Eichengreen: Europe’s Tobin Tax Distraction

Barry Eichengreen is not a big fan of the Tobin tax, at least not for the purposes leaders in Europe have given when arguing for the policy:

Europe’s Tobin Tax Distraction, by Barry Eichengreen, Commentary, Project Syndicate: At last, European leaders have revealed their top-secret plan for solving the euro’s crisis. And it is – drum roll – a version of the “Tobin tax,” a levy on financial transactions first suggested in 1972 by the Nobel laureate economist James Tobin. ...

But how, exactly, a tax on financial transactions would help to cure Europe’s ills is unclear. According to the European Commission’s own estimates, it would raise only about €50 billion ($65.7 billion) a year, even if imposed throughout the European Union. This is a pittance compared to the eurozone’s debts and deficits, and would fall far short of funding Europe’s permanent rescue facility... Moreover, the Commission’s €50 billion estimate surely overstates the prospective receipts. ...

If the aim is to augment revenues, a Tobin tax is the wrong tool. Indeed, Tobin designed it to solve an entirely different problem: excessive volatility in currency markets. ...Tobin’s proposal sought to promote exchange-rate stability by preventing national currencies from coming under speculative attack. The irony, of course, is that eurozone members have no national currencies to attack. ...

Forgive my naiveté, but I have begun to think that politics rather than economics explains European leaders’ enthusiasm for a Tobin tax. Sarkozy can preempt a long-standing proposal of the Socialists in the run-up to this spring’s presidential election. By supporting Sarkozy, Merkel can get in return what she really wants: French support for stronger fiscal rules. And EU leaders can claim that the financial sector is being made to contribute to the costs of Europe’s financial cleanup. ...

Though no one can say for sure what Tobin would have thought of Europe’s crisis, his priority was always the pursuit of full employment. One suspects that he would have urged European policymakers to dispense with their silly fixation on a financial transactions tax and instead repair their broken banking systems and use all monetary and fiscal means at their disposal to jump-start economic growth.

I've supported this tax mainly because it helps to overcome a market failure. If it produces revenue at the same time, so much the better.