With federal budget deficits soaring all over the world, policy makers are looking at every opportunity to find new sources of revenue. After the bailouts of the financial sector and public backlash against announcements of large profits and bonuses by banks, a financial transactions tax appears to be a popular proposal both in the U.S. and abroad to "recoup" costs from the financial services industry. But is it really a good idea?
Following James Tobin’s original proposal, governments would place a small tax on financial transactions to discourage speculators (who trade frequently) without putting an undue burden on investors who buy for the long haul. Such a national transaction tax, at a rate of 0.1% to 0.25% of the value of the trade, would be levied on all financial transactions such as stock trades, but not on consumer transactions like credit cards. Advocates in the U.S. argue that it would raise $100 billion to $150 billion a year. Many economists – including prominent figures like Paul Krugman, Joseph Stiglitz, and Jeffrey Sachs – have backed the tax.