Merkel and Sarkozy are right about a Tobin tax

August 17, 2011

By Mark Thoma
All opinions expressed are his own.

The financial transactions tax is back in the news today. According to reports, French President Nicolas Sarkozy and German Chancellor Angela Merkel will propose a financial transactions tax in September.

Is this a good idea? It would certainly provide needed revenue to cash strapped governments, but at what cost? Governments must raise revenue somehow, but is this the best way to get the cash they need? Some taxes have a large distortionary effect on economic activity — with a financial transactions tax, the worry is that investment activity will be curtailed– and others have a much smaller effect. Some taxes can even make markets work better, e.g. taxes that force firms to internalize pollution costs and other externalities improves the decisions firms make. From society’s point of view, they are more, not less efficient. Thus, in designing a tax system, we should look for taxes that provide the most revenue at the least cost.

So is a financial transactions tax a highly distortionary, costly tax? The answer is no. The tax would discourage short-term speculative activity, but much of this activity provides little social value. It pushes money around among winners and losers, and traders like it for that reason, but if this activity is discouraged through taxation it would have little effect on long-term investment decisions by firms. For example, one thing this would discourage is high frequency computer trading to exploit minute differences in prices. Does it really matter for long-term investment if these differences persist for a few seconds or minutes more?

In fact, there’s even an argument that this tax will improve the efficiency of financial markets. The late economist James Tobin, the originator of the tax, argued that speculative activity causes harmful fluctuations in financial markets. For example, pursuit of speculative gains can cause firms to increase leverage, and if a financial crisis hits it can be very disruptive to the economy when firm are forced to unwind that leverage quickly. That wouldn’t be so much of a problem if the costs fell only on those making the decision to take on so much leverage. But, unfortunately, as we have seen in this crisis, the costs can be very large and spread beyond the firms and individuals making the decision to take on so much risk. Thus, just as with pollution there are externalities — costs that fall on the innocent — and to the extent that a transactions tax forces firms to internalize the costs of their decisions, it improves rather than hinders the efficiency of financial markets.

There is one potential problem however: the ability to avoid the tax by moving activity elsewhere. But I don’t see this as a huge worry. Trading is mostly carried out on centralized exchanges, so keeping track of the transactions and taxing them isn’t that hard (the UK has had a tax on stocks for some time, and that hasn’t driven all activity elsewhere). Nevertheless, if the U.S. were to follow suit, as I think it should — it could raise hundreds of billions a year in revenue with minimal distortions — that would help to prevent evasive activity.

A financial transactions tax raises considerable revenue with minimal distortions to long-run investment activity; there’s even an argument that it improves efficiency by forcing firms to pay the full cost of their speculative activity. In addition, it helps to insulate the economy from the fallout when there is a financial crisis.

What’s not to like?

PHOTO: France’s President Nicolas Sarkozy welcomes German Chancellor Angela Merkel as she arrives for a meeting at the Elysee Palace in Paris, August 16, 2011. REUTERS/Philippe Wojazer


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Great piece Professor Thoma.

Posted by Cate_Long | Report as abusive

I don’t see how not holding entities responsible for their risk taking is “externalizing” a la pollution. A tax will only dry up liquidity in the market, and push risk taking further up the food chain making more “too big to fail” entities. And once again instead of simplifying the tax code we make it more complex making it easy for people with money to avoid many of the taxes. When are we going to get it that obfuscating confiscation is counter-productive. Call it what it is and make it easy for everyone to comply.

Posted by Byanyothername | Report as abusive

Mr. Thoma is forgetting the tiny detail that France and Germany have state-run retirement programs, not 401k or equivalent.

Thus EU governments can make populist jabs at financial markets once in a while, without actually having to know how markets work (see previously considered bans on short selling).

If a financial transaction tax were introduced in the US, it would affect institutional investors and brokers (both of which also make short-term transactions on their own behalf). Costs would not stay with them, but rather be passed on to everyone else through increased commissions and higher retirement fund costs, most likely a combination of both.

Posted by 206ter | Report as abusive

On the contrary, I think this is an excellent idea.

