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Question

45. Consider the following statement about Tobin tax.
1. It replaced short-term capital gains tax on financial assets.
2. Tobin tax aims to discourage volatile short term capital flows.
3. Unlike Tobin Tax, Capital Gain Tax is levied only on financial assets.
4. India could not adopt Tobin Tax due to the lack of required tax administration.
Which of the above statement(s) is/are correct?

A
Only 1 and 4
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B
Only 2, 3 and 4
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C
Only 2
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D
Only 3
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Solution

The correct option is C Only 2

A popular feature of short term capitals flows (movement of international investable money) is that they are often speculative and are highly unstable flows. Their quick inflows and outflows are creating management problem for many emerging market central banks like the RBI.
1.
Tobin tax is a tax on international flow of short term capital. The tax is known after economist James Tobin who proposed it in1972 in the form a currency transaction tax.
2. Basically, Tobin tax aims to discourage volatile short term capital flows or hot money which are very speculative.
3. Tobin has advocated the imposition of tax on cross border flow of short term capital as these are the sources of volatility and risks in the host economies


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