For and Against the Tobin Tax

Barry Eichengreen doesn’t like the Tobin tax being proposed by Merkel and Sarkozy. He says:

  1. It doesn’t raise much revenue.
  2. It won’t rein in the financial sector.
  3. It will lead to banks getting bigger.
  4. And it won’t be effective anyway because financial transactions will move somewhere else.

His feeling is that the proposal is political and does not to solve the real problem which is that the large banks are too big to fail.

Mark Thoma, on the other hand, is in favor of a Tobin tax on financial transactions (recall that the original proposal Tobin made was to smooth out currency fluctuations after Bretton Woods fell apart). Thoma argues that it helps reduce the negative externality associated with speculative trading.

I fall more on the side of Thoma in this debate. I view a Tobin tax as a kind of Pigovian tax, the same as Thoma. The financial sector in the United States has increased its profits and its share of the economy not through doing what it’s supposed to be doing (matching borrowers with savers, investing in the long run growth of the economy), but by encouraging zero-sum “investing” and either taking its fees off the top or being the smart money in the trade.

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