And to Byanyothername — before pollution laws and regulations were implemented, there was no incentive for companies to responsibly manage their pollutants. One could surmise that the fiduciary responsibility to maximize shareholder value in the time before pollution control laws and regulations were implemented actually may have prevented a company from paying extra to responsibly manage its waste, since there would have been no legal obligation to do so.

The lack of pollution regulation caused industrial pollution to be externalized. Hence, great areas of many industrialized countries became contaminated, posing a risk to citizens, wildlife, and eventually leading to huge expenditures in an attempt to clean it up.

It’s much cheaper to prevent pollution than it is to clean it up. Externalizing the cost of pollution management ultimately leads to a much higher cost than internalizing it and requiring pollution — by law — to be managed appropriately.

Posted by BNeal | Report as abusive

They should allow traders to avoid the tax if they recognize that the government will in no way, directly or indirectly, enforce the transaction with their court system, police departments or any other government agency. If they trust their counter-party sufficiently or have other means of enforcement that do not involve the government and do not violate civil or criminal law in the process, they should have no problem with a tax free purely private solution. If they would like to be able to sue someone or enforce a judgment or not be accused of theft when they transfer money from one account to another, then they should pay the transaction tax.

Posted by Kaleberg | Report as abusive

@ Byanyothername:

I don’t like paying taxes any more than anybody else but this one makes a lot of sense to me. Well explained as well.

May even save us from one or two stock market bubbles in the future (if the stock market still exists in 10 years, that is).

Posted by Rhino1 | Report as abusive

I agree. Computerized trades should pay a tax per transaction that grows exponentially with the number of trades and increase by a multipler taxes on trades that are held for shorter periods of time.

While we are solving the worlds ills with taxes I would also like to see a tax on credit default swaps, higher luxury taxes (yachts, private jets, homes over 2 million, cars over 80k) , and taxes on Hedge Funds and stricter reporting on their holdings.

These taxes with some true regulatory reform of the banking industry, a little inflation to encourage the 1 trillion in cash held by companies to be spent, and some real investment in infrastructure like mass transit, high speed rail, and high speed internet and we might actually see a recovery.

BTW I am not an economist, I just like economics.

Posted by DavidGreyStahl | Report as abusive

Without short term traders all long term traders would pay much, much more for every transaction. Spreads on stocks used to be 25 cents now many are 1 penny, and that saves a huge amount of money for all long term investors. A transaction tax would only work if every single location in the world had it (which won’t happen) and if you could magically stop someone from starting a new electronic exchange in a trade free zone. The world is electronic now, the trades will find a way around any transaction tax so it is pointless to discuss because it won’t work. The author should have researched how many times this has been tried in the past and failed, and talked to traders in England to see how they have very easy ways to avoid the tax and that is why the volume did not move. Forget about ideology, this type of tax simply won’t work in real life, it will cause millions of support people to lose jobs worldwide, and it will cause every single long term investor money in wider spreads. If you want to raise taxes then you can do so, but you need to focus on a tax that can work in reality.

Posted by basicfacts | Report as abusive

It would seem that the author has little real world experience of the financial markets. A financial transactions tax would discourage financial trading activity. This is negative for a number of reasons, the most compelling that it would discourage speculators. Speculators are important to a well functioning market economy as they provide an efficient mechanism for price discovery as well as absorbing risk in the system. It would be well worth remembering that the root cause of the financial crisis was caused by poor lending (and thus highly vulnerable and risky investment assets). If anything, speculators hasten the discovery of these poor investments by betting against them, without which the problem may have grown to an even more devastating proportion.

Discouraging speculator participation and trading would result in poorer price discovery and quality. Discouraging market participants would widen spreads of financial instruments (I know from over 20 years experience in the financial markets), make it more expensive to execute transactions and thus push more costs into the economy (let alone the fact that yet another taxation is being introduced). This has a double impact for ordinary consumers who will find that even the simplest act of buying foreign exchange for a holiday would be more expensive (for example) to the overall impact on inflation as companies pass through the higher transaction costs onto finished goods and services. This is conveniently overlooked by such supporters of a Tobin Tax.

