Tobin Tax: What Is It?

The Tobin tax is a tax levied on spot currency conversion, with the intention of disincentivizing short-term currency speculation. This tax is named after economist James Tobin.

When fixed exchange rates under the Breton Woods system were replaced with flexible exchange rates in 1971, there was a massive movement of funds. Short-term currency speculation commenced then. 

Source: https://www.bernama.com

The Tobin tax seeks to mitigate or eliminate these issues. The tax has been adopted by a number of European countries and the European Commission to discourage short-term currency speculation and stabilize currency markets.

The currency transactions tax does not impact long-term investments. It is only imposed on the excessive flow of money that moves regularly between financial markets through the actions of speculators in search of high short-term interest rates. The tax is paid by banks and financial institutions that profit from market volatility by taking excessive short-term speculative positions in the currency markets.

According to Tobin, to work effectively such a tax should be adopted internationally and be uniform, and the proceeds donated to developing countries. Although Tobin suggested a rate of 0.5%, other economists have put forward rates ranging from 0.1% to 1%. But even at a low rate, if every financial transaction taking place globally was subject to the tax, billions in revenue could be raised.

The Tobin tax has been controversial since its introduction. Opponents of the tax indicate it would eliminate any profit potential for currency markets as it is likely to decrease the volume of financial transactions, slowing global economic growth and development in the long run. Proponents state that the tax would help stabilize currency and interest rates because many countries' central banks do not have the cash in reserve that would be needed to balance a currency selloff.

In Malaysia’s case, the daily FX turnover was USD12.6 billion for 1 April 2024. It averages around USD12-15 billion per day. If we only tax one side of the trade, say the “sell ringgit” transaction, then it is USD6-7 billion per day. And if we tax that at 0.1%, revenue would be USD6-7 million per day, or USD120-140 million per month (assuming 20 working days) or say USD1.56 billion per annum (or approximately RM8 billion per year). That will reduce our borrowings and meet part of our development expenses. This is a simple, efficient tax system compared to GST. Isn’t this better?

Reference:

Tobin Tax: What it is, how it works, examples, Julia Kagan, Investopedia, updated 30 August 2022