DEFINITION of 'Tobin Tax '

A means of taxing spot currency conversions that was originally suggested by American economist James Tobin (1918-2002). The Tobin tax was developed with the intention of penalizing short-term currency speculation, and to place a tax on all spot conversions of currency. Rather than a consumption tax paid by consumers, the Tobin tax was meant to apply to financial sector participants as a means of controlling the stability of a given country's currency.

BREAKING DOWN 'Tobin Tax '

The Tobin tax has been controversial since it was originally introduced in 1972 by James Tobin, recipient of the Nobel Memorial Prize in Economics in 1981. Opponents of the tax indicate it would eliminate any profit potential for currency markets. Proponents state that the tax would help stabilize currency and interest rates because many countries' central banks do not have the cash in reserve that would be needed to balance a currency selloff.

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