Tackling Instability in Financial Markets with a Panic Tax

Abstract

The motivation for much recent debate on introducing a financial transaction or ‘Tobin’ Tax is to generate revenues for public goods – this is the main aim of the ‘Robin Hood Tax’ campaign. But James Tobin first proposed his idea in order to enhance market stability. The evidence suggests that a Tobin Tax might not reduce instability. However, a Panic Tax – a simple mechanism to tax panic rather than trade – could promote stability by dampening crashes and booms and providing policy space for more orderly adjustments in the financial markets.