What is Tobin tax? What are its main features?. (250 words)

  • It is a tax on currency trades across borders.
  • First proposed by James Tobin, Ph.D., a Nobel laureate economist in 1978.
  • Interest has grown rapidly in such a mechanism, as the pace of foreign exchange transactions and financial deregulation has accelerated over the past two decades.

Why Tobin tax?

  • It has potential to prevent financial crises.
  • This would reduce the volatility of exchange rate fluctuations and provide exporters, importers and long-term investors a more stable exchange rate in return for paying the tax.
  • The tax would give more autonomy to governments to set national fiscal and monetary policies by making possible greater differences between short-term interest rates in different currencies. Such a tax would also reinvigorate the capacity of central banks to alter exchange rate trends by intervening in currency markets. By cutting down on the overall volume of foreign exchange transactions, central banks would not need as much financial clout to intervene.

In the globalized economy, there is a lack of adequate funding for global problems such as disease, poverty and hunger. Global climate change, deforestation, population growth and unemployment, declining fisheries and pollution threaten local communities worldwide. Projects which could help to address these needs and create jobs will cost more than $400 billion annually. Private donors do not meet the need, and some nations cut their aid budgets. New multilateral approaches to public finance, such as Tobin Taxes, may provide part of the answer.

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