The Tobin tax, proposed in 1972 by Prof James Tobin during a Janeway Lecture at Princeton University, are excise taxes on cross-border currency transactions with the primary aim of reducing exchange-rate volatility.

Interestingly, Tobin, who received the Nobel Prize in economics in 1981, had taught Thailand's economic guru, Virabongsa Ramangkura, who criticised MR Pridiyathorn Devakula's management of the baht when Pridiyathorn was central-bank governor. Virabongsa has long been a supporter of a weaker baht, saying local exporters could not compete while trading partners like China maintained a weak currency to support their exports.

Before implementing the 30-per-cent withholding rule, the central bank had also been criticised for ignoring exporters by allowing the baht to rise too much amid intensifying speculation.

The objective of the Tobin tax is similar to what the Thai authorities had hoped for when they launched the reserve requirement, which has been heavily criticised by both local and foreign market watchers as too harsh and mismanaged. The measure caused stock investors to panic and saw Bt820 billion vanish from the Stock Exchange of Thailand's market capitalisation.

The Tobin tax has never been far from controversy.

On August 15, 1971, then-US President Richard Nixon unpegged the dollar from gold, fearing the depletion of US gold reserves, effectively ending the Bretton Woods system of international monetary management. Tobin suggested a new system for international currency stability and proposed that such a system include an international charge on foreign-exchange (forex) transactions.

The Tobin tax has become a target of the anti-globalisation movement and a matter of discussion not only within academic institutions, but even on streets and in parliaments round the world, including in the UK and France.

In 1997, Ignacio Ramonet, editor of Le Monde Diplomatique, renewed the debate around the Tobin tax with an editorial titled "Disarming the Markets". Ramonet proposed the creation of an Association for the Taxation of Financial Transactions for the Aid of Citizens, which would introduce the tax.

The Tobin tax levies a tiny amount, less than 0.5 per cent, on all forex transactions, to deter speculation on currency fluctuations. While the rate would be low enough not to have a significant effect on longer-term investments in which yields were higher, it would cut into the yields of speculators moving massive amounts of currency round the globe as they sought to profit from minute differentials in currency fluctuations.

The central bank's reserve requirement was also criticised for being too high and acting to discourage even real investors. No investor could afford to use only 70 per cent of their money, with the other 30 per cent parked in the Thai market, critics said.

As a uniform international tax payable on all spot transactions involving the conversion of one currency into another, in both domestic security markets and forex markets, the Tobin tax would, in theory, discourage speculation by making currency trading more costly. The volume of destabilising short-term capital flows would decrease, leading to greater exchange-rate stability.

The tax can be enacted by national legislatures, followed by multilateral cooperation for effective enforcement. The tax revenues should go to global priorities: basic environmental and human needs. Such taxes would help tame currency-market volatility and restore national economic sovereignty.

The central bank said the reserves it would accumulate from capital controls would be used to generate returns later.

Although there are many differences, the central bank's reserve requirement is in many ways reminiscent of the Tobin tax.

Jiwamol Kanoksilp

The Nation