Adbusters, the group behind the Occupy Wall Street movement, is gearing up for a massive protest at the G8 Summit in Chicago.  And no leftist protest is complete without a full-throated demand for implementation of the Tobin tax.

The Tobin tax, otherwise known as the Robin Hood tax, is a small tax to be levied on financial transactions.  Support for the tax often goes hand in hand with populist anger directed at big banks and large financial institutions.  George Soros, who indirectly backs OWS, is in the favor of the Tobin tax for the obvious reason that it hurts his small-time competitors.  French President Nicolas Sarkozy is planning to implement a financial transaction tax this summer -- another sign that the once-eurozone powerhouse is still in great need of revenue.  Though the proposed rate of the Tobin tax is seemingly miniscule at first (Sarkozy wants a 0.1% rate starting in August), the overall economic implications are disastrous judging by recent history.

When Sweden enacted a financial transaction tax in 1983, the country experienced huge capital flight.

As a study from the Adam Smith Institute shows:

Almost 60% of trading volume of the 11 most actively traded Swedish shares migrated to London during Sweden's attempted Tobin tax. The temptation, and indeed relative ease, with which capital flight and cross border arbitrage can occur would spell disaster for the UK.

Sweden is the only country to have tried a "pure" Tobin tax, of 0.5%. It raised only one thirtieth of the proceeds predicted by its proponents and was scrapped after five years. The taxes sparked an exodus of financial activity from Sweden. By 1990 60% of the trading volume for the top 11 most traded Swedish stocks had moved to London. Trading for over 50% of Swedish equities had moved to London by 1990.

Worse yet, the Tobin tax makes it more expensive for traders to provide much-needed liquidity in light of a downturn or financial shock:

All market participants would be subject to the tax; a Tobin tax is unable to discriminate between de-stabilising trades and those which provide liquidity, information and tradefinancing. With short-term trading providing invaluable liquidity to the market, an incapability to segregate individual trader motivations will therefore lead to a reduction in both liquidity and welfare-enhancing trade, in addition to increasing market susceptibility to individual shocks.

The various financial Atlases shrugging to escape taxation come as no surprise.  There are plenty of other developed markets out there that would gladly welcome an influx of capital from countries with politicians delusional enough to believe a predictive model estimating tax revenues based on static behavior.  It's as if public officials truly believe that people are submissive and will take these various attempts at pilfering with little, if any, protest.  Should the Tobin tax be enacted in France, or worse yet the U.S., the short-term trading industry will suffer a serious blow.  Since short-term trades occur frequently, they are disproportionately affected by such a tax.

But the core issue with a financial tax goes much deeper than the immediately observable effects.  Market transactions aren't just exchanges of goods or services; they convey vital market information as prices representative of profits and losses.  Sharing market information is necessary in a world defined by scarcity.  Without an efficient and cheap way to conduct trades, capital has a more difficult time meeting productive hands.  Economies can't progress with entrepreneurs unable to acquire the necessary funds to enhance their current business or seek other ventures.  Meanwhile, the funds acquired through the tax go into the hands of political bureaucrats who either grow their own agencies in staff and resources or monetarily appease special interests.

The Tobin tax may start small, but one should never doubt the extent to which such taxes are increased in times of fiscal stress.  The income tax enacted in 1913 within the U.S. was first levied at 1% for most incomes and between 2% and 7% for higher incomes.  There is no telling what kind of market growth America could have seen had those rates been kept in place.

So while the eurozone continues to implode and the Occupy Movement thoughtlessly campaigns on behalf of increased taxes, the Tobin tax is to be feared not by investors alone.  A market economy invariably ties all participants together as remunerative trade builds wealth at a greater rate than politicians will ever understand.  The greater the chains of burden placed on the market from the halls of government, the greater the long-term impoverishment for all.