Sunday, 8 November 2009

Hutton on Brown and Tobin Tax

There's an interesting piece by Will Hutton, writing in today's Observer, on Gordon Brown's championing of a transaction tax, or 'Tobin Tax', at the meeting on G20 finance ministers. In September, Paul Sweeney wrote on PE about German calls for a Tobin Tax.


Niall Douglas said...

I don't personally find Tobin Taxes all that progressive: a progressive tax is one which aids and helps society, and simply raising extra money for the government is not helping society, it's helping government which is not the same thing.

A FAR better way of achieving what Tobin Taxes wish to achieve is to reduce the number of large trades on *real* things such as stocks or shares to no more than one per day e.g. you could only buy or sell FCOJ (Frozen Concentrated Orange Juice) or shares in AIB at midday each day. For real things society does not need more than one trade per day - the market gets cleared and everyone is happy, particularly because temporal volatility is essentially eliminated.

However no such trading restrictions ought to exist on meta trading i.e. derivatives of real things such as futures, options and collaterised bundles etc. Those you can trade a million times a second if you so wish.

How does this help? Companies - indeed society itself - experience large costs in raising capital due to market volatility, so debt looks cheaper and certainly easier and thus we get speculative bubbles. Restricting trades to once per day fixes this. However market efficiency is unimpaired because the derivatives still allocate market potential ideally.

Most importantly of all though, now the casino is kept separate from investment. Morally this is a far better solution than a flat transaction tax which is indiscriminate and amoral.


SlĂ­ Eile said...

Check out Gordon Brown's gordian knot on a Tobin Tax in an article in today's FR:

and John Gibbon's provocative piece in the IT last week (Tax on speculative trading a great way to raise billions):

For data on the known scale of financial transactions into and out of this small isle see latest CSO estimates at

To be effective a Tobin Tax would need to be implemented together by key States globally - and the proceeds channelled into developing countries plus new green technologies. It is a goal worth struggling for even though IMF and others are against. Wonder why? A bit moral leadership from this State would help especially if we met our 0.7% aid target (Sweden was above 0.9% of GDP in 2007).

Nat O`Connor said...

To add to Niall's point: I listened to a documentary on BBC radio that described the supercomputer networks that can make up to 400,000 trades per second! In other words, they permit 'casino' traders to buy and sell and buy again in seconds. They can maximise their profits, while driving smaller operators out of business. Yet they are not doing what the market was intended to do in terms of supplying capital to businesses. It is also a far cry from shareholders taking a real interest in the companies they own.

Niall Douglas said...

Nat: Oh it goes far further than just this! Even within Neo-Classical theory there is the wonderful concept of "interdeterminacy" which is a limited conceptualisation of chaos theory.

Now according to chaos theory - and very ample empirical suppport - is that when you distend an autopoetic system, the system both remembers and reacts, and lots of little distensions are very much like biting flies: the cumulative effect is to build up an unstable internal pressure which is not obvious from the outside. If left to continue, the system will unpredictably undertake a rapid movement into a new attractor which we see as the boom & bust cycle.

If financial markets are allowed to continue to make rapid trades, that in which they trade will experience increasingly violent peturbations. I don't see much worry for this in derivatives as they are entirely reliant on their fundamentals for profit and therefore they can't wander off too far. However it is a VERY different matter for commodities and capital where volatility is not only bad for future planning, but sudden unexpected shifts literally kill people through starvation.

The purpose of civilisation is mutual protection and the succour of the unfortunate. If we fail in this, we have failed morally.