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Tobin tax transactions dying a slow death

09 November, 2009

The original proposal for the Tobin tax rate was 1%, which was subsequently lowered to between 0.1% and 0.25%. It was named after the economist James Tobin, and was intended to put a penalty on short-term speculation in currencies.

According to the latest news reports PM Gordon Brown’s proposal of this being the right way to tax banks is now dying a slow death and looks quite remote after international leaders failed to support the idea at the G20 meeting. US Treasury secretary Timothy Geithner, and head of the International Monetary Fund Dominique Strauss-Kahn, voiced their doubts and opposed the suggestion - along with many other senior members.

Brown does seem to have received support from George Soros who agreed that some sort of transaction tax was principally a good idea.

It has been quite clearly stated that banks cannot assume that trust will return without significant change, and now other ways of their misusing taxpayer’s money must be considered. Making banks pay insurance fees related to risk is a promising suggestion.
There are two suggestions being examined at the moment, one being that the banks who are posing the bigger risk to the system should hold fatter capital and liquidity cushions, also known as a to-big-to-fail tax. 

The second one will focus on banks with short-term wholesale funding, which are more risky than those with long-term money. Therefore the more the bank relies on this sort of money, the higher the insurance premium would be paid to the central bank.This sort of hot-money tax would be seen as an incentive for banks to secure stable sources of funding and if the central bank were concerned that a bubble was inflating, the fee could be increased and thereby help deflate it. This would also help create a holding fund to fall back on instead of a burden to the taxpayer.

It has also been suggested that there is no real need to select one or the other,  and that both systems could be used.

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