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Old idea, new thinking

The comments by Adair Turner, chairman of Britain’s Financial Services Authority, have reignited a debate over a Tobin tax on financial transactions. A number of commentators including our own Matthew Goldstein have advocated one, but the fact that a financial regulator is publicly floating the idea adds some substantial heft to the discussion.

The tax was proposed by Yale economist James Tobin in 1972, as the fixed exchange-rate system was falling apart, to discourage destabilizing short-term currency speculation.

Megan McArdle, however, is not impressed, questioning how a transaction tax would reduce leverage, one of the prime factors in the financial blow-up. What such a tax would do, she says:

is make a lot of people freak out. If you tax debt transactions, you’ve suddenly got more points on your mortgage, your money market account stops paying much of anything, your credit card comes with a hefty annual fee, and businesses small and large have more trouble borrowing short money to cover temporary cash flow issues. If you don’t tax debt transactions, the largest effect of the tax will be to punish actively traded investment funds.

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