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Tuesday, 16th April 2024
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Cost of ‘Tobin Tax’ too high Back  
The costs of a ‘Tobin Tax’ on financial trading could undermine its potential benefits, a study by the OECD has revealed. The study says that instead of tempering excessive volatility in foreign currency trading which it was believed a small levy, or ‘Tobin Tax’ on each transaction would achieve, the costs of such a tax might outweigh potential benefits.
Such a tax on foreign exchange transactions was first suggested by the late Nobel Prize-winner James Tobin in 1971. Tobin, however, subsequently distanced himself from certain interpretations of the proposal, in particular that the levy could be used to help fund development aid to poor countries. With around 1.25 trillion dollars traded daily on the foreign exchange markets the potential revenue of such a tax is large, though not as large as some of its advocates have suggested, as the tax base itself is likely to fall significantly if such a measure were introduced.
The study finds that there is a link between high volumes traded and high volatility. But it is far from clear that the former causes the latter, and volatility and trading volumes can both be triggered by the influx of information to the market, says the study.
Looking at a number of markets where transaction charges have been imposed, the study concludes that the effect on volatility is at best mixed. In some cases there was no appreciable reduction; in others, volatility actually rose, say the study’s authors.
Implementation of a ‘Tobin Tax’ would be difficult. Unless it is applied on a worldwide basis, it is unlikely to be effective, the study says. The levy would also have to cover other traded financial instruments and even some real commodity markets as these could be used to avoid the tax. The consequent rise in costs could undermine potential benefits, according to the paper.

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