A Tobin tax is a special tax on currency transactions, designed to penalise excessive short-term speculation in currency markets. Advocates have long argued that in order to reduce speculation and instability in financial markets some form of transaction tax should be imposed on a range of financial transactions. Initially referred to as a securities transaction tax, it is more formally known today as a Financial Transactions Tax (FTT), or less formally a Robin Hood tax.
The original idea can be traced back to British economist, John Maynard Keynes as a response to the financial crisis in the 1920 and early 1930s.
The idea was revived by the Yale Nobel prize-winning economist, James Tobin, who proposed a tax on foreign exchange transactions in 1972 in response to intense speculation against the US dollar, which ultimately led to the collapse of the IMF exchange rate system in 1971.
Supporters of an FTT have, of course, come to the fore since the global financial crisis of 2007/8. More recently, the severity of the sovereign debt crisis in the Eurozone has strengthened the case for the introduction of new taxes, including an FTT. Even the most conservative commentators seem resigned to the fact that such a tax will be implemented, and the debate has now moved on to the scope and scale of the tax, rather than the principle of having such a tax.
There is a growing consensus at the micro-economic level that, since deregulation and the ‘Big Bang’ of the 1980s, the banks have got too big. Their growing size has created a ‘textbook’ list of diseconomies of scale, including; widespread information failure, with members of boardrooms failing to understand the complexities of modern financial products; asymmetric information between buyers and sellers; and the principal-agent problem leading to improper risk management and other management inefficiencies. In addition, the bank bailouts, while being necessary to bring stability in the short run, have created the potential for future moral hazard which, in turn, increases the probability of inappropriate bank lending and excessively risky financial transactions.
The macro-economic case for such a tax in Europe is also straightforward – it is a potential source of new revenue for governments with a broadly neutral impact on household spending and growth.
According to Tobin, to work effectively such a tax should be adopted internationally, and be uniform. Since 2009, the European Commission has been lobbying for a global FTT, recognising that it would be much easier to implement it in the EU if all G20 countries adopted a uniform system. Given the relative size of the UK’s financial sector, the current Franco-German plan to push through a European FTT has met with strong resistance from the UK government. UK Chancellor, George Osborne, warned that financial business will be diverted from The City of London to the US and Asian markets.