Tobin Tax

What Is the Tobin Tax?

The Tobin tax is a tax demanded on spot currency transformations, with the intention of disincentivizing short-term currency speculation, named after economist James Tobin.

Rather than a consumption tax paid by consumers, the Tobin tax is intended to apply to financial sector participants for the purpose of controlling the stability of a given nation's currency. It is all the more officially referred to now as a Financial Transactions Tax (FTT), or less officially a Robin Hood tax.

Understanding the Tobin Tax

When fixed exchange rates under the Breton Woods system were replaced with flexible exchange rates in 1971, there was a huge movement of funds between various currencies that took steps to weaken the economy. Furthermore, the rise in short-term currency speculation energized by the idea of the free currency market increased the economic costs incurred by countries trading currencies.

The Tobin tax, proposed by James Tobin in 1972, looks to relieve or dispense with these issues. The tax has been adopted by a number of European countries and the European Commission to deter short-term currency speculation and balance out currency markets.

The currency transactions tax doesn't impact long-term investments. It is just imposed on the over the top flow of money that moves routinely between financial markets through the activities of examiners looking for high short-term interest rates. The tax is paid by banks and financial institutions that profit from market volatility by taking extreme short-term speculative situations in the currency markets.

The Tobin tax was originally presented by American economist James Tobin (1918-2002), beneficiary of the Nobel Memorial Prize in Economics in 1981.

As per Tobin, to work successfully such a tax ought to be adopted universally and be uniform, and the proceeds gave to emerging nations. In spite of the fact that Tobin suggested a rate of 0.5%, different economists have put forward rates going from 0.1% to 1%. However, even at a low rate, on the off chance that each financial transaction occurring globally was subject to the tax, billions in revenue could be raised.

The original intent of forcing the Tobin tax has been slanted throughout the long term by various countries carrying out it. While Tobin's proposed tax on currency exchanges was expected to curb undermining capital flows across borders which makes it challenging for countries to execute independent monetary policies by moving money rapidly this way and that between countries with various interest rates, a few countries presently impose the Tobin tax for the purpose of generating revenue for economic and social development.

Illustration of the Tobin Tax

For instance, in 2013, Italy adopted the Tobin tax not on the grounds that it was confronted with exchange rate instability, but since it was facing a debt crisis, an uncompetitive economy, and a weak banking sector. By stretching out its currency transaction tax to high-frequency trading (HFT), the Italian government looked to balance out markets, reduce financial speculation, and raise revenue.

The Tobin tax has been questionable since its presentation. Rivals of the tax show it would wipe out any profit potential for currency markets as diminishing the volume of financial transactions, slowing global economic growth and development over the long haul is possible. Defenders state that the tax would assist with settling currency and interest rates on the grounds that many countries' central banks don't have the cash in necessary reserve to balance a currency selloff.

Highlights

• The Tobin tax is a duty proposed on spot currency trades to punish short-term currency trading to settle markets and disincentive speculation.
• The Tobin tax is once in a while alluded to as the Robin Hood tax, however many consider it to be a way for governments to take small measures of money from individuals making large, short-term currency exchanges.
• The Tobin tax can be utilized to generate revenue streams for countries that see a great deal of short-term currency movement.