Tobin’s folly

The Eurozone Tobin tax announced on Tuesday by Merkel and Sarkozy is intended to reduce market volatility. It could have the opposite effect, and, if introduced in Britain, could cripple Britain’s financial sector, a new report by the Adam Smith Institute says.

Based on the example of the “pure” Tobin tax that was implemented in Sweden in the 1980s and a large number of studies looking at equity and foreign exchange markets, a clear relationship was revealed between increasing transaction costs and higher levels of volatility. Transaction volumes also decrease as business is driven to lower tax regimes. When Sweden introduced a levy of 0.5 per cent, 60 per cent of the 11 most actively traded Swedish shares and over 50 per cent of Swedish equities had moved to London by 1990. Naturally, this affected revenues. The tax raised only one thirtieth of the promised proceeds in Sweden. The UK Robin Hood Tax Campaign assumes that £20billion can be removed from the UK financial sector without causing major disruption, highlighting the campaign’s economic illiteracy.