Ah, here we go again with an old chestnut. It's said that there are few truly new ideas, but many that are recycled time and again. The Tobin Tax, named after a proposal of Nobel Prize in Economics winner James Tobin to tax international currency trading, has come and gone in our collective consciousness. Tobin envisioned it as a way of generating socially beneficial revenue and, by contrast, limiting trading which generated socially dubious results including destabilizing currency movements. Activists have long championed the cause of a Tobin tax for understandable reasons, though its uptake has been nil as it would require agreement of all the governments of money center countries. Its prospects have always been dim.It is thus with some interest that I read that Lord Turner of the Financial Services Authority, Blighty's watchdog, has once more raised the specter of a Tobin tax in the pages of a popular newsmagazine for largely the same reasons Tobin proposed it 38 years ago when major economies abandoned the dollar-gold standard: the spread of financialization is rather unproductive and socially negative. From the FT:
The head of Britain’s top banking watchdog supports the idea of new global taxes on financial transactions, warning that a “swollen” financial sector paying excessive salaries has grown too big for society.OK, I do not necessarily have qualms here. Note also that the emphasis has shifted from just FX transactions in the wake of the dollar-gold standard's demise to a broader range of deals. For obvious reasons, the Asian financial crisis prompted more dead-on calls to limit short-term speculative currency flows whereas this one is wider-ranging. However, those working in the City and the government minders in Treasury seem to have other ideas--especially the future of London. The main point of dispute concerns visions of Britain's future: is rolling back the frontiers of finance desirable, or should trends continue of a financial sector occupying a larger and larger share of economic activity?
Adair Turner, chairman of the Financial Services Authority, says the debate on bankers’ bonuses has become a “populist diversion” and that more drastic measures may be needed to cut the financial sector down to size. He also says the FSA should “be very, very wary of seeing the competitiveness of London as a major aim”, claiming the city’s financial sector has become a destabilising factor in the British economy.
His comments, floated in an interview in Prospect magazine published on Thursday, may be read in other financial centres, including New York, as a sign that Britain is becoming increasingly sceptical about the perceived advantages of being a leading financial centre.
Lord Turner’s suggestion that a “Tobin tax” – named after the economist James Tobin – should be considered for financial transactions is also likely to reverberate around the world. The proposed tax, which has previously been championed by development economists and the French government as a means of funding the developing world, has been fiercely opposed by the finance industry.
Lord Turner appears worried about a return to “business as usual” in the banking sector, suggesting that new taxes may be necessary to curb excessive profits and pay in the financial sector. “If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit,” he says.
Lord Turner says higher capital requirements [reserve requirements] will be the FSA’s main tool to eliminate excessive activity and profit, but that a tax on transactions on a global level may be an additional option.
Aides to Alistair Darling, chancellor, said no such taxes were under consideration. Mr Darling insists that the banking industry in London should continue to play a leading role in global finance...Interesting stuff. The French and Turner are well-meaning if I do not necessarily expect much to come out of this latest episode. Moreover, Darling and Co. are on a weaker footing: why should London be uniquely disadvantaged if--and this is a big if--everyone else agrees to such a tax?
“This isn’t on the table,” said one government official. “If Adair Turner has views on tax policy, perhaps he should go and work in the Treasury...” [Turner] argues that parts of the financial industry have grown “beyond a socially reasonable size” and that London’s competitive position should not be defended at any cost.
To illustrate his point he looks at growth in the share of gross domestic product made up of wholesale financial services and considers “what percentage of highly intelligent people from our best universities went into financial services”...
Lord Turner’s suggestion of a Tobin tax to rein in excessive profits may turn out to be about as successful as Mr Chirac’s failed initiative. The FSA chairman admits that a global agreement would be “very difficult to achieve”. But his stark warning illustrates a wider fear among some regulators that the easing of the financial crisis has bred complacency and that tough measures still need to be implemented.
UPDATE: Unsurprisingly, misinterpretations of Turner are rife. a global Tobin tax wouldn't single London out for ill fortune as it would impose a similar burden, um, globally. Why London's mayor among others isn't more careful in interpreting what Turner said demonstrates unwillingness to listen. Alike so many other public issues, the quality of the debate is simply appalling.
