Krugman on the Tobin Tax

28 11 2009

The Nobel Laureate economist Paul Krugman has come out in favour of imposing a small tax on each financial transaction. The tax, which would be a small fraction on one percent of the value of each transaction, would have a trivial impact on long-term investment but would discourage short-term speculation on the price of stocks, currencies, and other assets.  Krugman’s proposal has been inspired by the work of the deceased economist James Tobin and by Gordon Brown, who recently mused that a Tobin Tax would be a good idea. CNBC’s Jim Cramer, who is neither a Nobel Laureate nor a world statesman, has also endorsed a sort of Tobin Tax.

I suspect that if all of the world’s actual and potential financial centres implemented such a tax, large financial institutions would have no choice but to pay. But   what if one or two countries refused to implement this tax? Wouldn’t currency speculators move to that country?  Financial services are highly mobile. After all, the SarbOx legislation in the US caused much business to shift from Wall Street to the City of London.

Toronto's Financial District Today

It seems to me that if the other Western countries implemented a Tobin Tax, there would be a golden opportunity to make Toronto a global financial centre. The Canadian government could simply announce that is had no intention of imposing a Tobin Tax.

For more on this issue see here, here, and here.