<nettime> Paul Krugman: Taxing the Speculators ( - aka 'Tobin Tax')

["Patrice Riemens" <patrice@xs4all.nl>]

Tobin Tax redux: "First they ignore you; then they laugh at you; then they
attack you; then you win."  - Mahatma Gandhi


New York Times/ Intenl Herald Tribune, Nov 27/29, 2009.
original at: http://bit.ly/5uo46S

Taxing the Speculators
By PAUL KRUGMAN

Should we use taxes to deter financial speculation? Yes, say top British
officials, who oversee the City of London, one of the world?s two great
banking centers. Other European governments agree ? and they?re right.

Unfortunately, United States officials ? especially Timothy Geithner, the
Treasury secretary ? are dead set against the proposal. Let?s hope they
reconsider: a financial transactions tax is an idea whose time has come.

The dispute began back in August, when Adair Turner, Britain?s top
financial regulator, called for a tax on financial transactions as a way
to discourage ?socially useless? activities. Gordon Brown, the British
prime minister, picked up on his proposal, which he presented at the Group
of 20 meeting of leading economies this month.

Why is this a good idea? The Turner-Brown proposal is a modern version of
an idea originally floated in 1972 by the late James Tobin, the
Nobel-winning Yale economist. Tobin argued that currency speculation ?
money moving internationally to bet on fluctuations in exchange rates ?
was having a disruptive effect on the world economy. To reduce these
disruptions, he called for a small tax on every exchange of currencies.

Such a tax would be a trivial expense for people engaged in foreign trade
or long-term investment; but it would be a major disincentive for people
trying to make a fast buck (or euro, or yen) by outguessing the markets
over the course of a few days or weeks. It would, as Tobin said, ?throw
some sand in the well-greased wheels? of speculation.

Tobin?s idea went nowhere at the time. Later, much to his dismay, it
became a favorite hobbyhorse of the anti-globalization left. But the
Turner-Brown proposal, which would apply a ?Tobin tax? to all financial
transactions ? not just those involving foreign currency ? is very much in
Tobin?s spirit. It would be a trivial expense for long-term investors, but
it would deter much of the churning that now takes place in our
hyperactive financial markets.

This would be a bad thing if financial hyperactivity were productive. But
after the debacle of the past two years, there?s broad agreement ? I?m
tempted to say, agreement on the part of almost everyone not on the
financial industry?s payroll ? with Mr. Turner?s assertion that a lot of
what Wall Street and the City do is ?socially useless.? And a transactions
tax could generate substantial revenue, helping alleviate fears about
government deficits. What?s not to like?

The main argument made by opponents of a financial transactions tax is
that it would be unworkable, because traders would find ways to avoid it.
Some also argue that it wouldn?t do anything to deter the socially
damaging behavior that caused our current crisis. But neither claim stands
up to scrutiny.

On the claim that financial transactions can?t be taxed: modern trading is
a highly centralized affair. Take, for example, Tobin?s original proposal
to tax foreign exchange trades. How can you do this, when currency traders
are located all over the world? The answer is, while traders are all over
the place, a majority of their transactions are settled ? i.e., payment is
made ? at a single London-based institution. This centralization keeps the
cost of transactions low, which is what makes the huge volume of wheeling
and dealing possible. It also, however, makes these transactions
relatively easy to identify and tax.

What about the claim that a financial transactions tax doesn?t address the
real problem? It?s true that a transactions tax wouldn?t have stopped
lenders from making bad loans, or gullible investors from buying toxic
waste backed by those loans.

But bad investments aren?t the whole story of the crisis. What turned
those bad investments into catastrophe was the financial system?s
excessive reliance on short-term money.

As Gary Gorton and Andrew Metrick of Yale have shown, by 2007 the United
States banking system had become crucially dependent on ?repo?
transactions, in which financial institutions sell assets to investors
while promising to buy them back after a short period ? often a single
day. Losses in subprime and other assets triggered a banking crisis
because they undermined this system ? there was a ?run on repo.?

And a financial transactions tax, by discouraging reliance on
ultra-short-run financing, would have made such a run much less likely. So
contrary to what the skeptics say, such a tax would have helped prevent
the current crisis ? and could help us avoid a future replay.

Would a Tobin tax solve all our problems? Of course not. But it could be
part of the process of shrinking our bloated financial sector. On this, as
on other issues, the Obama administration needs to free its mind from Wall
Street?s thrall.


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