Why we don’t need a Tobin Tax

There are two arguments for a Tobin Tax (i.e. a small tax on foreign exchange transactions):

  • it would provide a dedicated source of revenue to pay for increases in aid;
  • it would benefit the economy by reducing volatility by reducing the amount of trading in currency markets.

Neither of these arguments stands up to scrutiny.

First, we can increase aid without finding a new source of revenue.  UK Overseas Development Assistance is expected to be £4.9 billion this year, about 0.39% of GDP. We would need about another £3.8 billion a year to get up to 0.7% – the internationally agreed aspiration, which Jeff Sachs reckons is more than is needed to reach the Millennium Development Goals. UK public spending (measured as Total Managed Expenditure) is expected to increase by £28 billion in real terms over the next two years – we’d need about a seventh of the total increase to go to aid to reach the 0.7% target in two years.  Alternatively, it would need about 1p on the basic rate of income tax, or a 3p increase in the top rate of tax.  Linking aid increases to the introduction of a new tax (and one that is likely to be difficult, if not impossible, to get international agreement on) enables us to hide from the truth, which is that we haven’t increased aid because we don’t want to.

Second, I don’t understand why people think that high turnover in foreign exchange markets makes them more volatile.  Deep and liquid markets are more, not less, likely to converge quickly on prices that reflect the economic fundamentals.  The trends in currency prices that adversely affect poor countries are the inexorable long term depreciation as the terms of trade move against countries dependent on the export of primary commodities and the income gap between rich and poor countries continues to grow.  These long term trends won’t be reversed by a Tobin Tax.  If the problem was short term volatility, it would be simpler and cheaper to hedge than to try to reduce the volatility.

2 thoughts on “Why we don’t need a Tobin Tax”

  1. And it wouldn’t work anyway. The London Eurodollar bond market was created by Kennedy introducing a taax on interest income. Taxes drive trade away, the Tobin tax would probably make Switzerland or the Bahamas the centre of world currency trading (currently it is London).

    Incidentally – Banks are already taxed on their profits, a transacation tax would merely reduce their profits available for taxation.

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