Tobin Tax

Páginas: 7 (1681 palabras) Publicado: 6 de abril de 2012
The economic reasoning behind the Tobin Tax

On the 15th of August 1971 President Richard Nixon abolished the gold standard upon which the US Dollar was secured. Therefore the USD($) was no longer directly exchangeable for a set amount of gold. This meant that USD was no longer directly fixed to any commodity. This in turn led to the adoption of a global system of floating exchange rates.These floating rates could then in turn be used to create financial gain for short-term investors who effectively could now bet (short term) on the currency exchange market, with a view to making a large profit (Lizcano, 2011). However, although originally intended to increase liquidity, this removal from the Gold Standard presented the world with a new potential economic and financial problem. Thereason for this is that most speculators in the currency exchange markets work with shortterm transactions and make money on speculating on whether or not the relative price will deviate and by how much. This may initially not seem like much of a problem, but what would happen if there were a large number of speculators in a floating market? Take for example, if a large amount of money can bewithdrawn from a country or currency. In order to keep the currency attractive to the rest of the world the government of the country in charge of the currency would have to alter interest rates, in order to keep the currency relatively more attractive to the rest of the world with regard to the other international currencies. The problem is that this changing the interest rates on the currency inquestion can have devastating knock on effects for the domestic economy of the country (Rodrigez Suances, 2012). The Tobin Tax was a tax measure first proposed in 1972 by the late Nobel Prize laureate and American Economist, James Tobin. His idea for this economic mechanism of curtailing potential fluctuations within the financial markets was inspired by the famous economist John Maynard Keynes (1936).Tobin (1978) wrote: “It would be an internationally agreed uniform tax, administered by each government over its own jurisdiction. […] The tax would apply to all purchases of financial instruments denominated in another currency - from currency and coin to equity securities. It would have to apply, I think, to all payments in one currency for goods, services, and real assets sold by a resident ofanother currency area. I don't intend to add even a small barrier to trade. But I see offhand no other way to prevent financial transactions disguised as

trade.” The Tobin tax works “throw some sand in the well-greased wheels”, by attaching or fixing a small tax on all foreign currency exchange transactions to the amount being transacted, and by doing so, will in theory have the effect ofdampening potential fluctuations in the international currency exchange markets. Thus by introducing the Tobin tax and curbing speculation, more economic stability could be achieved in all international economies. In spite of the potential ramifications of not introducing this stabilising tax, after some international deliberation, the proposed ‘Tobin Tax’ was never introduced after its proposal.Modern views on the Tobin Tax

The crisis of the late 1990s gave rise to the Anti-globalization Movement. This international Anti-Globalization movement was made very evident. Such public sentiments came to a head, in the both demonstrations against the World Consumer summit in November 1999 in Seattle (USA), and at the Social Forum World Porto Alegre in Brazil in 2001 (Lizcano, 2011). The samesentiments were also echoed in the French magazine ‘Le Monde Diplomatique’. In December 1997 the magazine ran an editorial piece promoting the instigation of a Tobin Tax, when it published an article, part of which said: "One such mechanism is the Tobin tax […] The idea was to impose a modest tax on all exchange transactions, to stabilise the markets and generate revenue for the international...
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