Head-to-head: the Robin Hood tax
- 9 December 2011
- From the section Business
Financial transaction taxes - fans call it a "Robin Hood tax", designed to fight speculation and claw back money from the rich; opponents warn of huge job losses and dire consequences for our economic well-being.
The tax proposal, put forward by Nobel prize winning US economist James Tobin, would impose a small tax levy on large transactions of currencies, bonds and shares. Given the size of global financial markets, revenues could be huge.
We asked two investment experts to make the case for and against the "Robin Hood tax".
Gemma Godfrey, chairman of the investment committee at Credo Capital will make the case against the tax.
Arguing in favour is Prof Avinash Persaud, chairman of Intelligence Capital and fellow at the London Business School.
THE CASE AGAINST
Hailed as a way for the financial sector to 'give back', the Tobin tax would charge financial institutions a fee for the transactions they execute, with the aim of bringing greater stability to the markets and using the funds to tackle poverty and related problems. However, this 'Robin Hood tax' is severely flawed.
It would not 'steal from the rich' but poison the poor, not merely failing to achieve its goals but making matters worse.
Strongly supported in Germany, but vigorously opposed by the UK chancellor, there are (at least) three fatal flaws in the plan. Firstly, it will not be the banks but savers and pensioners that foot the bill. Secondly, tax revenues could actually fall not rise as trade moves elsewhere, jobs are lost and the economy shrinks. Finally, instead of promoting stability, it could make markets far more dangerous.
Pensioners, charities and savers will suffer. There is a vast difference between the legal payer of this tax (financial institutions) and where the financial burden in reality finally lies.
Banks will be charged the tax, but they will pass on the cost to the end customer via reduced returns on pensions and higher fees to do business.
A costly tax
Bad for business, the tax could drive trade elsewhere. Applied in Sweden in 1984, 60% of the trading volume of the 11 most actively traded stocks migrated to London.
With a lower base on which to charge capital gains tax, the revenues from the transaction tax were offset.
'Revenues' for the UK are expected to be even worse. With estimates of up to 90% of the trading of certain instruments (derivatives) at risk of moving to the United States or Asia, this could end up costing £25.5bn. Without international adoption, the tax would be costly.
Job losses could amount to almost one million. These would not be isolated to the financial sector but far more widespread.
For every 10 jobs cut in finance, up to 4 jobs could be lost in sectors either supporting the finance industry or merely providing services to its former employees, such as restaurant workers etc.
Already at risk of recession, we do not have the luxury of considering such a potentially damaging proposal.
The National Institute of Economic and Social Research has given the UK a 50/50 chance of falling into recession next year, increasing to 70% if the eurozone crisis is not resolved. European leaders have more pressing issues on which to focus.
Risk reduction will be hampered. By charging for transactions, the tax is hoped to discourage high amounts of short-term high risk trading, and stabilise markets. However, this could also cause a fall in the number of trades employed to protect people's money. Charging a tax to add positions that could offset potential losses (known as 'hedging') could leave more at risk of greater losses.
Furthermore, lower volumes could increase not reduce market volatility, an Adam Smith Institute report has suggested. Price moves are averaged out over fewer trades, so the wider index could swing more violently and make it tougher for an appropriate price of an asset to be determined. Moreover, slower adjusting markets would not just slowdown market falls but lengthen the time is would take to for them to recover.
With concerns that countries cannot afford to pay their debts, it is not a tax that will bring calm to the markets.
As defined by Einstein, insanity is doing the same thing over and over again and expecting different results. The tax did not work in Sweden, and it will not work now.
THE CASE IN FAVOUR
Just because something is repeated frequently does not mean it is true. In the past few weeks - as the possibility of a Europe-wide tax on financial transactions has loomed large and campaigners have stepped up demands for what they dub a 'Robin Hood' tax to tackle poverty - opponents from the Prime Minister downwards have been emphatic: financial transaction taxes (FTTs) must be global to work.
Financial markets, they argue, have moved into cyber space, where, with a couple of clicks, trades can be routed to avoid taxes and regulation.
It's an image perpetuated by bankers, but one that does not stand up to scrutiny. The International Monetary Fund, the European Commission and the Gates Foundation have all found that unilateral transaction taxes are feasible.
Ironically, the best evidence for this can be found in the UK, where a Stamp Duty of 0.5% on transactions from anywhere in the world in UK shares raises £3bn per year.
The reason why this tax works, and the oft-quoted example of the Swedish transaction tax did not, is that it is a tax on the legal transfer of ownership. If the transfer has not been "stamped" and taxes paid, the transfer is not legally enforceable and institutional investors do not take risks with legal enforceability. Far from sending taxpayers rushing abroad, this tax gets more foreigners to pay it than any other - they contribute 40% of the revenue.
Understandably, bankers peddle the story that Armageddon would strike if you dare raise taxes in the financial sector by a smidgen.
In reality a 0.1% tax on transactions involving shares and bonds (or 0.01% on derivatives) doesn't figure highly in the decision-making of long-term investors. Despite introducing new FTTs, Brazil is still struggling to calm overseas investor enthusiasm.
Some of the world's fastest growing financial centres - Hong Kong, Mumbai, Seoul, Johannesburg and Tapei - all have FTTs that collectively raise £12bn a year.
The UK chancellor, aware of the inconsistencies of the UK's position, has shifted ground, arguing that the economic consequences would be too large for the UK to bear.
He quotes the European Commission's impact assessment to claim it could cut GDP by up to 1.76% over 20 years. The Commission also says it could also be as small as 0.53%.
There is no disputing that right-sizing finance will create vocal losers. The principal ones will be those engaged in very high frequency trading such as hedge fund managers, their investors and brokers.
Traditional pension funds, insurance companies and individual investors - who turn over their portfolios less frequently - will hardly notice. High frequency traders are contrarian during the good times when liquidity is plentiful.
But during times of crisis, they try to run ahead of the trend, draining liquidity just when it is needed most, as we saw with the Flash Crash on Wall Street on 6 May 2010. Removing this relatively new activity will improve systemic resilience.
If the 1.76% cost is compared with the 100% of GDP (£1.8tn) the Bank of England calculates the financial crisis will cost the UK economy, an FTT would be worth it on economic grounds alone if it helps to reduce the prospect or size of the next crash by just a few percentage points.
Finance is VAT exempt, and if an activity is under-taxed it will become over-sized.
Global public goods in which everyone can benefit from without paying - like life-saving vaccines for some that reduce the risk of contagion to all, or alternative energies that reduce global warming - will be under-sized. Lets bring greater balance by raising taxes on an under-taxed sector that has benefited most from globalisation, to fund global public goods that benefit us all.