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The odd lure of the Tobin tax

       
James Tobin

"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. Tobin's tax would provoke unintended and harmful consequences. It should be put back in the old filing cabinet from which it has recently been withdrawn.


For all that, with calls for greater regulation of flows of funds that are part of the response to the terrorist attacks on the US, the Tobin tax is being seen in some circles as an effective part of the arsenal of control.



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