Biting back

It may not be the most pressing issue European leaders should focus on at the moment. But the idea of a financial transactions tax, long favoured by the leftist anti-globalisation brigade, is back. Some world leaders see it as a rational way to correct the most hysterical aspects of markets’ ebullience. Jose Manuel Barroso, the European Commission president, has made it a central plank of his agenda for the coming year. The driving forces behind the push, however, are Germany and France.

The original intention behind the so-called Tobin tax, named after the economist who suggested it in the 1970s, was to slow down foreign exchange markets in order to dampen major, disruptive capital movements.

The clearest case for implementing it today is that it would notably hit high-frequency traders, limiting their activity and the snow-balling impact they have in times of high volatility.

Taxes are usually created for three reasons: to raise revenue for states; to modify consumers or businesses’ behaviour; and, or, to penalise and punish. It would be better if the latter justification wasn’t at the core of Barroso’s rationale. There’s no sense in insisting on making the tax a payback for a financial sector that received trillions of euros of public support. But as long as the tax remains at a low rate on a broad base, like good taxes should be, the case to use it to throw sands in the wheels of markets stands on its own.

Questions of tax avoidance, or evasion, are harder to answer. The UK so far is opposed to the idea, which will make it difficult to implement EU-wide. The US isn’t keen on the concept either. Fears of a financial exodus to tax-free heavens are gripping the City of London. And devils may certainly hide in the details.

But there are also reasons to challenge the conventional wisdom that countries that implement a Tobin tax will suffer. Governments can always threaten to use powerful tools at a later stage to convince investors that a relatively moderate tax now is a small price to pay for long-term peace of mind.