As the previous commentator also notes that this would add complexity to the tax system and it would also encourage further taxation arbitrage. This is hardly beneficial to any economy. The author of this piece also overlooks the implementation, administration and compliance burden of implementing a financial transactions tax. The system redesign implications alone of such a tax are enormous. A Tobin tax serves no purpose in a market based economy unless you want to discourage growth and encourage inflation.

Posted by LondonObserver | Report as abusive

Outstanding explanation. Our country will need to follow this example.

Posted by Intriped | Report as abusive

This is an excellent idea and for that reason we will probably never see it here in the USA.

The Republicans will see it as burdening all their wealthy cronies and since they they are utterly opposed to raising taxes on the rich, they will fight it tooth and nail.

Posted by stanrich | Report as abusive

great invention, but can it control people population? I think the major cause the comunity consumsion which want the double digit growt.

Posted by Noah_ark | Report as abusive

This is ridiculous and illustrates the difference between academia and the real world. Speculators provide liquidity in the markets at times when there may not be enough liquidity – just like short selling does. So-called “long-term” investors still re-balance or re-allocate their portfolios from time-to-time. If we were to have only long-term investors in the market with restricted speculation and short selling it would actually make markets more volatile. Furthermore, NO tax scheme produces the revenue it is projected to produce because people don’t want to have their money confiscated. In fact, when one factors in the adverse affects of unforseen activities taken to avoid confiscation of assets most tax schemes fail miserably. That is why NO government taxation scheme – least of all those devised to control human behavior – operate in the black!

Posted by beofaction | Report as abusive

It’s a great way to help prevent addicted gamblers.

It should also include a tax based on the size of the transaction. This will prevent the big players from an unfair advantage and stop ponzi schemes cold in their tracks.

Posted by Butch_from_PA | Report as abusive

Take my complete paycheck. Please!. It is much less painful and more efficient than getting it in so many small parts that equal the whole. Just provide food, clothing and shelter please. This is called socialism but used to be called Communism…. and it didn’t work!!

Posted by IFeelYourPain | Report as abusive

Such a tax would quickly generate “exceptions” which are driven by “public policy” and which will mean that the tax will become a burden of the weak and the poor. New taxes in America always have for over 1/2 century. Part of the reason is that our Governmental system is corrupt, corrupt in that it is for sale for money. It is for sale for money going directly to the politicians who make policy. The USA is overwhelmed with high level bribery that has twisted the entire fabric of Government so badly that Government is little else but bribery, plain and simple.

So many powerful politicians owe so much to people paying bribes that change is no longer possible within the system. Instead of being a problem of the system, bribery has become the system. The Government does what it is paid to do, nothing more, nothing less. What you see is what we will have until collapse ends it.

No tax can change that.

Posted by txgadfly | Report as abusive

Less liquidity, more volatility… and not only that. The stock market is an alternative way of financing ventures, thus you will be affecting businesses finance. As it stands, borrowing already has the upper hand (you can deduct borrowing cost from your income), if you further add taxing financial transactions you will make it more lopsided for borrowing instead of IPO´s.

Not to mention this will have a horrid effect on pension funds, social security and other institutional investor with big possitions forced by law to hold.

The tax is one of the most horrible ideas in the history of bad ideas.

Posted by OrlandoGomezT | Report as abusive

One major difference between Germany and France vs. US:
Germany and France have state-funded retirement systems, whereas the US has the 401k system.

The VAST majority of trading in the US stock market is by institutional investors trading our retirement funds. After that, there are hedge funds and brokers trading in their own interest.

Any financial transaction tax would be passed on in the form of higher brokerage commissions and higher fees on retirement accounts. The buck would just get passed on to individuals without changing the behaviors of so-called “speculators”.

EU governments like to make populist shows of trying to curtail financial markets (remember proposed bans on derivatives and short selling?) in order to get votes. These don’t hold up for two seconds when you actually look at how the market works.

