Joseph Stiglitz has recently declared that a Tobin tax is both “possible and necessary”, and that it should be levied on all international financial transactions. He adds: “The financial sector polluted the global economy with toxic assets and now they ought to clean out.”
We do not disagree with Nobel Laureates lightly, but here we simply must, for reasons we will mention briefly, but be happy to delve into in more depth if asked to do so. First of all, a Tobin tax is a tax (or fee) on currency across borders. This means that any financial transaction across national borders will be taxed. James Tobin suggested a rate of between 0.1% and 0.25% and, contrary to popular belief, did not advocate any particular use of the profits of this tax.
The main glaring problem is the fact that this will only work if all countries are involved. If the UK, for example, has a Tobin Tax, a trader in New York can decide to buy shares of a company in Paris, Tokyo or Singapore rather than deal with the tax. If all these countries levy Tobin taxes, companies can decide to be traded in Hong Kong, Sydney, Frankfurt, Bahrain, or a host of other cities. Sweden tried a similar tax in the 1980′s that it had to abandon since people simply stopped trading. Of course, even if every country in the world implemented it, there are many other ways of buying stock that avoid the tax (local branches and consultants will start popping up, offering to do exactly this for investors).
Also, a Tobin tax will dry up liquidity. Speculators and traders have garnered a bad reputation in this crisis, not least because they are an easy scapegoat, but these are precisely the investors that help plug in gaps, that maintain the trading of shares and that can arbitrage price discrepancies. Getting rid of them for the fact that they don’t make markets run smoothly all the time is like outlawing airbags because they can hurt your nose upon impact. It’s missing the point and sidestepping the cause.
We should remember that this last crisis was sparked by the Housing bubble, which had very little to do with either speculators or with international transactions. A Tobin tax would not have prevented this bubble and, once it occurred, it would have then made it harder for any positive changes to take place. James Tobin himself said that a Tobin tax is not feasible. Joseph Stiglitz seems to think otherwise. We think he’s only human, and getting caught up in the ‘post-financial meltdown blame-game’.
