The case for taxing global financial transactions rests on the notion that such a tax will discourage short-term flows, which are viewed as destabilizing, without affecting longer-term flows that are presumed to be desirable and based on fundamentals. But short-term flows are by no means all undesirable and destabilizing. And there is no way of discriminating between useful flows and destabilizing speculative ones.
For example, because foreign trade and investment inflows and outflows are not always fully offsetting, short-term capital flows are typically needed to balance out a country’s external accounts. These capital flows occur in response to actual and anticipated movements in the exchange rate, and thus serve to smooth out exchange rate fluctuations.