What is a Tobin Tax?

A Tobin tax is a kind of transaction-based tax designed to limit speculation in currency, with the goal of stabilizing currencies. The tax is levied on spot currency conversions used by traders to speculate rapidly by converting between currencies immediately to take advantage of shifting exchange rates. The tax is structured in a way intended to limit such trades while allowing people who are not speculating to trade currency without interference. Proceeds from the tax can be applied in a variety of ways.

This concept was proposed in the early 1970s by economist James Tobin. Tobin argued that currency speculation contributed to instability in the global market in addition to undermining the strength of individual currencies. Speculation was on the rise as trading activity went global with the assistance of better communication between financial markets and traders. Various meetings of international organizations during the 1970s expressed concerns about currency fluctuations and Tobin proposed the tax as a way of curbing speculation.

The design of the Tobin tax is intended to levy a small tax on individual transactions. People who are not speculating in currency wouldn't be adversely affected by the tax, as it would add a small expense to their transactions, without penalizing them for exchanging currency. Speculators making a large number of small spot trades would be penalized, as the tax would eat into the bottom line of speculative profits. This would have the effect of slowing the rate of currency speculation, keeping currency prices more stable.

In addition to putting a check on speculation, the Tobin tax would also create more room for ordinary investors who trade currency. Currency trading on a low volume wouldn't be as affected by the tax, as traders could afford the relatively low taxation on small numbers of trades. Traders using computers to execute large numbers of trades at once while engaging in spot trading would be the primary targets of a Tobin tax.

Several nations have discussed the possibility of implementing a Tobin tax and some have even attempted to pass measures to put such a tax in place. Resistance tends to be aggressive, as traders oppose the tax and some economists fear that it could interfere with the function of the free market. In the early 2000s, as a financial crisis swept a number of nations, there was renewed interest in the potential applications of a Tobin tax and its uses in preventing speculative behavior of the type that contributed to the development of the financial crisis.