Monday, October 5, 2009

More on the Tobin Tax

. Monday, October 5, 2009

One of the bloggers at From Davos to Seattle thought I was too harsh on the Tobin Tax last week:

[W]hile the Tobin Tax is certainly not ‘the answer’, it might well be an answer. At the least, it has the potential to become a progressive and effective tool in global economic governance. The strange thing is that however much it might irk the city and financial institutions, the Tobin Tax is an idea that never quite seems to go away. Its simplicity and elegance, together with the fact that it’s not a tax that (directly) impacts much on the ordinary citizen make it perennially popular. One gets the feeling that however much structural power is wielded by those who stand to lose by it, every idea that manages to be both good and popular at the same time will have its time come eventually.

More specifically, the post argues that it doesn't matter if the two given goals of the Tobin tax are in contention (as I claimed), because the primary point is to limit hot money flows in and out of the developing world. Any revenue raised by the tax would be a nice bonus, especially if that cash is given to an international organization for global redistribution (potentially making it a progressive, not regressive, tax), but is not required.

Last part first: no way is that going to happen. Developed countries aren't even living up to their Millenium Development aid promises, and sovereign debt has exploded since the onset of the financial crisis and ensuing recession. These governments are not going to agree to tax investment into their countries and then redistribute the proceeds to poorer countries.

More importantly, if we want to limit hot money flows (and esp. mitigate their negative consequences, like pressures on exchange rates), aren't there ways of doing that more directly? We could institute capital "curfews" that prevent investors from pulling money out of a country during a panic. Indeed, this was advocated during the Asian financial crisis, put in place in Malaysia, and is now part of the IMF's program. Or we could require minimum investment periods upfront as a condition of large financial investment in LDCs, so investors know they cannot prematurely withdraw their funds without steep penalties. All capital controls have their downsides, but at least these would be attacking the problem directly.

Not that that has much of anything to do with our current crisis and recovery. Even proponents of the Tobin tax (like Rodrik) do not imagine that a Tobin tax would have made our present circumstance less dire. Neither would a Tobin tax actually protect countries from exchange rate pressures from capital flight unless it was very large.

So what's the point? What can a Tobin tax do that other, more direct, capital controls cannot do? Perhaps it is more politically palatable than stricter capital controls, but given that the Tobin tax has yet to be tried despite its "simplicity and elegance" (I thought those were derogatory words in economics these days?), that argument doesn't persuade me either. I just don't see the value-added of a Tobin tax relative to the policy options already in our toolkit.


More on the Tobin Tax




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