David Coats, associate director of policy, The Work Foundation
Lord (Adair) Turner got into trouble earlier this year when he mooted the possibility of a Tobin tax—a tax on financial transactions—to put some sand in the wheels of the financial system and prevent the high-risk behaviour that helped to precipitate the financial crisis.
The argument is straightforward. If
the value of a high-risk deal depends on a tight margin then a small fiscal intervention can reduce the risk burden carried by banks and other institutions because it renders such trades much less attractive. The proposal would have looked like kite-flying had it not been for Gordon Brown's intervention at last November's G20 finance ministers' meeting, where he pinned his colours to the Tobin tax mast. Of course, it was unhelpful that US treasury secretary Tim Geithner seemed to reject the initiative, but the IMF is continuing with exploratory work and the tax is still on the international agenda—albeit looking slightly battered.
The conventional objection to such a tax is that it can work only if all G20 nations signed up to the principle. This may be true if our concern is with the global financial system, but there is no reason, for example, why the European Union couldn't act alone and there is no strong evidence to suggest that a modest tax, perhaps at 0.1 per cent, would cause a mass exodus of bankers.
Policymakers should look for a package of policies that injects more responsibility into the system: breaking up the big banks, moving to a macro-prudential model of regulation, increasing capital requirements, limiting excessive bonuses, encouraging better corporate governance and implementing a Tobin tax to restore the health of public finances. Responding to public anger requires nothing less.
Graeme Leach, chief economist and head of policy, IoD
About 10 years ago I read an article entitled "The Tobin tax: a bad idea whose time has passed". The title was correct then and it still is now. Then, the idea was being dusted down in the years following the Asia financial crisis. Now, with an even bigger crisis, it pops up again. But the motivation has changed. The original idea focused on how to reduce financial market volatility. Now the talk is of trillions of dollars globally in potential revenue—a nice little earner given the fiscal costs of the financial troubles.
All too often the motivation appears to be more emotional. Those City slickers need to feel some pain. Unfortunately, when emotion and economics intertwine, the result is seldom beneficial. Setting aside the desirability of the tax, one must ask whether or not it is feasible. The IoD is in the sceptics' camp.
If two parties to a financial contract can just as easily do the deal in the Cayman Islands as in New York or London, there is little point in US or UK policymakers imposing such a tax. The incentive for a financial centre somewhere in the world to opt out of the tax and grab the transaction business would be immense.
Nobel laureate Paul Krugman argues that a Tobin tax is feasible because while traders are located across the globe, a majority of transactions are finally settled centrally in one place. This has led US economist Gregory Mankiw to argue: "The finance industry is set up to take advantage of very small price differences. If London became ever so slightly more expensive, wouldn't contracting and settlement quickly migrate elsewhere?" It's a good question.