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Reconsidering the Tobin Tax

In: Emerging Asia

Author

Listed:
  • Ramkishen S. Rajan

    (School of Public Policy, George Mason University, USA and Visiting Senior Fellow, Institute of Southeast Asian Studies (ISEAS))

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.

Suggested Citation

  • Ramkishen S. Rajan, 2011. "Reconsidering the Tobin Tax," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Emerging Asia, chapter 8, pages 43-48, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-0-230-30627-1_8
    DOI: 10.1057/9780230306271_8
    as

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