DMPQ- What do you understand by the term Tobin Tax?

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The Tobin Tax, named after Nobel Prize-winning US economist James Tobin, was proposed in 1971 for the first time with the intention to levy it on short-term capital currency transactions. whenever currency crises have erupted, the proposal for a levy on international currency transactions has been debated.

  • Tobin tax as a tool to discourage speculative currency trading and reduce exchange rate volatility. The Tobin tax is often referred to as the Robin Hood tax, as many see it as a way for governments to take small amounts of money from the people making large, short-term currency exchanges.
  • The Securities Transaction Tax applicable on stock market transactions in India is a similar tax intended to discourage short-term investments.
  • According to International Monetary Fund (IMF), a Tobin tax might reduce market liquidity and effectively increase volatility — clearly contrary to its suggested purpose. The legislators should thus consider a Tobin tax proposal only in the event there is a similar imposition at international level as unilateral measures can prove more damaging than the exchange-rate instability they are designed to cure. Rigid controls can cut India off from economic reality, and make the country uncompetitive.

 

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