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Examples include the graduated personal income tax rates, in which those with higher earnings pay a higher percentage tax compared to lower-income earners. Another example of a Robin Hood effect is the imposition of a higher road tax for bigger engine automobiles; higher-income individuals who can drive larger, more expensive cars can be expected to pay higher rates.
Normal economic activity and changing market conditions can also produce Robin Hood effects. For example, the construction of a high-density affordable housing complex next door to a large mansion could make the new lower-income residents better off, while imposing costs on the higher-income residents of the mansion via increased noise and congestion. Another example could be the formation of labor unions that increase the bargaining power of workers, benefiting them at the expense of their employers.
Objectives of Income Redistribution At its core, the Robin Hood effect refers to the redistribution of income and wealth , often to rectify inequality. This concept often surfaces in politics as lawmakers debate how best to enact economic policy for the public good. The objectives of income redistribution are to increase economic stability and opportunity for the less wealthy members of society, and therefore often include funding for public services. This relates to the Robin Hood effect because public services are funded by tax dollars, so those who support redistributing income argue the need to increase taxes for the wealthier members of society to best support public programs serving the less well-off members of society.
The premise for the need to redistribute wealth and income derives from the concept of distributive justice, which asserts that money and resources ought to be distributed in a way that is socially just. Another argument in support of income redistribution is that a larger middle class benefits the overall economy by increasing purchasing power, and providing equal opportunities for individuals to reach a better standard of living.
Some proponents of the Robin Hood effect argue that capitalism creates an unequal distribution of wealth that should be rectified for the benefit of everyone. The Robin Hood Effect and Macroeconomic Policy In Keynesian economics , the preferred method to moderate economic cycles is fiscal policy : conducting deficit spending during recessions and running government budget surpluses during economic expansions.
During both recessions and expansions, this prescribed fiscal policy can often have a Robin Hood effect. So from a Keynesian point of view, it makes sense to run a fiscal policy that also has a Robin Hood effect during recessions. The combined effect of government spending and tax relief directed toward lower-income people during recessions and higher taxes on investments by people with higher incomes during economic expansions can create a massive, economy-wide Robin Hood effect.
Key Takeaways The Tobin tax is a duty proposed on spot currency trades to penalize short-term currency trading in order to stabilize markets and disincentive speculation. The Tobin tax can be used to generate revenue streams for countries that see a great deal of short-term currency movement. The Tobin tax is sometimes referred to as the Robin Hood tax, as many see it as a way for governments to take small amounts of money from the people making large, short-term currency exchanges.
Understanding the Tobin Tax When fixed exchange rates under the Breton Woods system were replaced with flexible exchange rates in , there was a massive movement of funds between different currencies that threatened to destabilize the economy. In addition, the rise in short-term currency speculation encouraged by the nature of the free currency market increased the economic costs incurred by countries exchanging currencies.
The Tobin tax, proposed by James Tobin in , seeks to mitigate or eliminate these issues. The tax has been adopted by a number of European countries and the European Commission to discourage short-term currency speculation and stabilize currency markets. The currency transactions tax does not impact long-term investments. It is only imposed on the excessive flow of money that moves regularly between financial markets through the actions of speculators in search of high short-term interest rates.
The tax is paid by banks and financial institutions that profit from market volatility by taking excessive short-term speculative positions in the currency markets. According to Tobin, to work effectively such a tax should be adopted internationally and be uniform, and the proceeds donated to developing countries.
Although Tobin suggested a rate of 0.
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Whenever one currency is appreciating, you have to say compared to what. And when one side is appreciating, the other side is depreciating. What causes changes in FX rates? Investors demand more of a currency if they think its value will increase. What are the different ways foreign exchange can happen?
Spot: This is when you simply want to convert one currency to another right now. This can happen through a bank, through a financial institution, or through anyone willing to exchange one currency for another, like the FX kiosk at the airport. Be aware of fees. Spot tends to be the only type of FX trade that involves physical money being exchanged, like dollars for pesos at the FX kiosk. But most FX trades, including spot, are handled electronically. Forward or Futures : If you know that you will need a certain amount of foreign exchange in the future, you may want to eliminate the uncertainty of what the FX rate will be at that time.
Options: One way to invest in FX is to buy or sell options. Options are an investing tool that gives the owner of that option the right, but not the obligation, to buy or sell FX at a future date, at a certain FX rate.
What are the costs of foreign exchange? The FX rate you see on the front page of the business news is not the same as the rate you have access to. Banks and other financial institutions that offer foreign exchange do so to make money, and the money they make is the difference between the FX rate they have access to, and the FX rate they offer you.
The tax is paid by banks and financial institutions that profit from market volatility by taking excessive short-term speculative positions in the currency markets. According to Tobin, to work effectively such a tax should be adopted internationally and be uniform, and the proceeds donated to developing countries. Although Tobin suggested a rate of 0.
But even at a low rate, if every financial transaction taking place globally was subject to the tax, billions in revenue could be raised. The original intent of imposing the Tobin tax has been skewed over the years by different countries implementing it. Example of the Tobin Tax For example, in , Italy adopted the Tobin tax not because it was faced with exchange rate instability, but because it was facing a debt crisis, an uncompetitive economy, and a weak banking sector.
By extending its currency transaction tax to high-frequency trading HFT , the Italian government sought to stabilize markets, reduce financial speculation, and raise revenue. The Tobin tax has been controversial since its introduction. Opponents of the tax indicate it would eliminate any profit potential for currency markets as it is likely to decrease the volume of financial transactions, slowing global economic growth and development in the long run.
Proponents state that the tax would help stabilize currency and interest rates because many countries' central banks do not have the cash in reserve that would be needed to balance a currency selloff. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
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