Tobin Tax

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The Tobin tax explained
By Martin Sandbu

Published: August 27 2009 14:46 | Last updated: August 27 2009 14:46

The “Tobin tax” was originally proposed in the early 1970s by James Tobin, an influential American macroeconomist and recipient of the Nobel prize for economics.

His idea was prompted by the collapse of the Bretton Woods system in 1971, which replaced an arrangement of fixed exchange rates ultimately based on the US dollar’s peg to gold with a period of volatile floating exchange rates.

Tobin proposed to reduce this volatility with a small tax – for instance 0.1 per cent – levied on every amount exchanged from one currency into another.

He wanted to discourage short-term currency speculation, which makes it difficult for countries to implement independent monetary policies by moving money quickly back and forth between countries with different interest rates.

Tobin’s goal was to “throw sand in the wheels” of global finance with a simple tax that would be small enough to make short-term purely financial movements uneconomical – without being a burden on trade.

The proposal never caught on in the 1970s but received renewed attention during the Asian financial crisis in the late 1990s when it became a cause celèbre for the anti-globalisation movement. A number of organisations, such as France-based Attac, sprang up to campaign for a Tobin tax long after the economist had died in 2002.

The original purpose of putting the brakes on currency speculation has been somewhat eclipsed among activists who have increasingly seen the Tobin tax as a good way of raising revenue for economic and social development.

Some have suggested that a Tobin tax should be introduced to finance the money needed to meet the UN’s Millennium Development Goals of reducing poverty and ill health. Governments have been at best lukewarm to the idea, although former French president Jacques Chirac expressed interest in it.

Tobin himself disowned activists’ adoption of his proposal for revenue-raising purposes, which he thought missed the point of the proposal: which was to reduce the socially harmful effects of finance while keeping its benefits. In this respect, FSA chairman Adair Turner’s broaching of the Tobin Tax as a method for regulating the financial sector may be more in line with the original idea.