Taxing times for Sarkozy

France's planned introduction of a "Tobin tax" has broken a practical taboo, but will it help or hamper economic growth, asks Jason Walsh.

Speaking on television on Sunday night, French president Nicolas Sarkozy announced plans to introduce a tax on financial transactions.

The 0.1 per cent levy, often referred to as a Robin Hood tax or Tobin tax after economist James Tobin, will be introduced in August as part of a package of measures, including hikes in VAT, the president says will promote economic growth and job creation.

It would be easy to dismiss Mr Sarkozy's move as nothing more than naked electioneering. Indeed there is much to commend such a view, but the move is more than just smoke and mirrors, even if it is gesture politics.

The idea of a tax on financial transactions is simple: supposedly it will take from the rich to give to the poor, hence the cute Robin Hood monicker.

Mr Sarkozy says the implementation of the tax, first proposed by Mr Tobin in 1972, will "create a shockwave and set an example" to other EU nations. It may well do.

Nevertheless, the French president is not quite the maverick trailblazer he claims to be. German chancellor Angela Merkel has previously expressed support for the idea, as have Joseph Stiglitz, noted economist and adviser to former US president Bill Clinton, former British prime minister Gordon Brown and EU commissioner Michel Barnier, to name but four. In fact, it is hard to find any senior political figure who is actually against a tax on financial transactions. True, Britain's prime minister David Cameron is strongly against imposing one, but the main complaint political leaders make about Tobin taxes are that they are fine in principle but cannot be imposed unilaterally without driving the financial services industry to leave the country en masse.

Clearly this is bunk and any blood and thunder proclamations of impending doom from bankers should be treated with some scepticism. That doesn't mean a Tobin tax is necessarily a good idea, though.

The idea isn't really to generate revenue from the tax, so much as to curb financial transactions by dissuading speculators from making short term investments (in the original conception Tobin taxes were aimed particularly in the foreign exchange market, a fact which goes some way toward explaining British reluctance: much of the City of London's business is actually transacted in euros). This is all predicated on a view of the world economy as a giant casino in which fortunes, often borrowed, are won and lost in a zero sum game. This may be a popular view today, but it obscures as much as it illuminates.

We are all now familiar with the concept of the real economy and how it has become disconnected from the high-flying world of finance, but we are still paying little more than lip service to the idea that investment exists to provide funding to the real economy.

Real growth requires not a curbing of financial services, but a recouping of investment to industry, something the tax is neither capable of doing, nor was it designed to do.

For those who say the tax is only fair given the various bailouts and nationalisations of banks — effectively the socialisation of private debt — the fact remains that bailing out bankrupt banks was a political choice and a Tobin tax will do nothing to address this or the consequent, also political, austerity programme being pushed across Europe. Mr Sarkozy claims the money will be used for social protection, but quite why anyone in Europe, where raised taxes are being used to pay down debt, believes the revenue from this tax will actually be used to help the poor has not been sufficiently explained. Far from being a move toward economic fairness, Mr Sarkozy's move is very much in line with the austerity agenda.

Image by 'Images of Money'. CC Licenced.