A Study on the Introduction of Tobin Tax for Stabilization of The Financial Markets
Asian Tax Journal Vol. 12 No. 4 (2011), pp. 173-205
Abstract
Since the 1990’s, the liberalization of international capital flows has been justified on the grounds that it could promote investments in and economic growth of emerging countries by improving the efficiency of capital and expanding insufficient capital. However, the rapid spread of the global financial crisis, which started in the United States in 2008, became attributed to the liberty of international capital flows, which led to the formation of a international consensus to partially restrict capital flows among countries. Korea underwent financial crises in 1997 and 2008, respectively, due to its backward financial system. In order to prevent further financial crises, a financial system that is suitable for Korea should be established. Prior to the establishment of a new financial system, however, market opening and liberalization should be balanced with market control and restriction. With financial markets open, in particular, international capital flows have been functioning as an constant anxiety factor in Korean financial markets. Thus, it is thought that steady management of a high level of dependence of the financial area on foreign countries is a top priority for the weak financial system of Korea. For this, measures to restrict short-term international capital flows are needed. Among various measures to restrict short-term international capital flows, including imposition of transfer tax, investment limit establishment, a price bidding system, and a mandatory deposit system, this study reviewed the imposition of transfer taxes. Considering that independently imposing financial transfer taxes in local markets such as the Korean won market is feasible, this study suggested the following fundamental directions for the Tobin tax. First, as some countries including the United States and Canada are against the implementation of the Tobin tax with concern of a decline in capital transactions among countries, an international organizations wholly responsible for the Tobin tax will not be established by international consensus for a while. Therefore, as a transitional form, it seems appropriate to impose the Tobin tax as national taxes as Brazil does. Second, objects of the Tobin tax should include spot exchange transactions, such as stocks, bonds, and foreign exchanges, and derivatives. Foreign exchange flows, however, should be excluded because they may arouse a psychological tax protest. Third, as the aims of most exchange trades is to create profits rather than to pay for trades, the Tobin tax should be imposed upon the points of making contracts for financial transactions. Fourth, the Tobin tax, suggested by James Tobin, is imposed upon all types of exchange trades, which may be infeasible. Therefore, as a complementary measure, the two -tier Tobin tax should be implemented. The results of this study are expected to be regarded as a reasonable alternative measure for effectively restricting short-term speculative foreign capital, which is blamed for the current financial crisis in Korea.
Keywords
- Currency Crisis
- financial crisis
- Tobin tax