Reconsidering the Tobin Tax

Abstract

Political leaders in emerging economies who have been concerned about the volatility of capital flows have intermittently suggested a global tax on international foreign exchange (forex) activities. Such a tax was originally proposed by James Tobin in the 1970s. This “Tobin tax” is essentially a permanent, uniform, ad-valorem transactions tax on international forex flows. The burden of a Tobin tax is claimed to be inversely proportional to the length of the transaction, i.e. the shorter the holding period, the heavier the burden of tax. For instance, a Tobin tax of 0.25 percent implies that a twice daily round-trip carries an annualised rate of 365 percent; while in contrast, a round-trip made twice a year carries a rate of 1 percent. Accordingly, and considering that 80 percent of forex turnover involves round-trips of a week or less, it has been argued that the Tobin tax ought to help reduce exchange rate volatility and consequently curtail the intensity of “boom-bust” cycles caused by international capital flows.