The name is absent

V. International Financial Transactions
as a Global Tax Base

Tobin (1978) proposed a tax on foreign currency transactions and revived the idea in
the early 1990s (Tobin, 1991). This year, as world financial markets experienced a marked
volatility, the "Tobin tax" has reemerged. It has been debated by, for example, Eichengreen,
Tobin and Wyplosz (1995), Garber and Taylor (1995), Greenaway (1995), and Kenen (1995)
in one volume of the Economic Journal, while Shome and Stotsky ( 1995) have also attempted
to weigh its pros and cons as an instrument for reduction in the volatility in world financial
markets. This seminar is, again, a forum to exhaustively reconsider the tax in the light of its
potential as a revenue generator and the concomitant attractiveness that is entailed in the
possible use of the revenue for achieving global equity objectives, an idea that has recently
gained currency. This section attempts to summarise the main issues in this debate while
cautioning against selected possible difficulties with the tax.

1. Efficiency issues

A financial transactions tax may assume various forms. In a domestic context, it is
usually an excise levied on transactions in financial assets, including stocks, bonds, futures,
options, and other derivative instruments. In an international context, it could be conceived
as an excise levied on transactions involving currency conversions (for transactions in
financial assets, goods, and services).

It is feared that a financial transactions tax may carry significant efficiency costs
(Hubbard, 1993, Schwert and Seguin, 1993, Hakkio, 1994). International financial markets
are usually characterised by low transactions costs and limit the incentive of investors to hold
on to financial assets. A tax would impose a cost on this market, affect trading patterns,
increase the cost of capital, necessitate higher before-tax rates of return, and possibly affect
capital formation and growth. Application of the tax to selected assets would result in
unwarranted resource reallocation. If, however, the tax applied to all currencies, traders
would shift into vehicle currencies to minimise currency conversions.

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