ECONOMIC SCENE: Is a currency transactions tax an answer to national budget woes?
When the United States went fully off the gold standard in 1971, a Yale University economist, James Tobin, proposed a small tax on foreign-exchange transactions to curb currency speculation. Over the years, this tax idea has popped up, recently at a Nov. 7 Group of 20 meeting in St. Andrews, Scotland.
The idea has a certain allure. Currency transactions exceed $2 trillion a day, so a 0.1 percent tax might net more than $2 billion a day. With stock trades and, possibly, other financial transactions, that鈥檚 perhaps a $1 trillion-a-year honey pot that cash-strapped governments find tempting.
British Prime Minister Gordon Brown brought up the idea at the St. Andrews meeting of the world鈥檚 key finance ministers. French Finance Minister Christine Lagarde called the tax 鈥渁 very good thing.鈥� But it was whacked down by US Treasury Secretary Timothy Geithner. That doesn鈥檛 mean the Tobin tax is completely dead.
To Da Vid, the holistic, New Age director of the San Francisco Medical Research Foundation, the Tobin tax is attractive because, he figures, it could raise $3 trillion a year (at a 1 percent rate) for good purposes and 鈥渄oesn鈥檛 threaten anybody.鈥� As founder of the 鈥減olitical paradigm鈥� Light Party, with about 1,500 members, Mr. Vid doesn鈥檛 carry the clout of, say, a finance minister. But he eagerly promotes the Tobin tax.
A less enthusiastic advocate is Jeffrey Frankel, a highly respected financial economist at Harvard University. He sees a political advantage. The tax would 鈥渁ccomplish the political goal of aiming a silver bullet into the heart of the [understandable] popular outrage鈥� over spending billions of taxpayer dollars to rescue the banks, he wrote in a blog a year ago. 鈥淭he public is out for blood,鈥� he says today.
Like many, Vid disapproves of the billions of dollars in bonuses being paid executives at financial institutions. He sees the Tobin tax as a way to redistribute such wealth.
But a keen advocate of taxing the rich harder, Robert McIntyre, director of Citizens for Tax Justice in Washington, maintains that the tax advocated by the late Mr. Tobin, a Nobel laureate, would be 鈥渂ad for the financial markets.鈥� And he adds, it would tax financial transactions by small investors as well as by wealthy investors.
Tax people on money they make, rather than on what they do, Mr. McIntyre says.
To others, the tax seems like a kind of zombie, a dead idea that keeps rising from its grave. Yves Mersch, a member of the European Central Bank鈥檚 governing council, recently called it 鈥渟currilous.鈥� Critics say the tax would damage the liquidity of financial markets.
Another challenge: Unless the Tobin tax is embraced by at least the major economic powers, financial transactions would soon migrate to some nations that did not impose it.
As long as the tax is tiny, say 0.1 percent, Professor Frankel doesn鈥檛 think it would seriously damage liquidity 鈥� the ability of financial markets to clear most transactions. Of course, that would also imply far less revenue than $3 trillion. Maybe the tax could come into effect, he suggests, if government revenues prove inadequate in three to five years after the economy has recovered.
Twenty years ago, an up-and-coming Harvard professor also advocated a Tobin tax in a paper titled, 鈥淲hen financial markets work too well: A curious case for a securities transaction tax.鈥� The author? Lawrence Summers, currently director of President Obama鈥檚 National Economic Council.
So far, that idea is not official administration policy.
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