Definition of Tobin Tax
- A Tobin tax is the name given to a specific tax placed on currency transactions.
- It was proposed by economist, James Tobin, as a way of stabilising currency markets.
- The idea is that by increasing the marginal cost of currency transactions it reduces the incentive to speculate on currency movements. In theory, this prevents destabilising swings in currencies.
- Tobin initially proposed a tax of 1% on all currency trades. This has subsequently been reduced to lower figures such as 0.25%. One UK proposal suggested a Tobin tax as low as 0.01%
Advantages of a Tobin Tax
- By placing a tax on currency trades, it makes currency trading slightly less attractive. By marginally increasing the cost of currency trading there should be a reduction in speculative trading, leading to greater exchange rate stability in floating exchange rate systems.
- Raises Revenue. The global trade in currencies has grown at a very rapid rate. In 2007, the global currency market was worth $3,200 billion a day in 2007, or £400,000 billion per annum. Of this, trade in Pound Sterling as £34,000 bn a year.
- A tax set at 0.01% on just Sterling trades would raise £2bn a year. A tax on global currency trades could raise significant sums.
- Redistribution from Financial Sector to Developing World. The idea of a Tobin Tax is often seen as a good way to redistribute income from developed world to the developing world. The idea has been seized upon by many aid charities and anti-globalisation protesters. Though James Tobin has often stated that the main purpose of the tax is not about raising revenue and redistributing wealth, but its impact on reducing speculation.
- After damage created by speculative investments such as derivatives and futures trading. There has been greater support for intervention to reduce speculative buying in financial markets.
Arguments Against Tobin Tax
- Difficult to tax all transactions, it may encourage investors to find ways around the tax.
- Decline in currency flows may harm functioning of markets and lead to poor liquidity in currency markets.
- Tax may be insufficient to prevent speculative flows and currency movements which are driven by economic fundamentals.
- A tax may discourage 'hedging' which is a way of insuring against currency movements rather than discouraging speculation.
- If it was introduced unilaterally in one country, e.g. UK then it would lead to loss of financial business as firms trade in other currencies / countries
- There may be better ways to deal with speculation e.g. placing lump sum insurance schemes on financial firms who invest in speculative markets.
A Tobin tax is more than just a measure to tax 'undeserving financial speculators' It is not going to undermine the world economy as some of the more extravagant claims may suggest. On balance, it is a sensible policy with many benefits - both economic and social.