Posted by 206ter | Report as abusive

The first factor I think about with a transaction tax is will it have differant levels and categories.
For instance fast moving consumer goods as opposed to depreciating fixed assets. The $ figure of the transaction tax is still driven by real goods and services as a base.
Also one has to consider the velocity of money.
and in an open economy traded as opposed to non traded goods.
Would exports be taxed at source for the whole finished good or would they be exempt to some extent.
I think this type of system of a transaction tax would be more succesful in the United States of America.
By adjusting the transaction tax using it as a policy lever you will directly affect the velocity of money and prices especially with further pump priming by the FED with QE3 expected soon.
Given Americas monetary stimulus if inflation was outside the Feds target range a transaction tax could have a more even affect in cooling the economy as America has limited policy tools and inflation targeting could well become the buzz word over the next few years. America could be satified with low real economic growth, increasing monetary stimulus with the goal to try and stimulate excess capacity,not inflate and depreciate the currency to oblivion. This policy will allow restructuring to take place in the private sector.
In summary the transaction tax is a policy tool good for short term fine tuning. I think it could be very favourable in short term bursts and its affect on the economy would be good in fighting inflation while keeping key economic indicators balanced.
I would make it revenue neutral and use a Keynesian type model where fine tuning is the goal,not just to raise taxes and put in general revenue.
David Wajand

Posted by wajand96 | Report as abusive

Once again Europe boldly goes where the US & UK dare not follow.

Posted by Gillyp | Report as abusive

Please Reuters give us the ability to rate others comments!

Posted by Gillyp | Report as abusive

Would it be easier to simply repeal Gramm-Leach-Bliley and the Commodity Futures Modernization Act and reinstate Glass-Steagall? After all it worked reasonably well for close to 60 years.

Posted by borisjimbo | Report as abusive

I was taught that taxes shouldn’t be for influencing human behavior, and this one sounds like that. However, more worrying is the argument that the short term risk-taking that the tax would want to eliminate could (easily?) be done elsewhere. Apart from the tax money it brings, what’s the use then? And, if so, I think the tea party people are going to have an easy time shooting this one down.

Posted by Lambick | Report as abusive

If you follow this proposal you will see that it does not have enough support to pass in Europe, much less in the G20. It is mostly France and Germany wanting to tax the transactions in London.

On the surface the FTT looks like a harmless tax. Because, hey, lets tax “those guys”. As long as it doesn’t cost me anything, it is a good idea…yes?
However, you know what happens when you increase the cost of doing business to the banks? They pass on the cost to the consumers through added fees. This happens over and over again and then you see the bank sitting on a huge pile of cash. Wells Fargo is planning to implement a $3 a month charge to have a debit card…for example.

The average person does not realize the FTT will trickle down to them in many ways. It will directly affect their retirement funds, pension funds, and the large mutual funds in which many citizens participate, as the transaction costs will skyrocket. It could potentially increase the cost of all the goods they consume as the Futures market transactions for farm products, oil, and natural gas will all be taxed.

With the FTT, the buyer, whether it be you, your mutual fund, or your retirement account manager, of say an option for 100 shares, would be subject to this tax. The tax is on the total value of the instrument. In the case of an option to buy 100 shares, the tax is levied on the value of the 100 shares, even if you never actually own them. The same way on a Futures contract. You never actually own the product, only the contract. But the FTT taxes the entire amount value of the contract.

Do you think your pension or mutual fund, your natural gas supplier, or the supply line of gasoline and heating oil, of corn and wheat, are going to be exempt from this tax? Will they be buying, with each transaction, just 10 shares of a stock?

Will your food and energy supply line buy just 1 barrel of oil, 1 ton of corn or wheat, or 1 cubic meter of natural gas, in 1 transaction? No, they have to buy in huge volumes, and this tax will tax the entire value of that volume. That is why the financial markets are there, to serve these big buyers and sellers.

One of the proposals I saw said that retirement accounts would be exempt…the tax would be refunded AT THE END OF THE YEAR. This is not allowing those held dollars to be worked and compounded in your retirement account during the year, and is essentially a tax. This is a tax on the small guy. The real power of investing is in compounding and this FTT would strip away this ability from the small investor who manages their own funds.

