The Financial Times reports that the chief financial regulator in the UK has endorsed a “Tobin tax” on financial transactions.* With Sarkozy already on board, this might pave the way for coordinated movement by the governments of all the big financial centers; otherwise, anyone who imposes such a tax risks simply chasing transactions abroad. From both an equity perspective and an efficiency perspective, a transactions tax would be hard to beat, and the potential revenues are huge.
In the struggle to rein in income inequality and adequately fund public services, a transactionsn tax would be an enormous win. At the same time, there seems to be consensus among governments about cracking down on tax evasion and the banking havens that facilitate it. One argument against taxing the rich has been that capital mobility and the ease of evasion makes doing it virtually impossible. But if the U.S. and the EU can get together, that may cease to be possible.
We may get to see what Larry Summers and Tim Geithner are really made of.
* Megan McArdle points out that the label “Tobin tax,” used loosely in the article, properly applies to a tax on currency transactions. But many of the same arguments apply to securities transactions. I’m less clear on how they would work with loans, derivatives, etc.