So the President Barroso of the EC has proposed a Financial Transactions (or Tobin) Tax. Bill Gates is leaning that way too.
If the arguments for and against such a tax are well known, the evidence is not.
Cue the IDS systematic review from McCulloch and Pallacio. This is the first serious review of the research literature on a Tobin Tax and tries to debunk some myths:
* Will a Tobin Tax Reduce Volatility? This was the original motive behind Tobin's proposal. But the empirical evidence suggests no decrease in volatility and in a few cases, even an increase.
* Is a Tobin Tax Workable? Although these questions are not easy, there is a large literature on these questions and the consensus is that a Tobin Tax could be successfully implemented
*How Much Money Would a Tobin Tax Collect? If a tax rate of 0.005 % was applied only to spot transactions it would raise $26 billion globally and $11 billion in the UK only
* Who Would be Affected by a Tobin Tax? Would this really soak the rich? Or would it simply be passed on to consumers? The evidence base is weakest here but the authors think a Tobin Tax would be more progressive than other forms of taxation.
The main reasons given for the UK being against the Tax are political (the French and the Germans are behind it!), economic (it will lead to the decimation of the UK financial sector because bankers will up sticks) and budgetary (what is the case for a ring-fenced tax -- although it is interesting that Barroso is not linking the Tax revenues to climate finance).
So the Tobin Tax might be a useful tool to bolster public finances, but it might not deliver much for climate or do much for price volatility.
The former is a massive challenge--how to raise funds for something that rates far down the public policy list in public opinion polls?
The latter--volatility--might be dampened by a Panic Tax, the Tobin Tax's first cousin.
The Panic Tax--also a Neil McCulloch idea although he calls it an Inductance tax--does not tax the level of financial transactions, but the speed at which they occur.
This gets at Tobin's original concern directly and deals with the dangers introduced by High Frequency Traders.
See here for the Panic tax paper.