Named after Nobel-winning US economist James Tobin who proposed it in 1971,
this tax on short-term cross-border currency transactions is levied to
discourage such flows and help stabilize exchange rates by curbing speculation.
Since speculative currency trades occur on smaller margins, Tobin Tax reduces
or eliminates incentive for speculation. Mr Tobin argued that national
economies and governments are not capable of adjusting to massive movements of
funds across borders, without sacrificing the effectiveness of national
economic policy with respect to employment, output, and inflation
The global financial crisis reopened the debate on the relevance of Tobin
tax. The proponents of the tax argue that ill-effects and risks of volatility
are inherent to all financial markets and measures should be in place to curb
flows. Many countries such as Brazil,
Thailand, Columbia,
Chile and Malaysia have
similar taxes in place. Economists say globally co-ordinate action will enhance
the effectiveness of the policies at the national level.
In 2001, James Tobin said the rate
could be close to 0.5%. Economists have proposed financial transaction tax
rates ranging between 0.05% and 1%. Even a 0.5% tax applied per transaction in
the currency market could discourage trades, as the spreads in the many of
these transactions are as low as 0.005%.
Various studies suggest that capital account management and measures like
Tobin tax dissuade short-term capital flows. In the longer term non-financial
direct investment is relatively unaffected by the tax. While the long-term
implications on growth are not yet assessed, the literature available doesn't
suggest any serious downside risk due to capital account management.
For a
speculative trade to be profitable, the margin must be greater than the proposed
tax. But some argue that Tobin tax will lower liquidity and hence raise
volatility. So it may prove more damaging than exchange rate instability it is
trying to cure.
Ref-http://articles.economictimes.indiatimes.com/2010-03-19/news/28450137_1_tobin-tax-short-term-capital-flows-james-tobin
