Any improvement or misinformation, ur opinion is highly welcomed.
THE TOBIN TAX
International
trade has experienced various changes in its trading system as from
mercantilism until the liberalization era on twentieth century. It evolves from
barter trading system into multiple creations of derivatives and from gold
standards era into the multi exchange rate regimes. Thus, the stability of
international monetary system indirectly has been affected by these changes.
Historically, trading between nations was
settled through the barter system i.e. exchanging commodities and services with
the equivalent agreeable amount of commodities and services between two
parties. Then, world saw the birth of gold and silver era where the trading of
the commodities and services were paid by the gold in which the gold acts as
the monetary base of a country. Later, during the World War II period, the
world once again witnessed the new financial system known as Bretton Wood
system and it was abandoned due to the incompatibility of macroeconomic
policies between U.S and European countries and the unwillingness of US to
devalue dollar. Since the collapse of Bretton Wood system, countries started to
stipulate their own monetary and exchange rate regimes. Some of them adopted
floating exchange rate, fixed exchange rate, managed exchange rate and the
birth of one currency zone- Euro.
These
changes also indirectly caused the volatility and instability of international
financial markets which can be trace as among the factors of the economic and
financial crises. Thus, foreseeing that this instability will create more
problems in the future, James Tobin, an academician proposed the idea of tax
levied on every currency exchange, set at a level low enough not to hinder any
transaction needed to finance real trade in goods and services or long term
capital investment, but high enough to discourage the bulk of speculative
movements.
James
Tobin emphasized, this tax would be an internationally agreed uniform tax,
administered by each government over its own jurisdiction. Britain, for example
would be responsible for taxing all inter-currency transactions in Eurocurrency
banks and brokers located in London, even when Sterling was not involved. The
tax proceeds could appropriately be paid into the IMF or World Bank. The tax
would apply to all purchases of financial instruments denominated in another
currency.[1]
Originally,
the Tobin tax was been introduced to be levied on the spot transactions with
assuming that the derivatives are settled by spot transactions. However, later
it was discovered that the nature of forwards contract and swaps is different
from the assumption, thus, lead to these two derivatives being taxed.[2] Analogically, assume that
you have a saving account in CIMB, however, when you wanted to withdraw your
money, let say RM 100, you could not find CIMB atm. Thus, you withdraw your money
using BIMB atm, where you were charged RM 1 per transaction and the total
amount deducted from your account is RM 101. Remember that, if you withdraw
using CIMB atm, you will not be charged RM 1 per transaction and it will
provide you with various choices of actions:
1) You might withdraw RM 10 with 10 transactions = RM
100 deduction in account
2) You might withdraw RM 20 with 5 transactions = RM
100 deduction in account
3) You might withdraw RM 50 with 2 transactions = RM
100 deduction in account
4) You might withdraw RM 100 in single transaction =RM
100 deduction in account
If
you withdraw your money with BIMB atm, you will face these choices:
RM 10 x 10 transactions + (10 transactions x RM 1) =
RM 110 deduction in account
RM 20 x5 transactions + (5 Transactions x RM 1) = RM 105 deduction in account
RM 50 x 2 transactions + (2 transaction x RM 1) = RM 102 deduction in account
RM 100 x 1 transaction + (1 transaction x RM 1) = RM 101 deduction in account
RM 20 x5 transactions + (5 Transactions x RM 1) = RM 105 deduction in account
RM 50 x 2 transactions + (2 transaction x RM 1) = RM 102 deduction in account
RM 100 x 1 transaction + (1 transaction x RM 1) = RM 101 deduction in account
Comparing the delineated situation, we can get
general understanding on how the Tobin tax works. However, the tobin tax idea
was proposed on percentage, not in the fixed term as the above analogy. (This
analogy was modified and improved from the analogy introduced by Tim Harford)[3]
The
idea was pointed out due to the mobility of capital and domestic policies are
ineffective in governing the capital market which consists of cash market and
capital market. These reasons are claimed as the causes for the financial
crises by James Tobin. Nevertheless, there is also advantage when capital is
mobile and the argument is that the capital can be used to develop other
region. However, most of the arguments of James Tobin in his paper “A Proposal
for International Monetary Reform” centered on the floating exchange rate
regime rather than arguments in much broader perspectives.
The
objectives of the Tobin Tax are basically to reduce short term speculation where
evidently 80% of foreign exchange transactions occurred with the average of
seven days or less and another reason is to preserve and promote autonomy of
national macroeconomic and monetary policies in which indirectly opposed the
liberalist’s view that market shall be left to work alone guided by the “hidden
hand” as proposed by Adam Smith.
The
proponent of the Tobin Tax argued that this tax can stabilize the volatility of
the financial market and discourage the short term speculation or hot money
that exploiting the interest rates differences. They also claimed that it can
generate revenue for the government and the revenue can be used to finance
development projects of a country. In the long term, this tax can minimize the
effect of economic and financial crises.
As
most economists believed that there is no free lunch-everything has its own
costs and this Tobin tax also has drawbacks. Empirically, with the introduction
of Tobin Tax, it has caused significant capital flight from Sweden into London
of 60% of stocks and 50% of equity by 1990.[4] Other disadvantages of
implementing Tobin tax is, it will discourage people from participating in
financial market transactions and market will become unstable since most of
participants argued that speculation promotes the efficiency of financial
market. Later, due to discourage nature of tax, it will cause job losses in the
financial where the proportion of the financial transactions is almost 3
trillion daily. This situation somehow created domino effect, in which the
unemployment will be increased and we can expect that the domestic problems
such as political instability, riots and social problems increase accordingly.
However, if the government increased the interest rate in order to attract
investor, the result will be that the investment needed is not sufficient.
Additionally, this tax mechanism is difficult to be administrated given the complexity
of the financial markets which not only trading the real economy, but also
encompasses financial economy, i.e. derivatives and so forth.
opposition of tobin tax and the same time the
benefit of tobin tax can achieve by thoroughly devised on tobin
tax mechanism.
[1]
1978. “A Proposal for International Monetary Reform.” Eastern Economic Journal
4(July-October):153-9
[2]
The Tobin Tax : Coping with Financial Volatility by Adam N.S.G. Baldwin
[3]
The Tobin Tax : Coping with Financial Volatility by Adam N.S.G Baldwin
[4]
The Tobin Tax: Reason or treason? , A Comparative Study of the Potential
Effects of a UK Tobin Tax
READING
Patomaki, H. (2001). Democratising Globalisation:
The Leverage of The Tobin Tax. Zed Books Ltd.
Tobin, J. ((July/ October)1978). A
Proposal for International Monetary Reform. Eastern Economic journal,
153-159.
Grunberg, I., Kaul, I.,
Mahbub ul Haq. (1996). The Tobin Tax: Coping with Financial Volatility. Oxford
University Press
Baldwin, A. N. The Tobin Tax: Reason or Treason? A
Comparative Study of The Potential Effects of a Uk Tobin Tax
Maswood, S. J. (2008). International Political
Economy and Globalization (2nd Edition): 2nd Edition. World Scientific
Publishing Co. Pte. Ltd.
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