With an intention of finding a means to manage the unpredictability of the exchange rate, James Tobin, one of the Nobel Laureate economists, suggested tobin tax. It was basically designed with a purpose of penalizing the short-term currency conjectures and to levy a tax on the on spot currency conversions. In a motif to stabilize the currency of a country, it was specially suggested to be applied to the financial sector participants. According to the recent hft report (high frequency trading), the companies investing in the trading market are likely to face new challenges. The tax would also be placed on the high frequency trades occurring on the financial market, irrelevant of the fact that, whether it is a listed company or a non-listed one.
How the Tobin Taxes will work
- Lessen the Volatility of Exchange Rates: It deters speculation by levying a small tax on foreign exchange transaction. This in return reduces the unpredictability of exchange rates and offers the importers, exporters, short-term and long-term investors a static exchange rate on paying the tax.
- Discourage Short-Term Trading: Even though, tobin tax reduces the frequency of short-term currency conversion, yet leave a productive investment intact for long-term currency trades.
- Allow More Power to the Government: The currency tax gives more autonomy to the government rather than the financial markets to determine the fiscal policy and monetary policies.
- It Enables to Raise Revenue: As the hft report says, the high frequency trading is likely to increase in the near future even more. Thus, imposing tax on the currency conversion will enable to raise the revenue and at the same time generate resources for human development. Billions of revenue is evaluated that would be generated per year and it would go to a reliable trust for better use.
According to the hft report, For the all-round development of the country, a whole lot of councils are supporting this approach. Right starting from the World Council of Churches to the AFL-CIO, from Eurodad to War on Want, from Rainforest Action Network to Global Exchange have jumped on to the bandwagon in order to ensure bigger profit margins and a lot less volatile market.
Of late, a number of countries have signed on to the implementation of the tobin tax in order to raise a considerable sum from the industry of financial services and to make sure that there is no more speculation in the market, as can be seen from the hft report. The seriousness of the move can be estimated from the fact that the tax is being proposed to be implemented by four of the most powerful economies in the Eurozone, namely, Germany, Spain, France and Italy. As per the hft report says, a number of other countries are also in the group, namely, Belgium, Estonia, Portugal, Slovakia, Austria, Slovenia and Greece. It is being speculated that more and more countries in the Eurozone will be jumping on the bandwagon as well and implementing the tobin tax, looking at it as a desperate measure to manage the sinking economies that are finding it difficult to stand tall following the recession and the ensuing instability of the market.
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