Lord Turner, chairman of the UK’s Financial Services Authority, has set the cat among the financial pigeons by making highly critical comments about the City of London and financial intermediation in general. He recommended some drastic remedies, and suggested considering a global tax on financial transactions – a generalised Tobin tax. James Tobin proposed a tax on foreign exchange transactions to stabilise floating exchange rates and achieve greater national monetary policy autonomy in a world of increasing financial integration.
The Tobin tax was never implemented, which is just as well from the perspective of its declared objectives: it could have increased exchange rate instability and was unlikely materially to enhance national monetary policy autonomy. From a political perspective, it may be more surprising that it was never implemented. Even at a very low rate, the Tobin tax could have been a massive government revenue raiser. Distortionary taxes that raise large revenues, including transaction taxes on financial and real assets – such as the UK’s stamp duty on property – are, after all, a common feature of the political landscape.
What problem would a Tobin tax on financial transactions solve? Lord Turner asserts, in an interview with Prospect magazine, that the UK financial sector has grown too big; that some financial sector activity is worthless from a social perspective; that the sector is destabilising the British economy; and that new taxes may be required to curb excessive profits and pay in the sector. “If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit,” he says. Even if all these assertions are correct, they do not imply the need for a Tobin tax.