Tobin tax

A Tobin tax was originally defined as a tax on all spot conversions of one currency into another. It was suggested by James Tobin, an economist who won the Nobel Memorial Prize in Economic Sciences. Tobin's tax was originally intended to penalize short-term financial round-trip excursions into another currency. By the late 1990s, however, the term Tobin tax was being incorrectly used to apply to all forms of short term transaction taxation, whether across currencies or not. Another term for these broader tax schemes is Robin Hood tax, due to tax revenues from the (presumably richer) speculator funding general revenue (of whom the primary beneficiaries are less wealthy). More exact terms, however, apply to different scopes of tax. The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets.The concept of a Tobin tax has experienced a resurgence in the discussion on reforming the international financial system. In addition to many legislative initiatives in favour of the Tobin tax in national parliaments, possible ways to introduce a Tobin-style currency transaction tax (CTT) are being scrutinised by the United Nations.European Union leaders urged the International Monetary Fund on Friday to consider a global tax on financial transactions in spite of opposition from the US and doubts at the IMF itself. In a communiqué issued after a two-day summit, the EU's 27 national leaders stopped short of making a formal appeal for the introduction of a so-called 'Tobin tax' but made clear they regarded it as a potentially useful revenue-raising instrument.Ten studies report a positive relationship between transaction taxes and short-term price volatility, five studies did not find any significant relationship. (Schulmeister et al, 2008, p. 18). A Tobin tax was originally defined as a tax on all spot conversions of one currency into another. It was suggested by James Tobin, an economist who won the Nobel Memorial Prize in Economic Sciences. Tobin's tax was originally intended to penalize short-term financial round-trip excursions into another currency. By the late 1990s, however, the term Tobin tax was being incorrectly used to apply to all forms of short term transaction taxation, whether across currencies or not. Another term for these broader tax schemes is Robin Hood tax, due to tax revenues from the (presumably richer) speculator funding general revenue (of whom the primary beneficiaries are less wealthy). More exact terms, however, apply to different scopes of tax. Tobin suggested his currency transaction tax in 1972 in his Janeway Lectures at Princeton, shortly after the Bretton Woods system of monetary management ended in 1971. Prior to 1971, one of the chief features of the Bretton Woods system was an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold. Then, on August 15, 1971, United States President Richard Nixon announced that the United States dollar would no longer be convertible to gold, effectively ending the system. This action created the situation whereby the U.S. dollar became the sole backing of currencies and a reserve currency for the member states of the Bretton Woods system, leading the system to collapse in the face of increasing financial strain in that same year. In that context, Tobin suggested a new system for international currency stability, and proposed that such a system include an international charge on foreign-exchange transactions. In 2001, in another context, just after 'the nineties' crises in Mexico, Southeast Asia and Russia,' which included the 1994 economic crisis in Mexico, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis, Tobin summarized his idea: Though James Tobin suggested the rate as 'let's say 0.5%', in that interview setting, others have tried to be more precise in their search for the optimum rate. Economic literature of the period 1990s-2000s emphasized that variations in the terms of payment in trade-related transactions (so-called 'swaps' for instance) provided a ready means of evading a tax levied on currency only. Accordingly, most debate on the issue has shifted towards a general financial transaction tax which would capture such proxies. Other measures to avoid punishing hedging (a form of insurance for cashflows) were also proposed. By the 2010s the Basel II and Basel III frameworks required reporting that would help to differentiate them. and economic thought was tending to reject the belief that they could not be differentiated, or (as the 'Chicago School' had held) should not be. In March 2016 China drafted rules to impose a genuine currency transaction tax and this was referred to in financial press as a Tobin tax . This was widely viewed as a warning to curb shorting of its currency the yuan. It was however expected to keep this tax at 0% initially, calculating potential revenue from different rate schemes and exemptions, and not to impose the actual tax unless speculation increased. Also in 2016 US Democratic Party POTUS nominee Hillary Clinton included in her platform a vow to 'Impose a tax on high-frequency trading. The growth of high-frequency trading has unnecessarily placed stress on our markets, created instability, and enabled unfair and abusive trading strategies. Hillary would impose a tax on harmful high-frequency trading and reform rules to make our stock markets fairer, more open, and transparent.'. However, the term 'high-frequency' implied that only a few large volume transaction players engaged in arbitrage would likely be affected. Clinton referred separately to 'Impose a risk fee on the largest financial institutions. Big banks and financial companies would be required to pay a fee based on their size and their risk of contributing to another crisis.' The calculations of such fees would necessarily depend on financial risk management criteria (see Basel II and Basel III). Because of its restriction to so-called 'harmful high-frequency trading' rather than to inter-currency transactions, neither of Clinton's proposals could be considered a true Tobin tax though international exposure would be a factor in the 'risk fee'. Critics of all financial transaction taxes and currency transaction taxes emphasize the financial risk management difficulty of differentiating hedging from speculation, and the economic argument (attributed to the 'Chicago School') that they cannot in principle be differentiated. However, advocates of such taxes considered these problems manageable, especially in context of broader financial transaction tax. Briefly, the differences are: James Tobin's purpose in developing his idea of a currency transaction tax was to find a way to manage exchange-rate volatility. In his view, 'currency exchanges transmit disturbances originating in international financial markets. National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exchanges, without real hardship and without significant sacrifice of the objectives of national economic policy with respect to employment, output, and inflation.'