Adair Turner, chairman of the Financial Services Authority, the UK’s financial sector regulator, has proposed the possible use of Tobin taxes to curb destabilising financial transactions. The late James Tobin, winner of the 1981 Nobel prize in Economics, argued that a very small tax (between 0.1 and 1 per cent) should be imposed on foreign exchange transactions to dampen destabilising foreign currency speculation and thereby reduce exchange rate fluctuations. Lord Turner’s proposal would apply to a whole range of financial transactions, putting some friction in these very volatile and often highly leveraged markets. Such a tax would discourage some of the riskier and more exotic transactions on which many of the bonuses of bankers have been based.
Not surprisingly, his proposals have been met with derision by many in the banking sector. Many politicians too have been critical, arguing that the taxes will divert financial business away from London to other financial centres around the world. And yet, at the G20 summit in Pittsburgh on 24/25 September, both the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, argued in favour of such taxes. The result was that the IMF was asked to investigate the practicality of using Tobin taxes on financial transactions as a way of reining in more risky behaviour. A week later the IMF, while ruling out a simple Tobin tax, came out in favour of taxes on the global financial sector designed to reduce speculation.
So who is right? The following articles look at the issues.
FSA chairman Lord Turner says City too big Times Online (27/8/09)
Financial Services Authority chairman backs tax on ‘socially useless’ banks Guardian (27/8/09)
Cutting finance back down to size Financial Times (27/8/09)
Support for tax to curb bonuses BBC News (27/8/09)
FSA boss gets tough on bonuses (video 1) (Video 2) (Video 3) BBC News (27/8/09)
City tells FSA to stick to day job Reuters (27/8/09)
Charities applaud FSA’s support for new bank tax Guardian (27/8/09)
The time is ripe for a Tobin tax Guardian (27/8/09)
Ça fait malus: France gets tough on bankers’ pay The Economist (27/8/09)
Sarkozy chides bankers for bonuses, calls for tougher regulation (video) France 24 (18/8/09)
Politicians Clamp Down on Bankers’ Bonuses BusinessWeek (26/8/09)
Treasury would be crazy not to listen to Turner Guardian (27/8/09)
Three cheers for Turner and tax on easy money Guardian (27/8/09)
What is the City good for, again? Guardian (27/8/09)
Will Transaction Taxes Reduce Leverage? The Atlantic (27/8/09)
FSA backs global tax on transactions Financial Times (27/8/09)
The Tobin tax explained Financial Times (27/8/09)
Could ‘Tobin tax’ reshape financial sector DNA? Financial Times (27/8/09)
Turner defends bank tax comments BBC News (30/8/09)
Turner stands firm after Tobin tax backlash Financial Times (1/9/09)
Brown calls for bank bonus reform BBC News (1/9/09)
Brown pledges bonus clampdown Financial Times (1/9/09)
Cut the banks (and bonuses) down to size Financial Times (31/8/09)
IMF presses for tax on banks’ risky behaviour Guardian (3/10/09)
IMF’s Strauss-Kahn puts bank tax on the agenda Times Online (3/10/09)
Banks and traders threatened by new international tax plan drawn up by IMF Telegraph (3/10/09)
- Explain how a Tobin tax could be used to reduce destabilising speculation without preventing markets movement to longer-term equilibria.
- How might the use of a Tobin tax on financial transactions help to curb some of the ‘excessive rewards’ made from financial dealing.
- How do Lord Turner’s proposals differ from those of President Sarkozy?
- Examine the advantages and disadvantages of using a Tobin tax on financial transactions. How might the disadvantages be reduced?
- Explain what Lord Turner means by “the financial services industry can grow to be larger than is socially optimal”. How would you define ‘socially optimal’ in this context?