Chancellor Angela Merkel, President Nicolas Sarkozy and British leader Gordon Brown now support the idea of a tax on financial market transactions. The tax was first proposed by the American Nobel laureate James Tobin in 1971. After the financial crisis and the financing of the global climate agreement, it is once again on the agenda.

Over the last 30-40 years several politicians have proposed an international tax on financial transactions, partly to reduce speculation in foreign exchange and introduce economic action plan to stabilize the currency markets, by reducing the number of transactions.

The reason that several top politicians join the Tobin tax bandwagon is to effectively discourage short term speculation without appreciable damage to long-term international investment decisions.

When the former Danish Prime Minister Paul Nyrup Rasmussen was elected to the European Parliament he also proposed the introduction of the Tobin tax to create a significantly larger EU budget, more regulation of the financial trade and also proposed significantly higher EU expenditures. In short, he wanted the introduction of a politically controlled monetary policy in the EU. Paul Rasmussen's proposal was shot down. The proposal was not surprising because under his leadership in Denmark, a new tax or charge was introduced each month.

Stop speculation

Professor Tobin's proposal is more than 40 years old. He was concerned about the exchange rate volatility. He claimed that the taxation of short-term money movements in and out of different currencies would curb speculation and raised the possibility of macroeconomic management.

Previous OECD analysis shows that the result of a tax on transactions, in practice has led to greater fluctuations in the operations than before the tax were introduced. Analysis has also shown that the cost of recovering the tax could exceed the probable benefits. Most economists have previously argued that the large currency speculation is actually beneficial for the world economy. But these analysis are from the pre-sub-prime meltdown.

Adair Turner, head of Britain's Financial Services Authority also wants the introduction of the Tobin Tax, to reduce the size of the financial sector and the payment of obscene bonuses. He believes that a global tax on financial transactions would help to contain both issues.

Financial crisis must be avoided

In the final declaration of the EU summit recently, the International Monetary Fund, IMF, was asked to examine the feasibility of introducing a modest tax on financial transactions to improve their fiscal situation on top of the financial crisis. With even a modest tax in the magnitude of 0.01 -0.05 percent will result in significant addition of the IMF.

Economic activities of questionable business value like the intra-day trading and using the minimal differences across the fiscal markets will become uninteresting as a result of the tax. These transactions absorb significant financial resources and do not create any lasting value. An unanswered question is whether investors with a longer time span could also be discouraged by the proposed tax.

Tobin tax is never tested in practice. A global binding agreement with the use of the updated technology would enable the IMF or The World Bank to manage this tax. However before the Tax is introduced, a number of articles to revamp The IMF or The World Bank's structure, administration, voting rights, etc. is required.

Proceeds

Tobin tax could raise an unruly large amount of money if the base covers all global financial transactions. We are talking about huge sums - much larger than the current development or estimates of the potential gains by completing the Doha Round of trade negotiations.

The proposed tax rate of between 0.1 and 0.5 per cent means that depending on the percentage will generate between 800 billion and 8,000 billion usd each year. In comparison, the price of global efforts to tackle environmental problems and the climate change from the COP 15 conference is currently estimated to be 800 billion dollars a year.

Many politicians had trouble saying the word Tobin tax. Therefore they are now using a mysterious acronym called CTT - currency transaction tax, which covers exactly the same.

The biggest problem for CTT Tax is that the U.S. still says no. This occurred as late as at a meeting between the country's leading finance ministers, just as President Barack Obama has not spoken out on the issue of multiple taxation of banking bonuses. However many analysts believe that it's just a matter of time because both Ben Bernanke (head of the U.S. National Bank) and winner of last year's Nobel prize in economics American Paul Krugman are highly influenced by Prof. Tobin economic theories.

The Tobin Tax or CTT may fund the costs of the global climate agreement at COP 15 and create a buffer for the funding of future financial crisis.