The Tobin tax is a transaction-based tax designed to limit currency speculation and stabilize currencies. It would impose a small tax on individual transactions, penalizing speculators who make a large number of small spot trades, while allowing non-speculators to trade currencies without interference. Some countries have discussed implementing the tax, but there is resistance from merchants and economists who fear it could interfere with the free market.
A Tobin tax is a type of transaction-based tax designed to limit currency speculation, with the goal of stabilizing currencies. The tax is applied to spot currency conversions used by traders to quickly speculate by converting between currencies immediately to take advantage of changing exchange rates. The tax is structured in a way intended to limit such exchanges while allowing people who are not speculating to trade currencies without interference. Proceeds from the tax can be applied in a number of ways.
This concept was proposed in the early 1970s by the economist James Tobin. Tobin argued that currency speculation contributed to instability in the global market, in addition to undermining the strength of individual currencies. Speculations increased as trading activity went global with the help of better communication between financial markets and traders. Various meetings of international organizations during the 1970s raised concerns about currency fluctuations, and Tobin proposed the tax as a way to curb speculation.
The Tobin tax design is intended to impose a small tax on individual transactions. Non-currency speculators would not be adversely affected by the tax, as it would add a small expense to their transactions, without penalizing them for currency exchange. Speculators who make a large number of small spot trades would be penalized, as the tax would reduce the bottom line of speculative gains. This would have the effect of slowing down the rate of currency speculation, keeping currency prices more stable.
In addition to putting a check on speculation, the Tobin tax would also create more room for ordinary investors who trade currencies. Low-volume currency trading would not be affected as much by the tax, as traders could afford the relatively low tax on a small number of trades. Traders who use computers to execute large numbers of trades at once while engaging in spot trades would be prime targets for a Tobin tax.
Several countries have discussed the possibility of implementing a Tobin tax and some have even tried to pass measures to establish such a tax. The resistance tends to be aggressive, as merchants oppose the tax and some economists fear it could interfere with the function of the free market. In the early 2000s, as a financial crisis swept through several nations, there was renewed interest in the possible applications of a Tobin tax and its uses to prevent speculative behavior of the kind that contributed to the development of the financial crisis.
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