The debate about the Tobin tax, and other financial transaction taxes (FTTs), gives rise to strong views both for and against. Unfortunately, little of the popular debate refers to the now considerable body of evidence about the impact of such taxes. This review attempts to synthesise what we know from the available theoretical and empirical literature about the impact of FTTs on volatility in financial markets. We also review the literature on how a Tobin tax might be implemented, the amount of revenue that it might realistically produce, and the likely incidence of the tax. We conclude that, contrary to what is often assumed, a Tobin tax is feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions. However, it would be unlikely to reduce market volatility and could even increase it.
Institute of Development Studies, University of Sussex, Brighton, UK, 57 pp.