Tobin Tax would hurt poor countries

By Alex Singleton | 18 January 2005

The Tobin Tax, heavily advocated just a few years ago, seems like a pretty dead idea. The tax is named after its inventor, Nobel prizewinner James Tobin, who argued that currency markets should have a tax on each transaction to help fight world poverty.

The Tobin Tax gets much of its appeal from the fact that few understand how financial markets work. People imagine that financial markets have no socially useful role, and are a way of redistributing from poor to rich. Therefore if the money being traded on currency markets can be confiscated and given to poor countries, then great.

Perhaps the most emotive word in the world of financial markets is "speculator". After all, the UK government lost billions of pounds of currency reserves in 1992 to currency speculators, most notably George Soros. We should not blame speculators for this, but politicians. To give an analogy, if you throw dollar bills out of a hot air baloon, do not be surprised if the people on the ground below try and catch them. A speculator's role is merely an insurer. He takes risk away from those who cannot cope with that risk. His work helps trade to occur.

Paul Staines wrote a blog on Samizdata back in 2002, talking about an event he attended discussing the tax. He points out that not only are the tax's proponents confused about the figures they use, the tax's effect - far from helping - would actually hurt poor countries. It would be a regressive tax on their exports.