For or against Tobin Tax Essay

779 WordsNov 17, 20094 Pages
I personally do not agree with the introduction of Tobin tax on international currency transactions. First, it would reduce the liquidity of the foreign exchange market. The tax rate, though seems small, can distort economic activities. Trading volume in foreign exchange market would shrink. Small and less traded currencies will be influenced the most because for investors, they are not worth investing anymore. Thus, the tax might impair international investment and kill weak currencies. Tobin’s theory assumes that speculators are harmful for forex market. But actually, thanks to their ebullient trading activities, the liquidity of the market is ensured. Without them, the price becomes less volatile, the number of investors drops significantly, goods become difficult to trade. The final result is that every party involved in forex trading would become poorer, not richer. The largest part of daily transactions is hedging. This activity helps dealers to spread risk more evenly. The Tobin tax would prevent this practice because each transaction will be taxed. It reduces hedging, thus it would encourage more pure speculation and may lead to more volatility on the forex market. Second, the reliability of the Tobin tax theory should be questioned. Is it true that this tax can increase stability? Can you be sure that a market with fewer and larger transactions is likely to be more stable than a market with more investors and more frequent trading transactions? The same goes for transaction cost, a market with higher transaction cost cannot be more stable than a cost-free market. There is little practical evidence to support the idea that Tobin tax would reduce currency fluctuation. Countries have been trying to use many forms to control capital flow to reduce fluctuations, including implicit taxes. Many researches have concluded that capital control may

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