A Tobin tax for our times: hated, loved and doomed

A Q&A on the Tobin tax, a levy on financial transactions backed by Bill Gates's foundation.

Bill Gates and his wife Melinda.

The foundation set up by the Microsoft billionaire Bill Gates put forward a novel way on Friday to help developing nations. After a request from Nicolas Sarkozy, the French president, for suggestions on how the world's biggest economies could help the less fortunate, the Gates Foundation proposed a "Tobin tax" at a Group of 20 ministers' meeting in Washington. Many countries, including the US, China, the UK and Canada, have opposed the idea. But many, including France, Germany, Austria and a number of African countries, have favoured it.

q So what is the Tobin tax?

aIn its most basic form, it is a small tax on conversions of one currency into another. James Tobin, a Nobel Prize-winning economist who first proposed it in the 1970s, suggested a rate of 0.5 per cent. Back then, the point was to prevent huge swings in currency valuations after the removal of the gold standard.

What is the proposal now?

The idea is to tax financial transactions - not just currency trades. According to a Gates Foundation report, a tax of just 0.1 per cent on purchases and sales of stocks and 0.02 per cent on bonds could raise billions of dollars to help developing countries. A small tax on derivatives could bring the total amount to US$250 billion (Dh918.25bn), according to the report.

Will it succeed?

Success is highly unlikely at this point. Global leaders will be reluctant to put a Tobin tax in place without all of the world's biggest countries on board. No matter how small the tax, nobody wants to create a global imbalance by charging investors in some countries while others go untaxed. As long as the US and China remain opposed, it will almost surely be dead in the water.