Huffpost UK Politics uk
The Blog

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

European Parliament Web Team Headshot

Tobin or Not to Be

Posted: Updated:

Although taxes are inevitably taxing, a proposal for a minimum rate of 0.1% set for shares and bonds and of 0.01% for derivatives in Europe has led to a fierce debate about what should be done to discourage reckless speculation. Supporters of a financial transaction tax claim it could boost the EU's economy by up to €57 billion, however critics warn it will simply lead to traders taking their business elsewhere.

2012-02-28-money.jpg

When the global economy hit the skids in 2008, the volatility of the financial sector was quickly fingered by some as one of the main culprits as the pursuit of short-term gains can be at the expense of long-term stability. In the US a housing bubble was created because banks sold too many mortgages to people with no realistic chance of ever repaying them.

This is why the majority of MEPs revived an old idea for discouraging reckless speculation. They have been pushing the European Commission to come up with a proposal for a European financial transaction tax. It has been inspired by the so-called Tobin tax, which was first pitched in the 1970s. Economist James Tobin originally conceived of it as a levy on currency exchange small enough to not disrupt the economy but sufficient to dissuade speculators from investing in foreign exchange on a short-term basis. The result would have been less exchange rate volatility.

The idea of a small tax to discourage speculators quickly caught the imagination. Unlike investment which has the potential to benefit others by coming up with better, cheaper or safer ways to do things, speculation can only bring advantages to the speculator and disadvantages to the economy as a whole as it can threaten the stability of the financial system. Or to put it in baking terms, investment will leads to a larger pie for all, while speculation can lead to speculators having a larger slice of the same pie with a risk that the pie will be ruined for all. However, making this tax work is a whole different matter. Even Mr Tobin himself cast doubt on the feasibility of his proposed tax.

A case in point is Sweden, which introduced financial transaction taxes in the 1980s. The Scandinavian country found that trading volumes dropped significantly and they would not recover until the taxes had been scrapped. Opponents of Tobin-like taxes say they will not be effective unless they are implemented on a global scale as speculators will avoid the tax by simply doing their trade in another country.

Most MEPs have argued that the EU, being the largest common market in the world, would be large enough to make introducing a financial transaction tax based on the Tobin tax a success. Last year the European Parliament adopted a resolution stating: "EU should promote the introduction of a financial transaction tax at global level, failing which, the EU should implement a financial transaction tax at European level as a first step." Supporters of the tax say that once countries see that the tax works in the EU, they are likely to adopt the tax themselves. The same resolution also urged the Commission to produce a feasibility study on this. The impact assessment which the Commission then produced opted in favour of introducing an EU-wide financial transaction tax along with its legislative proposal. In case there is no unanimity on this among member states, then those who are interested could still go ahead through the enhanced cooperation rules.

Under the proposal there would be a minimum rate of 0.1% set for shares and bonds and of 0.01% for derivatives. The benefits of the tax are potentially very significant. According to a recent study and the revised impact assessment of the Commission, it could boost EU growth by 0.25% if implemented at EU level. But critics warn it could less to less growth as traders take their business elsewhere.

Tomorrow the European Parliament's economic and monetary affairs committee will discuss the Commission's proposal and possible amendments to it. A lot remains to be discussed, such as how the revenues should be used.

Of course the debate is far from over. Even among MEPs there is a lot of disagreement about how the tax should work or even if there should such a tax at all. However, at a time of economic turbulence, it doesn't hurt to have a fresh look at an old idea.