Revenue Potential of the Tobin Tax for Development Finance: A Critical Appraisal

Machiko Nissanke

in New Sources of Development Finance

Published in print November 2004 | ISBN: 9780199278558
Published online January 2005 | e-ISBN: 9780191601590 | DOI:

Series: WIDER Studies in Development Economics

Revenue Potential of the Tobin Tax for Development Finance: A Critical Appraisal

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The principal objective here is to assess the potential of currency transactions taxes (CTTs) – the celebrated Tobin tax – to raise revenues that can be used for developmental purposes. Thus, though Tobin proposed and others assessed CTTs in terms of reducing exchange rate volatility and improving macroeconomic policy environments, this chapter considers the CTT first and foremost from the standpoint of revenue and treats its potential to achieve valuable double dividends (such as the promotion of financial stability and policy autonomy) as a subsidiary objective. With a view of establishing the ‘permissible’ range of tax rates to obtain realistic estimates of revenue potential from CTTs, the debate on the effects of CTTs on market liquidity and the efficiency of foreign exchange markets is reviewed, and the P. B. Spahn proposal for a two‐tier currency tax briefly assessed. Next, a number of issues raised in the debate on the technical and political feasibility of CTTs are discussed, followed by an evaluation of several new proposals, such as those advanced by R. Schmidt and R. P. Mendez. The last two sections of the chapter present estimates of the potential revenue from CTTs in light of recent changes in the composition and structure of foreign exchange markets and give a concluding assessment of the potential of CTTs as a revenue‐raising tax instrument and their ability to achieve double dividends.

Keywords: currency transactions taxes; development finance; development funding; double dividends; effects on foreign exchange markets efficiency; effects on market liquidity; foreign exchange markets; P. B. Spahn; political feasibility; R. P. Mendez; R. Schmidt; revenue potential; tax rates; technical feasibility; Tobin tax; two‐tier currency tax

Chapter.  15813 words.  Illustrated.

Subjects: Economic Development and Growth

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