The proposers of the FTT look at the number of transactions and imagine that they can tax each one, or perhaps half of them. What they don’t see is that the FTT will increase the transaction costs 10x or more, per transaction. This will simply make many of transaction deeply negative and they won’t be made, at all. As mentioned, this is going to raise the costs of business because not only will there now be a tax on the transaction, but that the cost of the transactions, at the exchange level, will go up a lot. It was only some time ago that the transaction cost for a Futures contract might be $50. Now it is about $6. It is the number of transactions that creates the low transaction costs. If you kill a large number of the transactions, if they are never transacted, the cost of the transaction will go up twice…one due to the FTT, and the other due to the higher exchange fees. Then, with a greatly reduced number of transactions, what use will the FTT be? It will have killed the golden goose that supposedly laid golden eggs. No goose, no eggs.

Whether or not you believe speculators are responsible for the final delivery price, at the least having speculators in the market reduces the cost of transactions to a very low level and thus in the end, benefit the final consumer and help the economy.

Not mentioned yet is that the exchanges could relocate to say, Hong Kong or Singapore. The Chinese would love to have our financial exchanges. The Chicago Mercantile Exchange, the large Futures exchange, could move to Asia. Why not? Already HSBC, the huge London based bank has notified the British government that it is moving its world headquarters to Hong Kong.

If by some remote chance the FTT is passed in Europe, you may likely see the London financial market simply vanish to Asia, while Germany and France watch helplessly as their beloved prey evaporates before their eyes. Do you think this will help the financial situation in England?

Financial power is already shifting to Asia, and an FTT will accelerate it. Last year Singapore put in a bid to buy the ASX, the Australian Stock Exchange. This time it was stopped, but you get the picture, yes? Perhaps in the future many of the raw products now bought and sold in the US market could be transacted in Asian exchanges. Why not?

So, think twice as to whether or not the FTT will trickle down and take money from your wallet, or erode our financial markets which are the envy of the world.
I hear a lot about investment needing to produce “social value”. However, please look around at the economy we are living in. How much of the daily work people do are actually producing social value? At the end of the day, how many people can claim that? Simply this is not the world we live in today. Even, what is social value in today’s world? We are no longer living in small tribes where we have direct benefit to others in our jobs, most of us, but in a complex society and economy. What percentage of the jobs in our economy are fluff?

If you want social value then go visit an old people’s home and hold an elder’s hand while you talk with them, cook a meal for a hungry person, hold a baby in your arms Do it directly, one on one. Don’t try to make our financial institutions do it for you.

Even our own government is hugely wasting money that “should” be going into creating “social value”. With its globalist policies, it is creating social value, but not in the USA, rather in China and India, and Asia. It is starving the social value in the USA.

Rather than feeding the government with more sources of revenue…why not reduce military spending, for example, or root out the fraud in the Medicare payments. Why not clean up our government first, before applying more taxes? Where is the social value in our massive, massive military spending Afghanistan and Iraq “investments”.

When our own democratic institutions are failing so poorly, does it not seem misplaced to put the burden of producing social value onto the financial community? It is not their job to produce social value.

If you think you can tax the big guys without it coming back on you in many hidden ways, think again. Sorry, this is how it is.

And finally, do you really want to grow the government? Do you think it is working in your favor now? Is it protecting your interest? Will giving it more money from “those guys” really help you?

Posted by xnpatagon | Report as abusive

Ordinarily speculation may serve a purpose: To rationalize capital allocation. However with the US now recklessly printing money and making it available via the Federal Reserve for speculation against both the Euro and the whole project of European unity, a transaction tax to cool off all this hot money is absolutely necessary.
That action should have been undertaken a year ago.

Posted by ChrisHerz | Report as abusive

The U.S. needs the same thing. If day traders want to exploit the market by short term buying and selling or shorting stocks, then tack a fee on those transactions. Mid and long term investing is not what is causing market volitility. It’s the one day or even one hour rising and falling of stock and commodity prices that is scaring people and businesses. The market jumps one day and then it’s “profit taking” the next day. That makes all of us regular investors and retirement account holders not in on “the game” very nervous. Tax any sale or transaction within five days of purchase at 25% of the gain and disallow any IRS deductions on any losses incurred within that five day time frame.

Posted by mikemm | Report as abusive

high speed machine trades need to be curbed and
contribute nothing to price discovery

good article….good idea

Posted by maltadefender | Report as abusive

Yes, and paying the author 10 cents per word, vice the 1 cent per word currently being paid, is worthwhile,too. It might increase the quality of thinking before penning a group think peice of “increased revenue.”

Posted by mikeinfxbg | Report as abusive

Good article and good idea, indeed. However the devil is in the details as so many thoughtful posters have stated.

With large, powerful financial institutions lobbying it is likely any law that got through would be innocuous to any but the most egregious, short-term, high velocity transactions.

As long as that was the case, the law could pass and be marginally beneficial socially, as well as to Government revenue.

Posted by LEEDAP | Report as abusive

sorry to disappoint but we have been here before. ever heard of the eurobond market. history: in the 1970s the US tried to tax international issuers of US denomintaed bonds. Easy the market moved to London and called itself the eurobond market, the biggest and most successful bond market. so sorry eu taxers and spoilsports will not work. as always the market will find a way to avoid this and good that it will. no more money to to the eu fanatics and their followers.

Posted by camdeut | Report as abusive

“The tax would discourage short-term speculative activity, but much of this activity provides little social value.”
Professor Thoma’s statement above makes an assumption that is false. You can’t draw a valid conclusion in favor of a Tobin Tax when you base it on a false assumption. The false assumption is that short-term speculative activity provides little social value.
Speculative activity of all time frames provides liquidity to markets. Liquidity is a term that is often misunderstood and the value of which is often underappreciated. Liquidity gives non-speculators, or natural users of the markets, the option of trading and laying off their inventory risks when they want to, or when they need to. Having the ability to trade when they need to lay off risk removes costly uncertainty and lowers their costs of doing business. In this way, speculative activity does, in fact, provide value to the economy.
This supposedly unnecessary financial market speculation is no different than the speculation undertaken by a Home Deport or other store that carries inventory and makes it available to potential natural users of these products when they need them. At Home Depot, I can run out and get a generator at the last moment and do not need to plan for my uncertain need in advance. Does Home Depot’s speculation in generators provide little social value since Home Depot also has no fundamental need for generators and are only speculating that someone else will soon buy them from them?

Posted by 4moderation | Report as abusive

We can’t “fix” the current American financial or political systems. They are broken beyond repair. We need to scrap them and start over. It will happen. Not this year, but within the next ten.

Posted by tmc | Report as abusive

AUG 18, 2011
7:08 AM BST
Once again Europe boldly goes where the US & UK dare not follow.
Posted by Gillyp | Report as abusive

As in the euro funny money?…strange that as I thought the main part of the problems in the 4th Reich are laid at the door of their ****** currency…

Posted by mgb500 | Report as abusive

This certainly shows that the IDEA market, at least, is way too volatile….The responses pretty much cover the spectrum from anarchy to totalitarianism, eh? Just another sub-issue of the big question of the last two hundred years: where do we want to be on the competition-to-cooperation continuum? In the US we lean, and most particularly since, say, Reagan, towards competition; the Euros, who had an extended and painful lesson in the last century (WWI, WWII) on the effects of unrestrained competition, lean towards co-operation.

The American Dream is that anybody can make it; my favorite recent exposition of this is the guy in the bar who says, “As a future lottery winner, I support tax cuts for the rich.”

In fact, the last 30 years of “Greed is good” have seen MOST people get poorer, and A FEW people get so rich they couldn’t spend the money in a thousand years — but, the Dream lives on. Maybe as a society we’re better off with more wealth inequality, but I don’t see it — I don’t see the grand gifts that the rich once made, for the sake of honor and prestige, to the community.

So the question becomes, how long and how hard can the populace be squeezed before the system goes radically unstable? I leave that question to this little community of wise persons….

Posted by acebros | Report as abusive

The HFT computer traders will be exempt as they will have market maker status for starters.
Sweden tired this and hence won’t go near it this time “Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991 the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.”

Posted by dubaidogfish | Report as abusive

A financial transaction tax is also an excellent way for the government to keep tabs on the dealings of their citizens. The ICMS financial tax in force here in Brazil until just a few years ago charged you every time you paid a bill, withdrew or transferred money. It adds up at the end of the month. Oh, I almost forgot. With the tax records being generated the government has a mirror image of all you transactions. It doesn’t even have to subpoena them. So if you think governments efficiently use the money they have now and enjoy the thought of big brother looking over your shoulder, then, by all means, support these knee-jerk measures. You deserve them.

