First published: Prospect, 02/09/2009
FSA chief Adair Turner’s willingness to consider taxes on financial transactions, or a Tobin tax, to rein in the financial services industry has provoked a furore.
Much of the debate has, naturally, surrounded pay and bonuses. But to focus on compensation is to miss the bigger picture about how to control credit booms and finance in the first place. Turner is well aware of this. When he referred to possible Tobin taxes, he did so before saying “if increased capital requirements” are insufficient. Moreover, his comments came in the context of a longer debate about the excessive growth and size of the financial sector in general. Put another way, regulatory reform is essential for a more stable and orderly financial system in which discipline is restored. And in finance, size really does matter—but I would argue that the size of financial entities is more important for stability, profits and compensation than the size of the financial sector in principle.
If a Tobin-type tax were introduced, where would the authorities apply it? On foreign exchange trades, credit derivative exposure, leveraged lending, or particular types of asset-backed products? It beggars belief to imagine that this would subdue the financial industry. Resources would simply be switched to non-taxed products and services, taxed activities that were profitable would be moved to other locations, and clients would …more