Quest means business: Transaction tax plan raises heat

The decision to hold a G20 finance ministers meeting on the Scottish coast in the middle of winter was an "interesting idea."

When we arrived at St Andrews there was all the November weather we could want; rain and wind aplenty. The prospect of spending the next couple of days stuck in a tent (all right, a marquee) overlooking the North Sea was grim. I was already writing clever script lines about windy economic weather and force gales blowing stock markets.

By morning, I was warming to my task, and the weather was playing along nicely. The sun had come out and so had my metaphors. Suddenly the G20 was seeing sunny patches of economic growth with clouds on the horizon.

But like the Scottish weather, what should have been a rather predictable G20 meeting suddenly took a sharp, odd turn. A thunderstorm opened overhead — all because the British Prime Minister Gordon Brown chose to mention the "transaction tax."

The idea is simple: Tax financial institutions like banks and investment houses on their activities. The tax would prevent them from running unrealistic risks. The money raised would be used to pay for any future financial crises. It is getting the banks to pay for their own bailouts. Buying an umbrella before it rains, if you will.

The idea is often called "the Tobin tax" after the American economist who won the Nobel Memorial Prize in Economic Sciences and who first suggested taxing foreign exchange transactions in the 1970s.

The French Finance Minister Christine Lagarde liked the idea of "getting the banking system to provide for itself." Telling me that it's "quite appropriate" as a means of exploring a new project, Lagarde seemed most enthusiastic about the idea.

But the US didn't agree. Fearing it would be a tax on Wall Street and harm the US financial sector, US Treasury Secretary Tim Geithner said a day-to-day tax was not something he would support. Instead, he said, the United States "is looking at other ways ... to put out a financial fire ... where the financial system bears the cost."

Difficult to implement

If you're wondering why such a magnificent umbrella hasn't been introduced before, it's because the whole thing is fiendishly difficult in practice. According to Martin Redrado, the governor of Argentina's central bank, "it's a very nice idea that we economists in universities have studied in the last decade. And very difficult to implement."

So, is the transaction tax going to be like the Scottish early morning mist, destined to vanish as soon as the sun rises? Not just yet. The International Monetary Fund is now looking into how this might work. A report will be produced in times for next year's 2010 leaders' summit.