RAS question
The Tobin Tax proposed by James Tobin is a tax on:
Correct answer: (C) Short-term speculative foreign exchange transactions.
The Tobin Tax proposed by James Tobin is a small tax on short-term speculative foreign exchange transactions.
Explanation
James Tobin proposed the Tobin Tax in 1972 to reduce exchange-rate volatility by making currency trading more costly. The IMF Finance & Development article describes it as an international tax on spot transactions involving conversion of one currency into another, meant in theory to discourage speculation and reduce destabilising short-term capital flows. That is why the answer is short-term speculative foreign exchange transactions, not a general tax on income, goods, or property. India's Securities Transaction Tax is somewhat similar in concept for equity markets, but the original Tobin proposal is centred on foreign exchange.
Why the other options are wrong
- (A) Bank profits are not the target because the Tobin Tax is framed around foreign-exchange transactions, especially speculative currency trading, rather than a levy on banks' earnings.
- (B) Real estate transactions are outside the scope because the proposal concerns currency conversion and foreign-exchange market activity, not property sales.
- (D) Import of luxury goods is wrong because the tax is not an import duty; it is directed at short-term foreign-exchange transactions that can add to exchange-rate volatility.
Concept
This tests the Indian Economy syllabus area of international finance and capital flows. It recurs in RAS because policy instruments linked to speculation, volatility, and financial-market regulation are often asked through named economists and taxes.