It is time for a Tobin Tax

As a way to put a curb on financial speculation

Tobin Tax was proposed by Nobel Prize James Tobin, in 1978, as a small levy on all foreign exchange transaction to penalize short-term speculators but not long-term investors.

Some call this tax the “Robin Hood tax” because it levies a small tax on financial transactions, which are supposed to be done only by companies or wealthy people, and the proceeds can be invested in social programs, or programs related with global public goods, such as climate change or carbon emission reductions.

However, at this point, it is argued that the main purpose of this tax is to prevent speculation, to put a penalty on purely speculative financial transactions, to discourage, if not prevent financial roulette.

During the crisis of toxic assets, which was prompted by financial speculation with complex instruments, the need for financial mechanisms to prevent speculation and excessive risk taking was discussed.

In this context, towards the G-20 summit in Pittsburgh, in September 2009, the European leaders including German chancellor Angela Merkel and French President Nicolas Sarkozy promoted the idea of a tax on financial transactions or some kind of “Tobin tax”.

At that summit the G-20 asked to the IMF to: “…prepare a report with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system.”[1]

The report formulated in response by the IMF explores the issue, noting, “the recent crisis has renewed interest in the possibility of a general tax on financial transactions”. The document argues that “a tax of one basis point has been estimated to raise over $200 billion annually if levied globally on stock, bonds and derivative transactions, and a 0.5 basis point Tobin tax on spot and derivative transactions in the four major trading currencies to raise $20–40 billion”.

However, once the worst of the crisis was over, the idea of a global and coordinated measure went to the drawer of memories.

Today, European leaders blame speculators for the agitation in markets against the Spanish and Italian debt, and Chinese authorities have decided to adopt severe capital control measures, because they believe that a great part of the record capital inflow that the country received in a year, is speculative money. Something similar has recognized Brazil and has taken measures against short operations and put charges on them.

It is true that, so far, the governments in the developed world have not taken appropriate and timely measures -just see the time and the discussions that led to raise the debt ceiling in America, or the late and fruitless Greek bailout- but it is also true that speculation is one of the variables of the problem, perhaps the most pernicious.

So far the speculators are winning the game, at an electronic click pace. Meanwhile the governments, in a merely defensive attitude, react too late, when the disaster is inevitable.

The global and coordinated application of a Tobin tax cannot only moderate the negative effects of this quasi-illegal practices, but may be the signal that governments, finally, are determined to curb them.