The Tobin Tax is back…

Nicolas Sarkozy (yes, I realise I’m talking about him a lot today) just took over the G8 and G20 presidencies – and is already making some waves, says Le Point:

The President of the Republic called for the establishment of a tax on financial transactions, “the best method” for finding “new resources for development”. “France considers that this tax is a moral issue, given the financial crisis that we have recently experienced, that will be useful in reducing speculation and efficient in finding new resources for development”, explained the head of state. “I know all too well that this tax has powerful enemies and adversaries on the road towards its implementation. We will try to convince them to come over to our side,” he added.

I agree with Sarkozy on this, and it’s not the first time that he’s mentioned the need for such a tax. And the idea of the Tobin Tax has been around for almost 40 years. Originally limited to spot conversions of one currency to another, the concept has been developed by other actors, where it has evolved in the minds of many to a more general financial transaction tax. The basic reasoning is that taxing all financial transactions – perhaps at a rate of 0.5% – would reduce speculation and encourage long-term investment; the money raised by such a tax would be used to fund development projects in the Third World.

A levy of this kind has received considerable support from individuals like European Council President Herman Van Rompuy and former British PM Gordon Brown. And I wish it could become a reality – I really do. While there has been valid criticism of the Tobin Tax from people like Tim Harford in the FT, suggesting that it could actually increase volatility by encouraging larger transactions, most economists do seem to agree that it would help reduce short-term fluctuations in the market, possibly meaning that runs on currencies and other such phenomena could be avoided in future.

But the Obama administration has already shot down similar proposals in the past – remember Gordon Brown’s abortive efforts in 2010 to encourage the establishment of a global financial transaction tax? There’s no appetite in the US for a Tobin Tax – and President Obama would be the worst-placed to call for one, suffering as he already is from accusations of anti-American globalist socialist leanings and all the rest. Nicolas Sarkozy is just engaging in his usual posturing and pandering here, unfortunately. It’s a shame, because he’s actually onto something with this particular issue.

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