CURRENCY TRADE: A levy or "Tobin tax" of 0.5 per cent on the foreign currency trading conducted last year could have raised about $1.5 trillion (€1.59 trillion) in revenue, according to a new study by the OECD. The study concludes, however, that such a tax could lead to a huge drop in trading, with a concomitant drop in revenue.

It also concludes that the introduction of the tax might not have the effect on market volatility which would be its main objective. The study is contained in the organisation's forthcoming Economic Outlook No 71.

The introduction of a tax on currency trades was first suggested by Nobel prize winner Mr James Tobin in the 1970s. It was later suggested by others that the tax could be used to fund development programmes in poorer countries.

Even with sharply reduced trade, the revenue raised would be very significant.

But in its study, the OECD says the use of earmarked taxes might not be the most efficient way of funding overseas aid. If such funding was considered worthwhile, it should be done in a way which was transparent and reliable in terms of scale, according to the study.

The popular view was that a Tobin tax would be a tax on richer people. "This argument rests on the confusion that a tax is being paid by those on whom it is levied. In practice, taxes are being shifted through changes in prices and wages and the ultimate payer of the tax may be a quite different person from the one handing over the tax revenue."

In the case of a Tobin tax, it might be that some of those paying the tax could be the same developing countries it was intended to help, according to the study.

It found there was a link between high volumes of trading and high volatility but concluded that it was far from clear that the former caused the latter. Volatility and trading volumes could both be triggered by the influx of information to the market.

Reviewing the effect on markets where transaction charges had been imposed, the study found the effect on volatility was mixed. In some cases, there was no appreciable reduction. In others, it actually rose.

The study also notes that the infrastructure necessary to impose such a global tax was not in place. The tax would have to be applied globally or it would not be effective. It would also have to apply to other traded financial instruments and even some commodity markets, as otherwise these would be used to avoid paying the tax.