An alternative to a Tobin tax
The most efficient taxes are those which are imposed on payers who are not mobile enough to avoid the tax. Capital and rich people are more mobile than land, housing and poor people, which is why high marginal tax rates on capital and the rich are self-defeating, but taxes on consumer purchases (VAT), labour incomes (NIC and PAYE) and housing (stamp duties) are efficient. Foreign exchange operations can be easily done, and/or booked, anywhere in the world. Quite why radical and consumer groups go on backing the Tobin tax idea, rather than, for example, the much more promising (Henry George) land tax proposals has always surprised me.
But beyond that the Tobin tax is a bad idea, since it would greatly increase both the costs and volatility of foreign exchange dealing, and throw a huge spanner into the workings of the global financial economic system. The proponents of the Tobin tax mistake the fact that commercial end-use of foreign exchange (fx) dealing is not more than about 10%, at most, of the total of fx transactions into a belief that the other 90% is a form of ‘socially useless’ speculative froth, which could, and should, decline without real loss. This latter viewpoint is just wrong. Taking an unhedged, open fx position is risky, and, hence, bank market makers are not allowed to do so, beyond limits. So any new commercial order unbalances a market maker’s initial position, almost forcing him to rebalance by trading out of his new position with another market maker. The ‘hot potato’ will pass from hand to hand until prices and quantities eventually adjust to a new equilibrium.
Essentially a Tobin tax imposes much greater costs on that adjustment process, even it seems proportionately low, because the margins on which the market makers are operating are low. Because the costs of transacting out of an unbalanced position would rise sharply, the bid-ask spread on fx deals would rise considerably, liquidity would disappear and fx volatility would be enhanced. Counter-intuitively the introduction of a Tobin tax would probably raise the ratio of purely speculative to commercial operations in these markets.
Let me suggest a much better alternative, a tiny tax imposed on every individual addressee in an internet message, payable by the sender, and collected by the server from the sender, (the server would be recompensed for its costs in operating as a tax collector). What are the advantages? First, it would kill spam. Second, it would make senders think who really needs to receive the message. Third, the internet, being so much cheaper than any other current message service, would remain the preferred channel of communication, so the tax base would be immobile. Fourth, and most important, it would be a significant source of revenue.
Spam really is socially useless. Market making in fx has a social use. Let us tax the first, and not the second. Whenever a well-meaning, but misguided, do-gooder suggests adopting a Tobin tax on fx transactions, trump that by proposing instead a Goodhart tax on each e-mail addressee. We might even win.