The NYT had a piece on Adair Turner, the head of the UK's Financial Service Commission, and his advocacy of a tax on currency trades. Near the end, the article quotes an assertion from Richard Portes, a professor of economics at the London Business School: "It wouldn’t curb speculation, and it would have no effect on the size of the banking sector." It's not clear what Mr. Portes could possibly mean. Other financial transactions have been very successfully taxed over recent decades. In fact, the UK collects more than $8 billion a year on a tax on stock trades. Unless Mr. Portes attaches some magical quality to currency trades compared to trades of other financial assets, it is hard to understand why these trades would uniquely escape taxation. Also, the assertion that the tax would "have no effect on the size of the banking sector" is ridiculous on its face. A tax will reduce trading volume -- economists know that. Less trading volume means less revenue, which means a smaller financial sector. The NYT should have pointed out the fundamental illogic of Mr. Portes' comment, since it may not have been immediately apparent to many readers. It is of course very interesting that serious economists respond this way to the proposal of taxes on currency trades.
--Dean Baker
