?Only two things are infinite, the Universe and human stupidity; and I am not sure about the former,? said Albert Einstein.

The Brazilian Government imposed a 2% tax on all foreign exchange inflows a couple of months back. This has set off a debate across the globe on the feasibility of introducing such a tax in developing countries. Economists and financial strategists see an echo of the three-decades old Tobin tax in the Brazilian levy.

James Tobin was a Nobel Laureate and an economist at Yale. The 1981 award was in recognition of his pioneering work concerning financial markets and their relation to expenditure decisions, employment, production and prices. Tobin was a leading exponent of the Keynesian school. He was the intellectual force behind John F Kennedy?s tax cuts that started the 1960s? economic boom. Kennedy invited Tobin to join his council of economic advisors. Tobin hesitated, calling himself an ivory tower economist. Kennedy replied, ?Does not matter. I am an ivory tower President.? Along with Kenneth Arrow, Robert Solow and Walter Heller, Tobin heralded the dawn on ?New Economics?.

Motivated by a desire to provide Keynesian economics a more rigorous foundation, Tobin argued a small tax on speculative currency transfers would curb short-term speculation, stabilise currency markets, protect national autonomy and encourage a long-term approach to investment. The idea was prompted by the collapse of the Bretton Woods system in 1971, which replaced an arrangement of fixed exchange rates based on the US dollar?s peg to gold. Tobin proposed to reduce currency volatility with a small tax, say 0.1 %, levied on every amount exchanged from one currency to another. He wanted to discourage short-term currency speculation. His goal was ?to throw sand in the wheels of global finance? with a simple tax that would be small enough to make short-term purely financial moments un-economical, without being a burden on trade. Anti-globalisation activists saw in the Tobin tax a good way of raising revenue for economic and social developments.

The idea was lying dormant for 20 years and was revived in the 1990s at the time of the South East Asian economic crisis. (Goldman Sachs brought down Malaysia?s free currency system, leading to then President Mahathir lamenting how international currency speculators had ruined his country?s economy). In 1997, Ignacio Ramonet, editor of Le Monde diplomatique, came out with an editorial proposing to create an Association for the Taxation of Financial Transactions for the Aid of Citizens?.

Since the tax was to be levied on international currency transactions, it was assumed that its introduction would require unilateral implementation under the auspices of an international institution. The UNDP suggested implementation of the Tobin tax to restrain short-term capital outflows. A renowned tax expert, Vito Tanzi, in a celebrated essay published by the IMF in March 2001 referred to ?fiscal termites? gnawing away at the foundation of the tax systems, with electronic money substituting for real money, offshore financial centres and tax havens having proliferated into unaccounted transactions on a large scale. The ratio of tax revenue to GDP is bound to fall in developing countries, he had cautioned.

In 2004, the Commission of Finance and Budget in the Belgian Federal Parliament approved a Bill implementing the spahn tax, a version of the Tobin tax, for all countries of the Eurozone. In July 2005, former Austrian Chancellor, Wolfgang Schussel called for a European Union Tobin tax to base the community?s financial structure on more stable and independent grounds. All these proposals fell through.

French President Nicholas Sarkozy raised the issue once again in September 2009, suggesting the adoption of Tobin tax by the G-20 countries. In the UK, the proposal was initiated by development charity War on Want, which set up a Tobin tax network in 2002. The tax had the advantage of combining regulation of the international financial system with a means of raising money for development. The British NGO Stamp Out Poverty developed the Tobin tax into a modern proposal in favour of a mechanism solely for raising development revenue. This was in 2005 when the currency market had grown to $2,000 billion a day. One particular organisation in London found that a tax on sterling traded in the UK was quite feasible and could be unilaterally implemented. Lord Adair Turner, adorning the Chair of the UK financial services authority, supported the idea in August 2009, warning that a ?swollen? financial sector had grown too big for society. In November 2009, Prime Minister Gordon Brown suggested that the G-20 countries consider a tax on currency speculation. In March 1999, the Canadian House of Commons passed a resolution directing the government to enact a tax on financial transactions in concert with the international community. The idea has been supported by President Luiz

Inacio Lula da Silva of Brazil, President Hugo Chavez of Venezeula and President Nestor Kirchner of Argentina. They even proposed a regional Tobin tax.

Currency speculators trade at the rate of over one trillion dollars each day. About 85% of such trade is speculative. The Tobin tax would reduce dangerous currency volatility and restore macroeconomic autonomy. Revenue can be in billions and can go to international trust funds or other parts of national budgets to fund worthy projects.

The question now arises, why is India fighting shy? To start with, we can levy a tax on foreign currency transactions of foreign banks. This can finance infrastructure and build up mechanisms to fight money laundering. This should be made applicable to all currencies so that there is no disruption of the pattern of trade. Failure to do so would only mean obstinate stupidity at a time when a weak dollar is driving FIIs to park money in Indian markets to the tune of Rs 20,940 crore net in 2009. The rupee-dollar ratio is adversely impacted by this free flow.

The time has come to consider the levy of a Tobin tax or its variation in India.

The author is a former Chief Commissioner of Income Tax and ex-member of the Income Tax Appellate Tribunal