Tobin Tax - Nobel Laureated James Tobin

Introduction

The instability of international financial market has called for more comprehensive regulations in

order to support monetary, financial and economic stability in long term. With tax as one of the

important aspects of the financial reform regarding international currency transactions, Tobin tax

is often considered as a feasible method to minimize financial instability.

The Tobin tax is named after noted economist and Nobel laureated James Tobin who proposed a

tax on international foreign exchange (forex) activities, which he suggested "throw(ing) some

sand in the wheels" of international financial markets. The objective of the tax was to deter

speculators who were undermining the ability of central banks to follow appropriate monetary

policies. A low tax on transactions might help to curb speculative capital movements, thus

diminishing what Keynes had already identified as the counter-productive impact volatile flows

of "hot money" could have on the real economy.

The Tobin tax includes three main purposes:

 To reduce exchange-rate volatility by reducing currency speculation;

 To raise revenue for international organizations; and

 To make national economic policies less vulnerable to external shocks.

Tobin tax focus on cross-border speculative deals which could trigger off dysfunctional

fluctuations in exchange rates, impair international trade in goods and services, and destabilize

some economies. Tobin believed that a global tax on foreign-exchange transactions would lead

to a decline in short-term international capital movements, thus expanding the leeway available

for individual countries‟ monetary and fiscal policies. The tax would have to be charged

throughout the world, or at least in all of the countries with the world‟s leading currencies.

The main ideas of the Tobin Tax

The Business for International Settlements (BIS) estimated that average global turnover on the

foreign exchanges is at $1.2 trillion per day. And it puts the annual traded volume at around

$300trillion.