It is time for Tobin Tax

Tobin tax was suggested by James Tobin way back 1970s. The idea was to implement a tax on each foreign currency transaction thereby penalizing short-term speculation. This is what Tobin said “This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties’ crises in Mexico, South East Asia and Russia have proven. My tax would return some margin of maneuver to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets”.

His suggestion has been in the cold storage for a longtime (except maybe a nightmare for students preparing for exams, like this blogger many years back!!. I came to know about Tobin tax in mid 1990s, I found it attractive even then. Later East Asian currency crisis confirmed it). Recently British PM Gordon Brown brought it out, he said “I think we should discuss whether we need a better social contract to reflect the global responsibilities of financial institutions to our society. There have been proposals for an insurance fee, or a resolution fund or a contingent capital arrangements or a global financial transaction levy.”.
Tobin tax will help counter the volatility of financial markets and avert financial crisis. It will also discourage speculative currency trading and reduce exchange rate volatility. There is a popular support for these suggestions not only at the policy making level but even in the streets. There have been much discussions and it is high time to implement these proposals.

Need to add here that Tobin saw it as step to cushion exchange rate fluctuations only and nothing else but I guess world has grown much after him or quite likely he had tunnel view of world and yes role of economist in socio-political context is only advisory. Tobin tax will create as Brown puts it “contingent capital arrangement”. The suggestion to put it under UN is quite brilliant, this would give UN much needed fund to put the priorities of world community in place. Unlike Tobin this blogger would like to see UN strengthened, World Bank and IMF can wait. UN represents multilateralism and there is an urgent need to foster these. As UN Secretary General Ban Ki Moon said recently "We share one planet, one small blue speck in space. As people, as nations, as a species: we sink or swim together,"