Retarding Short-Term Capital Inflows Through Withholding Tax

Oftentimes an old idea needs the jolt of a new reality to gain currency, but sometimes the jolt could also be so strong as to obscure the idea's inherent merits within its originally intended scope of application. The specific idea in question-which can be traced back to Keynes (1936)-is the introduction of a tax on financial transactions to discourage speculative activities which are not in line with economic fundamentals. The new reality is the ease and speed with which capital could...
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Oftentimes an old idea needs the jolt of a new reality to gain currency, but sometimes the jolt could also be so strong as to obscure the idea's inherent merits within its originally intended scope of application. The specific idea in question-which can be traced back to Keynes (1936)-is the introduction of a tax on financial transactions to discourage speculative activities which are not in line with economic fundamentals. The new reality is the ease and speed with which capital could move across national borders in an environment of globally integrated financial markets. Keynes was writing, of course, at a time when the term globalization, in its modern connotation, had hardly entered the lexicon, and his proposal was directed narrowly at the U.S. stock market, which he likened to a casino where speculative activities were allowed to be carried out with little transaction costs. A financial transaction tax would have increased such costs and, according to Keynes, directed investments away from the speculative and towards the enterprise (i.e., productive) objective.