Dani Rodrik‘s thoughtful post on Share the World’s Resources¹ (15 September 2009) explains

“The beauty of a Tobin tax is that it would discourage short-term speculation without having much adverse effect on long-term international investment decisions. Consider, for example, a tax of 0.25 percent applied to all cross-border financial transactions. Such a tax would instantaneously kill the intra-day trading that takes place in pursuit of profit margins much smaller than this, as well as the longer-term trades designed to exploit minute differentials across markets.”

Why does he say “the beauty”? Because the type of speculation under concern can be problematic in a number of ways. He mentions the resources it consumes. There is also the notion that countries have to increase their interest rates to deal with some of the fallout from speculation activities. That can be a big problem for a country’s economy and thus the citizens that have to deal with that problem.

A Tobin tax also could raise, overall, extremely large quantities of money without causing an undue burden on those taxed. Currently, it’s that money that would get raised, which is attracting interest in the tax. The money could be used to cushion banks in the event of further economic disaster, or else be put to important use for various problems like world health or environmental improvements.

An article in The Globe and Mail² (5 February 2010) quoted French Minister of Economic Affairs, Industry and Employment, Christine Lagarde saying “I am, economically speaking, a liberally minded person – I’m not a state interventionist. . .” and yet she is in favour of the tax, recognizing the potential for raising money that world governments could use in myriad beneficial ways.

The article explains some technological hurdles, which are easy to overcome. One point it mentions is that

“The world would need to design a centralized financial clearinghouse for all transactions. As it happens, this idea is popular elsewhere, notably among governments hoping to put an end to tax havens and other tax-avoidance schemes.”

So, an unintended consequence of implementing a Tobin tax might also be to clean up tax havens. But let’s return to Flaherty and the Conservatives. On 7 November 2009, the Financial Post³ quoted him saying

“It’s one of the ideas that’s on the table, but is not particularly attractive to me as finance minister of Canada. . . We have been a government that has been reducing taxes.”

I’ve argued previously that reducing taxes in Canada has generally not been a good move, but the momentum of reduction seems to be the basis for which Flaherty doesn’t want to consider a completely different sort of tax. He doesn’t seem to care about the reasons the tax could be useful or not. According to another Globe and Mail article⁴ (19 February 2010) the Harper Conservative government stated

“Canada will not be supporting the introduction of a new global tax on financial services and urged countries instead to adopt sound regulatory practices like Canada’s. . .”

I’m not suggesting that adopting sound regulatory practices is a bad idea, it’s not, it’s a good one. Rather I’m calling into question why the Conservative government will not also consider the Tobin tax as a means for generating revenue that could be used to help it dig its way out of things like, the structural deficit it’s created? Or even further the safeties provided by sound regulatory practices.

Finally, I’d like to sum up with commentary from The Council of Canadians⁵ (22 February 2010) blog.

“At only 0.05% on top of speculative banking transactions, the Tobin Tax (named after the economist, James Tobin, who proposed it in 1972) or Robin Hood Tax (named after a new British campaign) could help all countries meet essentially all today’s pressing needs: food insecurity, climate change mitigation, underdevelopment, water pollution and lack of access to public services, etc. By the way, Harper — this tax you oppose could help mothers and children, too.”

For more information about the Tobin tax idea, take a look at the UK’s Robin Hood Tax Web site. It explains how it works, who it really affects, and why it’s needed.