Analysis has shown that the original Tobin tax is not viable. First, it is virtually impossible to distinguish between normal liquidity trading and speculative “noise” trading. If the tax is generally applied at high rates, it will severely impair financial operations and create international liquidity problems, especially if derivatives are taxed as well. A lower tax rate would reduce the negative impact on financial markets but not mitigate speculation where expectations of an exchange rate change exceed the tax margin. The assertion that reducing the level of trading would automatically reduce volatility can be contested.
Second, because of the high substitutability of financial products, taxing only spot transactions would create tax loopholes and reduce the effectiveness of the tax as an antispeculation device. However, including derivatives, particularly forward transactions, poses substantial conceptual problems as no fixed relationship between cash and derivative transactions can be established readily.
Third, even with a very low rate, the tax would raise substantial revenue given the high and increasing volume of trading. The high level of revenue ultimately generated by a low-rate tax may constitute a considerable problem for tax assignment.
Most of the difficulties of the Tobin tax could be resolved, possibly with a two-tier rate structure consisting of a low-rate financial transactions tax and an exchange surcharge at prohibitive rates. The latter, dormant in times of normal financial activities would be activated only in the case of speculative attacks. The mechanism allowing the identification of abnormal trading in world financial markets would make reference to a “crawling peg” with an appropriate exchange rate band, within which the exchange rate would move freely. Only transactions effected at exchange rates outside the permissible range would be subject to tax. This would automatically induce stabilizing behavior on the part of market participants. The effect should be strengthened through contingent claims to insure against eventual taxation as exchange rate volatility is likely to occur only under market imperfections.
Tax administration seems to be a minor problem although it requires international cooperation. A remaining problem with the proposed tax is related to political coordination and the assignment of the tax at the international level. Coordinating fundamental policy decisions at the international level will be crucial and will ultimately determine the long-term feasibility of the tax. However, the proposed policy seems to be feasible even on a unilateral basis.