Tobin Tax

Introduction

• A Tobin tax is levied on the international flow of short-term capital or hot money which are very speculative. 
• The aim of a Tobin tax was to generate stability in currency markets. 
• The Tobin tax proposed by James Tobin in 1972 in the form of a currency transaction tax.
• India has a variant of the Tobin tax called the Securities Transaction Tax (STT). It was introduced in 2004 and is levied on every transaction of securities listed on the stock exchanges and mutual funds.

Need of Tobin Tax

• The short-term capital flows (movement of international investable money) are highly unstable due to being speculative.
• Frequent inflows and outflows of short-term capital create management problems for many emerging markets central banks like the RBI in India.
• Tobin tax prevents the movement of volatile short term capital flows or hot money which are very speculative.

Benefits of Tobin Tax

• Tobin tax discourages short term speculative capital.
• Tobin tax provides the government and the central banks with a gestation period to provide the required adjustments so as to counter the destabilizing effects of both outflows and inflows.
• The process of entry and exit of capital is slowed down by the time taken to pay taxes.

Limitations of Tobin Tax

• Tobin tax can decrease financial transactions which result in decreasing job opportunities.
• It can cause a decrease in the liquidity of assets.
• The increased investment cost for the investors.
• Decrease in return on various funds such as pension funds as the banks would simply pass the cost of the taxes to the customers.