee are various occasions where governments tax too much from business people to the extent the businesses couldn’t survive. In such cases, taxation would not help to fight poverty, in fact it sustains it by killing the opportunities for the rich to create more jobs and employ more poor. It finally impoverishes the rich and causes lawlessness to prevail. Here is where we need to be careful.

    Amanyehun R. Sisay

    Founder & President
    The African Youth Leadership Academy
    Equipping Knowledge to the Mind & Wisdom to the Heart

  2. Owen I agree almost entirely, nice quotes too.

    The only link I see between the Tobin and aid is that (in the UK and USA at least) unless we find a way to prevent handing out billions to our bankers every decade or so from now on, we’ll soon find public support for aid drying up, as it will start to do once our current round of cuts really start to hit.

  3. I appreciate the elegant argument that the Tobin tax is neither a desirable way to discourage short-term speculative foreign exchange transactions (and that discouraging such transactions is anyway undesirable), nor the most efficient way to increase the amount of money available for development aid aimed at global poverty reduction. But I can’t help thinking that both objections are so counter-intuitive as to end up being unpersuasive.

    I have nagging doubts about the proposition that the greater the number of foreign exchange transactions (nearly all reflecting individual judgements about the ‘real’ current and likely future value of the currencies concerned), the greater the likelihood that the collective judgement implied in these transactions will reflect currencies’ ‘real’ value as determined by the balance of supply and demand for them. This seems to me to risk being circular: the real value of a currency is partly determined by the transactions in it, which in turn reflect judgements of traders that are just as likely to be irrational as soundly based on a sober assssment of the relevant countries’ economic prospects, fiscal policies, etc. Currency traders’ judgements are notoriously influenced by rumours, gut guesswork, one-off events of limited or no long-term significance, herd panics, herd fashions and fads. It’s not obvious that there’s any benefit to society from a multiplication of transactions so flimsily based; and it seems self-evident that the interests of society in reasonable stability and predictability of currency values may be damaged by aggressive speculation against particular currencies, and by the growing number of individuals enriching themselves by buying and selling money instead of halping to produce goods and services in the real economy. Accordingly, there does seem to be some logic in the Tobin objective of discouraging short-term speculative transactions by imposing a very small tax on them.

    As for Tobin tax as a source of extra revenue for development aid, it’s no doubt true that there are other ways of raising money for this desirable purpose that may be more efficient in various ways. But it’s not easy to think of an alternative revenue source that would match Tobin in terms either of public acceptability or of an extremely favourable ratio between the smallness of the rate of tax imposed and the huge size of the resulting revenue. It’s also clearly true that the problem of finding additional money for development is as much one of allocation of existing tax revenues as of devising new types of tax: but the political reality is that popular support is unlikely to be forthcoming for the diversion of more existing tax revenues to overseas development at the expense of public services at home, especially at a time of recession, whereas a tax on currency transactions (many of which confer no obvious benefit on society) would probably arouse no serious objections; indeed, many would wonder why these particular forms of financial activity are not taxed already when other kinds have always been taxed.

    At the very lowest, these pros and cons are surely worth debating?

  4. If someone as smart as James Tobin thinks that a small tax on speculation might help to make markets less suceptible to bubbles, then we should take that seriously.

    In general, it seems likely that more liquid markets, with a larger number of trades, will be more likely to reflect the underlying value of assets than markets with fewer trades and traders. So it isn’t obvious that a tax on transactions will make markets more effective.

    My view is that this decision should be made on its own merits. A tax on turnover should be compared with other possible ways to reduce inefficient speculation. For example, these might include changes to the bonus system to reward traders based on the long-term value of their activities; changes in capital adequacy ratios so that banks have to hold more in reserve as asset values rise; or taxes on excess profits rather than turnover. I don’t know which of these ideas is going to work best; or perhaps there are other options; but it seems to me to be ludicrous to make a decision about the best way to reduce harmful speculation based on the desire to raise money for poverty reduction.

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