What is a Tobin Tax?

Dr Rowan Williams has made his first substantial response to the protest at St Paul's Cathedral

The Archbishop of Canterbury, Dr Rowan Williams, has backed calls for a tax on financial transactions, the so-called Tobin tax.

In a BBC interview, he acknowledged that there are counter-arguments, but said "where you have a scheme backed by a lot of very serious economists, by people who can't just be written off as knee-jerk anti-capitalists, the likes of George Soros and Bill Gates, there has to be be something to be said for it."

The idea of some sort of tax on financial transactions has acquired some momentum recently in the wake of the financial crisis, but it has quite a long history.

Often called a Tobin tax, the Tobin in question is the late James Tobin, the Nobel prize winning American economist.

In 1972 he proposed a tax on currency market transactions. His concern was rapid international financial flows, putting constraints on the ability of governments and central banks to pursue the right policies for their national economies.

Exchange rate speculation, he wrote (in 1978), "can frequently have serious and painful real internal economic consequences".

To limit the problem and restore some of the autonomy to governments, he said, "we need to throw some sand in the well-greased wheels" (of the foreign exchange markets). In other words, raising the cost of currency transaction would reduce their volume and destabilising effects.

Robin Hood

Current proposals for a Tobin tax have a wider range of transactions in their sights. They are not confined to the currency markets. They generally include trading in shares, bonds and derivatives.

Activists in France calling for a Tobin, or Robin Hood, tax to be introduced Many campaigners prefer to call the proposal a Robin Hood tax

They also have additional objectives, although all would presumably have some impact on the volume of financial trading.

The European Commission for example has proposed one for the EU. It would the Commission says, discourage risky and unproductive trading - a sand in the wheels type of effect.

But it also argues that it would enable the financial sector to make what the Commission calls a fair contribution to the consolidation of government budgets taking place across Europe.

For development lobby groups, there is another objective - raising money for aid. Hence the other name given to the idea: a "Robin Hood tax".

Oxfam reckons a tax of 0.05% could raise up to $400bn (£300bn). That is almost ten times the group's figure for the cost of meeting the Millennium Development Goals, United Nations targets for tackling poverty and related problems.

There is a lot of political support for some sort of tax in continental Europe. There is, however, a lot of resistance in Britain and the United States.

But the German finance minister, Wolfgang Schaeuble has suggested it could go ahead in just the eurozone. So watch this space.

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