named after nobelwinning us economist james tobin who proposed it in 1971 this tax on shortterm crossborder currency transactions is levied to discourage such flows and help stabilise exchange rates by curbing speculation since speculative currency trades occur on smaller margins tobin tax reduces or eliminates incentive for speculation mr tobin argued that national economies and governments are not capable of adjusting to massive movements of funds across borders without sacrificing the effectiveness of national economic policy with respect to employment output and inflationwhy is tobin tax relevant nowthe global financial crisis reopened the debate on the relevance of tobin tax the proponents of the tax argue that illeffects and risks of volatility are inherent to all financial markets and measures should be in place to curb flows many countries such as brazil thailand columbia chile and malaysia have similar taxes in place economists say globally coordinated action will enhance the effectiveness of the policies at the national levelis there an optimum tobin tax ratein 2001 james tobin said the rate could be close to 05 economists have proposed financial transaction tax rates ranging between 005 and 1 even a 05 tax applied per transaction in the currency market could discourage trades as the spreads in the many of these transactions are as low as 0005what are the implications of the taxvarious studies suggest that capital account management and measures like tobin tax dissuade shortterm capital flows in the longer term nonfinancial direct investment is relatively unaffected by the tax while the longterm implications on growth is not yet assessed the literature available doesnt suggest any serious downside risk due to capital account managementhow effective is tobin taxfor a speculative trade to be profitable the margin must be greater than the proposed tax but some argue that tobin tax will lower liquidity and hence raise volatility so it may prove more damaging than exchange rate instability it is trying to cure