Like many apparently simple solutions to massive worldwide problems, the Tobin Tax idea is flawed in a simple but fundamental way.

The theory behind the Tobin Tax is to tax speculation -- that is, financial trickery in which the profit comes not from investment in useful activity (which most people agree is good and, in general, makes people's lives better) but from taking advantage of minute changes in the price of a given commodity whose price changes often. If you're a speculator, you're just in it for the quick buck.

Currency speculation is an especially unhelpful form of the practice because it has nothing whatsoever to do with production -- on actually making stuff that improves people's lives. In fact, it just piggybacks on other people's productive activities and weighs them down a little bit.

Currency speculation is attractive because, if you're good at it, you can make an enormous profit very quickly with minimal effort and negligible loss of liquidity.

The very nastiest form of currency speculation is "arbitrage," in which a speculator buys a currency on one market and then electronically whips over to another market where its going rate is slightly higher and sells it immediately. Generally, this means taking it across a national border.

OK. Here's where the Tobin Tax kicks in. As James Tobin, a Yale professor who won a Nobel Prize in economics for his work in describing the behaviour of financial markets, proposed in 1978, the Tobin Tax would slap a levy of a fraction of one per cent on currency transactions that crossed borders.

Given the truly massive amount of money that crosses borders every day, the Tobin Tax would supposedly raise something like $300 billion US a year, depending on the rate at which it was set.

Its appeal, in many people's minds, is twofold:

  1. It taxes something only fancy-pants money managers do -- it wouldn't affect you and me, who maybe own a bit of a mutual fund or something, but don't have arbitrageurs working to increase our billions.
  2. It would raise a very large amount of money practically out of thin air.

The problem, however, is that you can't yank $300 billion US a year out of the world economy and divert it for political purposes, however noble they might be, without people noticing that their money's not there anymore. The profit margin on most arbitrage transactions is profoundly minute. If you buy one unit of some currency for $0.0067 US and sell it across the world for $0.0068 the next minute and somebody taxes you 0.1 per cent to do it, suddenly it's not worth doing anymore.

Stopping that kind of trading might well be a valid public-policy goal. But best not to pretend you're going to raise money for the world's poor with a tax that kiboshes the activity it taxes.

What the tax would affect is international financial exchanges with slightly larger profit margins -- like, for example, the activities of the people who manage your (or your parents') retirement fund, if it includes a handful of Asian stocks that have to be bought in yen or baht or something.

The fabulously wealthy would find some other, microscopically less profitable, way to speculate, the middle-class's retirement funds would be hit, and the tax would raise some tiny fraction of the money it promised to.