The odd lure of the Tobin tax

“For every complicated problem,” the American journalist HL Mencken wrote, “there is a solution that is short, simple – and wrong.” The foreign exchange market’s view of the much-mocked, formerly dismissed but now resurrected Tobin tax follows the Mencken line. The idea of a tax on foreign exchange transactions is misconceived, most commentators and market participants agree.

Such a tax cannot work in practice, critics argue. Indeed, as a distorting intervention in the marketplace it would actually damage the functioning of foreign exchange markets, and make any perceived problems – of speculation and volatility – worse.