Tobin Tax was first suggested by economist James Tobin. In the context of large volumes of capital movements across the developed countries’ borders which was resulting in huge volatility in exchange rates and casing disruptions to financial markets repeatedly in the late ‘sixties and early ‘seventies, James Tobin had suggested imposition of a tax on financial transactions across the border. So capital coming into or exiting from a country should be subjected to a small tax which should discourage purely speculative movements of funds.

This idea, never implemented so far, came to be known as the Tobin tax. At times of large capital movements, authorities and specialists had often talked of Tobin tax on speculative movements. In the context of the current situation, when speculative funds movements across borders had unsettled financial markets and disrupted real economies, this is again being suggested. The derivative products and other forms of securities which were traded in large volumes just before the 2008 financial melt-down might not have happened if such a tax been in place.

However, currently the idea of a financial transactions tax is slightly different. In the aftermath of the financial melt-down, banks had suffered hits on their capital base. Their own funds had eroded and governments had to step in and provide funds. The present day financial transactions tax is being devised as an insurance against such developments. The financial transactions tax is supposed to provide funds collected from such a tax in good times so that this can become handy in times of crisis. This is not exactly a Tobin Tax, as originally conceived.

India has opposed imposition of such a tax now because this is not exactly in the interest of banks and financial institutions in this country. A financial transactions fund will put additional burden on banks and financial institutions unnecessarily. Indian banks and financial sector companies have not been exposed to the toxic assets which were purchased by western banks and financial institutions like pension funds or insurance companies. Hence, they need not to be rescued from any funds crunch.

However, what Manmohan Singh has pointed out in course of his statements in Cannes in France last week is that banks and financial institutions are majorly owned by the government in India.

A tax on them will be a tax on government entities only. This will in effect be a transfer from one account head of government to another account head without any additionality. It will only add to the costs administratively as well as to customers. Canada as well have opposed imposition of a financial transactions tax on similar grounds of additional costs. However, Germany and France have urged such a tax as their banks are freshly threatened by defaults by Greek government on their government securities. The French and German banks have been the principal buyers of the Greek government debts secure in the fact that Greece was part of the Euro system..

United States, on the other hand, have kept silent on the issue publicly although earlier the US was in favour of such a tax immediately after the financial melt-down when the US banks were the worst affected.

The differing positions about the financial transactions tax among different countries or blocs of countries are critically important. A financial transactions tax can be imposed only if all countries agree to such a tax. If one country agrees to such a tax and imposes it and another does not, then financial transactions will migrate to the country which does not have such a tax. Hence, there will have to be some consensus about such a tax. This only reflects the varying priorities and position of the G20 countries. As India had earlier pointed out, the countries are at different stages of their business cycles.

The varying positions of different countries in the G20 on Tobin tax also demonstrate the kind of ideological transition that have swept over academies, think tanks, policy makers and politicians in the principal western players. Hard core pro-market economists had opposed Tobin tax on the ground that it was a barrier to free market. In the heydays of “Washington Consensus”, such a tax was inconceivable. The irony is that it is the West which generally is asking for imposition of such a tax as a price on untrammeled movement of hot money. Similarly, unfettered capital account convertibility is also not in a favour, even though the IMF had urged even the less developed countries to introduce capital account convertibility.

It is now generally admitted that while the real economy could be opened up and trade liberalized, the opening up and liberalization of the financial sector would have to be approached with far greater caution. In this context, India’s approach of calibrating liberalisation of the financial sector and effective insulation of some areas of financial sector from global contagion has proved to be on correct lines. These have been emulated by others to some extent. Tobin tax could act as a measure to curb the exposure of national economy to disturbing waves from the rest of the world. It greater acceptance among western countries and authorities show the distance they have traversed from market fundamentalism to traditional approach of looking strictly after national interest. However, in this context they are trying to impose their national concerns on others who could justifiably have very different concerns. (IPA Service)