'Pigovian Tax' & 'Tobin Tax '

What is a 'Pigovian Tax'

A Pigovian tax is a special tax that is often levied on companies, traders etc. that pollute the environment or create excess social costs, called negative externalities, through business practices. In a true market economy, a Pigovian tax is the most efficient and effective way to correct negative externalities.

A type of a Pigovian tax is a "sin tax", which is a special tax on tobacco products and alcohol.

In the recent budget FM announced an increase in the STT (Securities Transaction Tax) on equity options from 0.017% to 0.05%. This has been done to neutralize social costs of equity options speculation and promote equity investment for long term.

What is a 'Tobin Tax '?

A means of taxing spot currency conversions that was originally suggested by American economist James Tobin.

The Tobin tax was developed with the intention of penalizing short-term currency speculation, and to place a tax on all spot conversions of currency. Rather than a consumption tax paid by consumers, the Tobin tax was meant to apply to financial sector participants as a means of controlling the stability of a given country's currency.