The Tobin Tax Gains Momentum
Various proposals for a Tobin tax have received renewed media attention in recent months. President Obama gave indirect support for the tax in a Press briefing on July 22, when he
recommended that the government consider new fees on financial companies pursuing "far out transactions . UK Prime Minister Gordon Brown, who has resisted pushes for a Tobin tax in the past, said at the G20 meeting in Scotland on November 7 that a tax on financial trading could prevent excessive risk-taking and fund future bank rescues. It "cannot be acceptable, he said, that banks enjoy the rewards of their successful trades yet leave taxpayers to pick up the cost of their failures. Governments spent more than $500 billion in the past year bailing out banks. U.S. Treasury Secretary Tim Geithner opposed the tax, but the fact that it was being seriously considered was a major development. The French finance minister said, "It's not so exotic and it even seems reasonable.
In the U.S., a bill called "Let Wall Street Pay for Wall Street's Bailout Act of 2009 , proposing to tax short-term speculation in certain securities, was introduced by Rep. Peter DeFazio (D-OR) last February; and a different bill to regulate derivative trades was approved by the Financial Services Committee in October. Derivatives are essentially bets on whether the value of currencies, commodities, stocks, government bonds or virtually any other product will go up or down. Derivative bets can cause shifts in overall market size reaching $40 trillion in a single day. Just how destabilizing short-term speculation can be -- and just how lucrative a tax on it could be -- is evident from the mind-boggling size of the market. The Bank for International Settlements estimates that in 2008, annual trading in over-the-counter derivatives amounted to $743 trillion globally " more than ten times the gross domestic product of all the nations of the world combined. Another arresting fact is that just five super-rich commercial banks control 97% of the U.S. derivatives market: JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.
Promoters of international development have suggested that a mere .005% tax could raise between $30 billion and $60 billion per year, enough for the G7 countries to double international aid. Other proponents favor the larger 1% tax originally proposed by James Tobin. The much-needed income from a U.S. tax could be split between federal and state governments.
Pros and Cons
Opponents of the tax, led by the financial sector, argue that it would kill bank jobs, reduce liquidity, and drive business offshore. Supporters respond that Tobin tax profits could be used to create new jobs, and that while the speculative market would shrink, the small size of the tax would hardly affect overall cash flows. More than raising money, the tax could be an effective tool for discouraging short-term traders, who often make money on very small margins. Dani Rodrik, Professor of Political Science at Harvard, writes:
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