Posted by Glennn | Report as abusive

The idea of a transactions tax, as has been mentioned by some commentators, will cause harm to financial markets and to the economy. It will reduce liquidity and will increase the cost of raising capital. Why would anyone want to do this especially in a recessionary environment?

One key effect of this proposal is to lower the already low confidence in its authors, not the naive Mr. Thoma, but the German Chancellor and the French President.

Posted by Quadrat | Report as abusive

I don’t think It would work in the US markets simply because of the facts that we rely on speculative investment for growth of a lot of trading income and portfolio returns. Its easier said then done, because the volume would come down and at the higher end people would have to move to other markets. The European system if it were to be put into action will have detrimental effects to the entire mechanism of cash management in a brokerage firm as they would have to rely on International markets where this the cause of speculation for the time being. But securities laws are similar in EU, US, but also different. The main problem they have to address is to stabilize what they broke and tell those countries to start buying. Like IRAQ, needs Aircraft from both airbus and Boeing. They need intel equipment, IT infra, Road Tech, start buying, they need education services. Chop Chop get going.

Posted by WallstreetXn | Report as abusive

any such move is nothing more than robbery perpetrated by NWO RICO organization. Do you people like being robbed again and again and again? Time to pull your heads out isn’t it?

Posted by Adom | Report as abusive

I am normally against taxes, but in this case I believe casino trading by computers is harming both the real economy and the investment community, and that a minor Tobin tax is appropriate.

A Tobin tax will have only marginal effect on the profitability of long term investors, but it will reduce computer trading and thus the volatility of the market. Today one computer provokes another computer and within seconds everybody are buying or selling.

Decreased volatility equals decreased risk, and leads to (professional) investors being able to allocate larger portions of their savings to equity investments producing a higher return in the long run (than bond investments).

High stock market volatility also makes consumers spend less money and this has a huge negative impact on business.

Finally a small tax on tradings could help finance a more powerfull FSA (Financial Securities Authority) focusing on stock market governance.

Claus Silfverberg
CEO, Danish Shareholders Association, 1995-2007
CEO, World Federation of Investors Association, 2005-2009

Posted by Silfverberg | Report as abusive

What’s the rate they are proposing? The FTT that was proposed in 1972 suggested a rate of just one half of one percent inclusive. Every financial transaction already is charged a fee to cover the operational costs of the various exchanges of .004%. This fee could easily be raised to .5% and all corporate taxes could be eliminated. Extend the financial tax to all retail financial transactions as well then all federal income taxes, state income taxes and state sales taxes could be eliminated while actually increasing federal and state revenues to eliminate deficits and reduce our national debt.

Posted by RMForbes | Report as abusive

I am surprised to see such a poorly informed and opinionated article published – is the author the self-described “comic/political activist/journalist” Mark Thomas?

Tobin’s guess that a decrease in speculative activity would decrease volatility is quoted, but the fact that most empirical evidence and most theoretical studies provide evidence that the opposite is true is ignored. One thing that is more certain is that liquidity would be dramatically reduced and transaction costs dramatically increased, which would impact the most important users of financial markets – non-financial companies that need them for trade and international business and even the individual who makes a transaction in a different currency to their own.

Posted by Elroch | Report as abusive

[…] of a Wall Street tax say that it will discourage investment, but economist Mark Thoma, who blogs daily at Economist’s View, says that the only trades affected by the tax will […]

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Posted by Are High Frequency Traders About to Destroy the City of London? | Report as abusive

[…] Thoma, on the other hand, is in favor of a Tobin tax on financial transactions (recall that the original proposal Tobin made was to smooth […]

Posted by For and Against the Tobin Tax | liamcmalloy | Report as abusive

[…] some public support for the tax, particularly in mainland Europe, but also in the UK,and there is some consensus across academics that the Tobin tax could be a useful tool, but only if it was applied […]

Posted by A European financial transaction tax | Nutmeg Blog | Report as abusive