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Tobin Tax

Overview

A Tobin tax is an excise tax suggested on currency trade across borders with an aim of putting a penalty on short-term currency speculation, taming the volatility of the currency market and restoring back the national economic dominion. Tobin taxes can be ratified by national legislatures then followed by all-party cooperation for it to be effectively enforced. The revenue from Tobin taxes ought to go to global priorities; mainly human needs and basic environmental.

How it works

According to James Tobin, the mind behind the taxation, currency traders across borders trade at the rate of over a trillion dollars a day. Therefore, speculative transactions ought to be taxed a tiny percentage of volume, as tiny as .1%, once per each transaction. On the other hand, non speculative transactions should be exempted about 10-15% of the daily transacted volume. The tax will hugely discourage short-term or overnight trade of currencies, the most unstable, while leaving the log-term investments hardly effected. As a result, hazardous currency volatility will substantially be reduced, in addition to restoring the national macroeconomic self-sufficiency.

Global Tobin tax projects

Originally, it was presumed that Tobin tax would need all-party implementation because one country cannot act alone to implement the tax. Stakeholders therefore debated that Tobin tax would best be implemented by an institution of international standards. It has been suggested that the United Nations oversee the implementation of Tobin tax, because they are strategically positioned to seek funding from many donors, autonomous from donations by participating states.

Tobin Tax Principles

The Tobin Tax principles are generally based on bilateral cooperation to tax currency speculators.

- The global financial crisis is the major contributing factor to human suffering which ought to be alleviated. This causes the currency to devalue, which in turn reduces the citizen’s purchasing power. As a result, basic items such as food become unaffordable, and jobs are lost. Financial crisis additionally aggravates existing economic problems such as widening the rich-poor gap and straining on the global environment.

- Further, currency speculation occurring globally is another major cause of the financial crisis. As a result, foreign currency exchange has rapidly grown to over a trillion dollars each day, extremely large than all the stock exchanges worldwide. As a result, the market becomes very large and volatile that the Federal Reserves and Central banks are not able to sufficiently protect the currency of their own economies.

- The volume of daily currency trading is expected to be reduced so that each economy will have the ability to control its own currency in addition to generating extra revenue. Thus, the Tobin tax percentage is expected to be large enough to make overnight currency speculation less lucrative. Suggestions range from .1-.5% per transaction. Ultimately, since long-term investments happen less often, they would not be unfavorably affected by the proposed small tax, and the overall volume remaining will be more than enough to make substantial revenue.

Conclusion

Economists argue that concerned parties are going to avoid tax, but it is believed that if effective regulatory mechanisms are adopted, it would not be possible to evade taxation. People against globalization argue that the Tobin tax will greatly protect countries from the spillovers brought about by financial crises, but supporters of globalization stress that Tobin tax will dehydrate the world liquidity and restrain globalization.

The revenue collected could be large, thus, it is proposed that a baseline criteria to allocate the revenue should be established, that will meet the basic needs first such as human and environmental needs. Collective enforcement of the Tobin Tax is generally considered institutionally and economically possible.

Tags: liquidity, market, revenue, tax, Taxation, trading

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