Tuesday, January 8, 2008

Tobin Tax

This tax was proposed by Mr. James Tobin of Yale University. He received Noble Prize in economics in 1981. Tobin tax is levied only on speculative foreign currency exchange transactions to deter speculation on currency fluctuations. The tax rate is very low (less tan 0.5%). It will not have any effect on long term longer term investments.

Approximately US $ 1 trillion worth of currency is traded every day in unregulated financial markets. Out of this, only 5% of the transactions are related to trade and other real economic transactions. The rest 95% is simply speculative in nature, betting on the exchange rate fluctuations and international interest rate differentials. This speculation is very dangerous for the national budgets, economic planning and allocation of resources.

Apart from deterring the speculative currency trade which harms national economic policies, the tax will generate billions of dollars in revenue by way of tax collection. Part of the revenue would go to the international funds while remaining to the national governments.

Benefits:

1. Reduction in the exchange rate volatility
2. More power to the national governments in determining fiscal and monetary policies
3. Revenue generation

Problems in implementation:
1. Need to forge an agreement among national governments on levying a uniform tax rate
2. Need to develop a mechanism on revenue sharing

No comments: