No less a scholar than Bill Nighy urges us to support a “Robin Hood Tax” to take money from the bankers and speculators and give to the poor.
The Robin Hood tax appears at first sight to be a way to kill three fairly succulent birds with one stone. It offers an attractive combination of:
- Higher taxes on the wealthy, so reducing inequality
- A curb on speculation and financial market excesses
- More money for global public goods and aid.
All these are worthy objectives, but Robin Hood tax is not a good way to achieve any of them.
Branding a financial transaction tax as a “Robin Hood tax” which takes from the rich and gives to the poor is a brilliant piece of communications. (Imagine if it had been called a “Class War tax” – this says more or less the same thing but somehow seems less appealing.) A Robin Hood tax lures many people who care about social justice, and want to spend more on international development, into opportunistically supporting the introduction of a tax on financial market transactions. But before we are seduced we should take a hard look at whether it will achieve what we want.
Stand and Deliver!
The campaign would like us to believe that this tax will be paid by speculators. That isn’t true, of course. It is like thinking that beer duty is paid personally by the barman in the pub, or that Richard Branson personally forks out for your airline passenger duty. The people on whom a tax is levied generally pass it on to someone else: their customers, employees, suppliers or shareholders. We don’t know who will end up bearing a financial transactions tax, but it is likely to be all of us who meet the costs, as customers of firms that use financial markets, or savers whose money is invested in financial assets. You should not assume that it will mean less champagne for people who work in the City: they may be in-bred aristocrats but they are probably smart enough to figure out quite quickly that they should pass on the cost to someone else.
If we want to tax the rich more, there are much more effective ways to do it than to tax financial transactions – ways which might actually fall on the rich, and catch a much bigger spread of rich people than a transactions tax. For example, you could raise much more money from the rich by extending National Insurance charges to all capital income (eg interest, capital gains, dividends and rent) rather than imposing it only on labour income. You could also abolish the upper earnings limit on National Insurance. You could close loopholes for non-domiciles and people who use trusts to avoid inheritance tax; or simply raise the top rate of income tax. You could treat all inheritance as income in the hands of the beneficiary, and tax it accordingly. Any of these would be a more targeted and fairer way of increasing taxes on the rich than a financial transaction tax.
Reducing volatility
Financial markets play an important role in the real world by channelling our savings to investments with higher returns and enabling us to share risks. In well-functioning markets, allocating money to businesses that meet the needs of their customers and so make a good return tends to benefit all of us – whether we are investors, customers or employees of these firms. For this allocation of resources to happen well, the prices of financial assets had better reflect their true underlying value, at least most of the time, and we are all worse off if financial asset values deviate for long periods from what the underlying businesses are really worth. But there are plenty of structural problems in the financial services industry that make it likely that financial assets may in fact be mispriced some of the time. These include the incentives created by bonuses (for example, linking bonuses to the value of a deal as predicted by firms’ financial models rather than the value that is eventually realised) and the rise of institutions that are “too big to fail” and therefore enjoy the implicit subsidy of a public guarantee.
However, it is hard to see how the existence of speculators, arbitrage and – most of all – liquid and highly traded markets make financial markets less effective. In most cases, we would expect markets with lots of buyers and sellers to do a better job of identifying the underlying value of assets than markets with relatively few transactions. Speculators generally make money when they correctly assess that a market price does not reflect the real value of the asset. George Soros made money from Black Wednesday when he judged that the value of the pound in the Exchange Rate Mechanism did not reflect what it was really worth (because the government was trying to sustain a higher value for the pound). By betting on that judgement, Soros helped to bring about the change in price that he was predicting, and so accelerated the alignment of the asset price with its true underlying worth.
A small turnover tax is likely to deter the small-scale arbitrage that helps to reduce the short-term discrepancies between prices, making markets marginally less transparent and slightly less efficient. It probably won’t make any difference to the big misalignments, such as asset price bubbles. The short term gains to traders from buying in a rising market will far exceed the cost of any turnover tax, so they’ll continue to get behind bull markets. Their behaviour is only likely to be moderated if they can be made to bear some of the costs of the future correction, instead of just getting the rewards when the bubble inflates. It is theoretically possible that a reduction in turnover will make a market more stable and less volatile (this was James Tobin’s point about “throwing sand in the wheels”), but it is the less likely outcome; more likely the opposite is true.
If we want our financial markets to work better, we should be looking at the causes of the volatility and misalignments. It is not the number of speculators, or the number of transactions in which they engage, but rather the incentives they face. Asymmetric bonuses which reward gains but do not punish losses encourage risk taking and short-termism. Institutions that are too big to fail will take bigger risks than they would without the implicit guarantee of a bail out. Insufficient competition between financial firms allows rent-seeking by monopolists. The privatisation of gains but socialisation of losses creates perverse incentives. If we want to tackle financial instability and misallocation of resources we need to address the root causes, not reach for a tax on transactions which is likely to hinder, rather than help, the ability of markets to correct themselves.
Raising money for good causes
So by now you think I’m being prissy. So what if a new tax does not redistribute money from the rich or make financial markets work better? It will raise a shed-load of money by taxing transactions in a way that nobody will notice, and we can use that to do good things on poverty and climate change. If taxation is the art of plucking the goose with the minimum of hissing, surely this is a sure fire way to get some money out of the system to spend on development which is woefully underfunded?
Well, not really. Good taxes are not just taxes that nobody notices, but taxes that tend to discourage people from doing bad things and encourage people to do good things; which add to rather than subtract from economic efficiency. There are lots of taxes that citizens don’t pay directly – such as corporation tax and employer national insurance contributions – which nonetheless add to the burden on ordinary taxpayers and the size of which is a matter of political debate. Adding a new tax is not going to make citizens more willing to see an increase in the overall tax burden.
Aid spending is pitifully small relative to need. As a nation we are spending much less than we should if we want to live up to our commitment to spare no effort to ensure that poverty is reduced, that mothers do not die while pregnant, that children go to school and that everyone has access to the water and health care that they need.
The amounts in question are tiny relative to total government revenues. Aid is a small fraction of overall spending and could easily be increased without any new taxes. The limit to aid is not lack of available money, but the lack of agreement that this is a priority for spending more of the nation’s money. Too many people believe – wrongly, in my view – that aid is not effective; that it transfers money from poor people in rich countries to rich people in poor countries; that much of it is lost in corruption or waste; and that it does as much to hinder as to help countries to grow and lift themselves out of poverty. Those attitudes are not going to change because we have introduced a new tax.
The development industry is right to say we should spend more on aid, but we are losing the argument. Instead of addressing the criticisms by demonstrating how aid is effective (and taking steps to make it more effective where it isn’t) we are turning to a Robin Hood tax apparently in the hope of bypassing public opinion. Because the chattering classes (which clearly includes me) have failed to persuade enough men and women that it is a good idea to spend more money on aid as well as on the National Health Service and schools, we are apparently hoping to go over their heads, by setting up a source of funding over which ordinary people will have no control
But that is not how the system works, nor should it be. The nation’s willingness to give money for development will be decided by whether we demonstrate the results, and whether we can really convince people that their money is being properly used. Introducing a new tax dedicated to what we think are good causes may give aid a temporary boost, but if people are not convinced that they want their money to go on aid they will quickly demand that budgets elsewhere are reduced accordingly. In the long run, this will have the opposite effect: a tax part of which is dedicated automatically to development will engender even more complacency in the development industry about the need to demonstrate to taxpayers how their money is being used.
Building support for development is not merely a communications challenge, as is often implied by the hand-wringing of the big aid agencies: it is a reality challenge. Not only do we have to show people how their aid is used, we actually have to make aid more effective, more transparent and more accountable, so that we drive up performance.
Dambisa Moyo is right that bad aid does not work; but she is wrong to claim that all aid is bad aid. She is wrong to claim that aid does more harm than good. There is a lot of hugely effective aid which transforms people’s lives every day. But the aid industry lacks sufficient mechanisms to drive bad aid out of the system, to spend more money well, and to be able to demonstrate conclusively its results. This, rather than a Robin Hood tax, should be the agenda for genuine progressives who want to see more money being spent on international development.
I have explained here before another reason why a Tobin Tax is a bad way of raising money for aid. Financial markets tend to be highly cyclical – there is a lot of turnover in rising markets in economic booms, and the markets tend to go quiet in recessions. So the revenues of such a tax would be highly cyclical – more money for development in global economic booms, less in global downturns. Yet aid should be the opposite. It is needed most of all to protect the weak and vulnerable from economic downturns. Aid is already too cyclical, exacerbating the impact of global economic fluctuations on developing countries, reinforcing the effects of changes in revenues from commodities, investment and remittances. The last thing developing countries need is for aid to become even more cyclical than it is today.
Conclusion
The backers of the Robin Hood tax are on the side of good and there is no denying their commitment to social justice, nor their genius for communications and popular engagement. We certainly need what the tax seems to offer: more redistributive taxation, a curb on financial market excesses, and more money for aid.
My reservation is not that the Robin Hood tax is too ambitious or that it cannot be negotiated. It is that it is the wrong way to address these problems. Each of the three objectives is better addressed directly than through the blunt instrument of a tax on financial transactions. We need to build a consensus that there are minimum standards of living below which no person anywhere in the world should be allowed to fall, and that those of us who are fortunate to live comfortably should all make a modest contribution to that. This should be part of the social contract in a democratic society, and it should be part of the mainstream system of taxing and spending. Robin Hood stole from the rich and gave to the poor at a time when we lacked institutions to tackle poverty and redistribute income. A Robin Hood tax is no more a lasting solution to financing poverty reduction than was the approach of Robin Hood himself.
Update: Duncan Green from Oxfam has responded here. We agree that this is not a good way to curb the excesses of the financial services industry. Duncan reckons “the banks” will pay a good part of the tax: presumably he means the shareholders. If so, why not just levy an additional profit tax on banks? I think his strongest argument is that in a world of second best, this is the best available option for raising more money. I think that is a mistake. We can and should make the case for aid to be financed properly; and I do not believe that raising money this way will add additional funding to development in anything but the very short tem unless we address rather than try to sidestep people’s concerns.
41 responses to “Why I am not a fan of the “Robin Hood tax””
Interesting post Owen. I have a slightly off topic question about who will end up paying for the tax. You mention that the people running the financial institutions will be smart enough to pass on the costs of the tax to “customers, employees, suppliers or shareholders”, couldn’t the argument be made that any tax on the rich or management-class would be similarly “passed on”? E.g. the bankers bonus tax in some cases seems to have been absorbed by the banks themselves by just “paying out” more to employees. Couldn’t wealthy taxpayers react to any increase in tax liability by using it to justify salary increases?
What am I missing here?
Owen replies: You are not missing much. It is true in general that to understand the eventual incidence of a tax, you cannot simply look at who is making the payment to the tax authorities.
The ability of a company to pass on a tax, and who it will pass it on to, depends critically on various elasticities. If their demand is price elastic (i.e. demand goes down a lot when the price goes up) then they won’t want to pass it on to their customers. If their labour supply is elastic, they won’t want to pass it on to their workers. If their investment is elastic with respect to returns, they won’t want to pass it on to shareholders. The actual burden of taxes will depend on the relative size of these elasticities.
This point is general: when you levy a tax, you have to think about the structure of that particular market to understand who will end up paying it. Different taxes will have different final incidence. A broad tax levied by increasing national insurance might be quite hard to pass on, and might fall on the the employees who pay national insurance.
The problem that I see with such a tax is with collecting it, or rather with enforcing its collection. Financial markets, we are told, are highly mobile so they (or a significant proportion of them) will relocate to jurisdictions that do not enforce it. The solution to that lies in closing down tax havens, which should be the real priority for sorting out international finance. And, for that matter, sorting out international crime.
Owen replies: Thanks Peter. I was deliberately setting to one side the question of whether it is negotiable. Many things have seemed inconceivable and yet we have found a way to get them agreed (e.g. debt relief) so I don’t think the difficulty of getting it agreed should be a reason not to support it. The fact that it won’t achieve any of its objectives well, on the other hand, does seem to be quite a big disadvantage.
[…] As for how we can raise money for development, Foreign Affairs reports this month about a voluntary, effective way of raising funds for the causes the advocates of the ‘Robin Hood Tax’ care about, and ‘Owen abroad” also gives it a kicking here. […]
Another lucid, interesting post. My issue is why there is so much focus on raising more money for aid. Too much “push” created by special funds created for this or that cause leads to bad incentives, badly designed programs and weak results. There is enough aid money in the system that should be redirected to “pull” mechanisms– demand side subsidies, and consumer driven programs. Development goals would be better served by figuring out how to leverage commercial investment, remittances and promote trade. We don’t need more Global Funds, MDG’s, MCC, RBM’s etc etc.
Owen, this piece is outstandingly clear and well-supported, as always. Thank you very much for raising the quality of debate on this subject and others. For years I have felt that the French “airline tax” was a sign of political failure in the aid community rather than political success, for precisely the reasons you sharply explain in your third point. The other two points apply to the airline tax as well.
Owen replies: Thanks Michael. Your praise means a lot to me.
[…] 11.09.10] Owen has, very helpfully. articulated further here… 0.000000 […]
Very interesting post on a timely topic.
My questions is, and bear in mind I’m writing from the United States, from the point of view of political economy is the Robin Hood tax a worthwhile investment? I agree that it is a blunt instrument. However, in one of the stingiest and wealthiest countries in the world many of your alternative suggestions would be met with considerably more political resistance than would a Robin Hood tax. This does not mean that it is a good idea but perhaps lacking the ability to enact the ideal taxation policies would make one take a second look.
Very good post, the very basic principles of economics are so often just forgotten. I was very happy to read about socializing losses and privatizing gains, something everybody seems to have forgotten.
I would like to add a few arguments:
firstly the principle of the unity of the budget. Indeed, a country budget reflects the order of priorities of the government. This is why income, that is not a direct payment for a semi-independently delivered service, should go into the one budget. Creating all kinds of compartments where income from one side goes specifically to a totally different but as specific issue, makes priority setting impossible. Indeed, the income stream will decide the budget for the good cause, not the priority allocated by the government. If the tax and income would be under the power of the minister of development, he would just raise the tax as high as possible.
Another aspect is the issue of punitive taxes. If the tax is successful in banning the bad practice (a good thing) then the income from it will go down, and development will be less funded.
[…] (or at least, that’s what I think he meant….). Not everyone seems convinced – Owen Barder raises problems about tax incidence, and some right wing economists think the whole idea is […]
[…] Barder has a thought-provoking post setting out his objections to a financial transactions tax (FTT) in response to the launch of the […]
[…] Duncan Green has responded to Matthew’s Tobin tax posts of yesterday and also to Owen Barder’s post, which raised concerns about whether financial transactions taxes might have a regressive impact. […]
Excellent piece. So much more temperate than my own splutterings.
To me the crucial point is the incidence of this tax. The Robin Hood bods insist that no actual consumer will be hurt i hte collection of this tax. They also refer directly to an FTT that already exists: stamp duty on share purchases in London (the Baker paper).
Yet there are several papers around looking at the incidence of said stamp duty. Two major carriers of the burden are pensions in the form of lower pensions for those who have been saving and companies in higher costs of capital (which, if we take that incidence further, almost certainly feeds through into lower wages for the workers. It was Joe Stiglitz who showed that, in theory at least, the incidence of taxes which make corporate capital more expensive can cost workers more than 100% of the tax raised in the form of lower wages).
So, if this FTT is like stamp duty, if the incidence is like that of stamp duty, then the people who will pay this tax is us. The peons.
Somewhow I expect the reaction to “let’s tax the bankers $400 billion” and “let’s tax ourselves $400 billion” to be different. Everybody loves taxing someone else, few like being taxed themselves.
I have to say I find this a highly cogent but flawed analysis. You speak often of incentives but rather less about capabilities, rather in keeping with neo-classical economic thinking. The politics of the situation also seems to be treated as extraneous, when in fact the political will and public energy to push through measures which are so hostile to key elites tends to dissipate fairly quickly, if history is a fair guide. I would like to have seen a more balanced
I find the faith in markets slightly perturbing, given recent events. Your assertion that it is “structural problems in the financial services industry” that distorts the transmission of fundamental value via equity market price signals seems far-fetched, given recent events, if nothing else. Markets are instable, procyclical, and tend to amplify psychological traits like fear, confidence, jubilation, anxiety and denial in participants. They are also the best way we have of exchanging information and arriving at price signals — but at a price. Are these traits not central to the current crisis?
Also, on the one hand you say that the costs will surreptitiously be borne by us all, and on the other bemoan the fact that the development industry has lost the aid argument and cannot persuade the public to fund aid increases. In what world is development (and thus, surely, the funding thereof) not the art of the least bad? Are we to make the better the enemy of the good because we disagree with the principles of the action in question? I’d be interested to hear your thoughts, on the other points too.
VERY interesting post and analysis.
In my view it’s also only second best. http://bit.ly/9fNURo
However, I still support the idea. For before it raises funds, it raises consciousness, i.e. it acts as a reminder of the conscience in bankers and politicians.
It shows them how many people do care.
It shows up the patheticness of the likes of Goldman Sachs.
Also it’s not just about “the rich”. It addresses all those who “make money out of money”, i.e. legalised usury.
It’s the tip of an iceberg that hopefull will melt sooner rather than later. No need to feel guilty about ‘living comfortably’. We won’t implement it anyway. But any publicity is good. Just speel the name right. And that is also easy. Brilliant re-branding of the Tobin Tax, and in tune with the Zeitgeist of banking climates.
Sabine
Organiser, Forum for Stable Currencies
http://forumforstablecurrencies.info
Owen replies: Thanks Sabine. With respect, I find it hard to reconcile the view that nobody will notice (which is one of the arguments given for why it is politically attractive) with the view that it will “raise consciousness”.
“It addresses all those who “make money out of money”, i.e. legalised usury. ”
With very little respect I find it difficult to equate those who enable us to realise the time value of money with “legalised usury”.
@Owen: the video was viewed some 150,000 times last time I looked.
@Tim Making money out of money is “realising the time value of money”???
I understand the difference between the “financial economy” and the “real economy” to turning money into “financial products” and making things or providing services that are useful to others.
Financial products may appear to be useful. But they are not as far as the real economy is concerned.
Making money out of money is like charging interest. Hence I use the term ‘usury’ for that process. And while usury is forbidden in most religions and philosophies, it is legalized as capitalism.
“And while usury is forbidden in most religions and philosophies, it is legalized as capitalism.”
No, Capitalism describes a system of the ownership of productive assets and resources. It doesn’t need or imply either usury or the charging of interest. There are plenty of Islamic economies that are recognisably capitalist that do not have usury or interest.
You, unfortunately, are using both “capitalism” and “usury” to mean “things I don’t like”.
@Tim,
When I lived in Saudi Arabia I had a bank account. The bank couldn’t pay interest on it. However, they paid me a fee in respect of my allowing them to use my money. This fee was calculated as a percentage of the amount in question over the time for which I chose to make it available to them. But they didn’t pay interest because that was unIslamic.
[…] The Robin Hood Tax, which my friend and author of Road from Ruin Michael Green isn’t so hot on either. […]
I really enjoy your blog Owen. Disagree with you on most of this one though. Have you seen Duncan Green’s reposte? Would love to know what your take is?
Owen replies: Hi Eddy – yes, my post links to Duncan’s reply and briefly reacts. I don’t think it is sustainable to say that we know that the arguments for this tax are not very good, but we are going to sieze the political opportunity anyway.
[…] Why I am not a fan of the ‘Robin Hood tax’ (9) […]
[…] My view on the Robin Hood Tax is here. Duncan Green does not agree. Posted in Economics […]
If I understand the theory, the tax is supposed to be small enough to be not felt much by people doing regular trade in actual goods and services, but to add up to something more noticeable when speculators engage in frequent trading of currencies, back and forth. So it has a slight dampening effect on speculation, and by far the majority of the tax comes from the evil financial speculators who cause financial crises for fun and profit.
At least, that’s what I think they say, so I have at least two degrees of separation between my understanding and what’s actually going on. Could you enlighten me? 🙂
“If I understand the theory, the tax is supposed to be small enough to be not felt much by people doing regular trade in actual goods and services, but to add up to something more noticeable when speculators engage in frequent trading of currencies, back and forth. So it has a slight dampening effect on speculation, and by far the majority of the tax comes from the evil financial speculators who cause financial crises for fun and profit.”
This is indeed what they say. However, changes in one part of an economy can have effects in another part.
So, those evil speculators do indeed have to start handing over cheques….and because they’re speculating they have to hand over a lot of them. Right, so they’ll do less speculating. This isn’t arguable: it’s actually one of the purposes of the tax.
Now it might actually be true that speculators are eeevil people only making money out of money (some think so, I don’t, but so what) but by their speculation they bring something to the market, liquidity. Remove them from the market and liquidity falls.
What happens in less liquid markets? Margins rise. That is, the difference between the buy and sell price of whatever it is will increase. Again, this isn’t controversial nor really even arguable.
So, first round effects. We’ve less speculation and still a considerable number of cheques being sent in.
Second round effects. What is the impact of increased margins on all who use those financial markets? Well, obviously, they face the increased costs of those increased dealing margins. Those effects might be small on any one transaction but cumulatively, on all those doing “regular trade”, it adds up to a pretty large sum.
Now note that some of the speculators, the people the tax is aimed at, have left the market and so aren’t taxed at all. But the people who we’re not so keen on taxing are still there….and they’ve got to pay not just the tax but the cost of those speculators having left. A double whammy on “regular trade” then.
It actually gets worse. there’s absolutely nothing in either theory or practice that says there has to be a diret relationship between those higher costs and the amount of tax raised. Indeed, Joe Stiglitz (serious economist, Nobel Laureate….) proved back in 1980 that the tax burden (that extra cost) can be more than 100% of the amount raised in tax.
So, while the campaign says that it’ll be just those eeevil speculators who cough up (or at least, most of it) we can actually see that the burden will fall on “regular trade” and that the burden can be (and in markets like foreign exchange, decent calculations show it probably will be) higher than the amount raised in tax.
There’s a difference between “let’s tax them over there, won’t cost you a penny” and “you’ll all have to pay $800 billion so we get $400 billion to spend on our pet projects”. The campaign uses the first as its rallying cry when the second is closer to reality.
Tim, agreed that speculators aren’t necessarily evil, and that they bring liquidity. I don’t think that’s controversial, except among some hard-core lefties.
However, I do wonder if we need quite so much liquidity, that speculative trade exceeds real trade many times over (so I have read, by a critic of speculators) and financial flows influenced by sentiment can have sudden and crippling effects on national economies.
If there’s a serious proposal for this tax, I can’t imagine that it’s enough to remove speculators from the market altogether – note that my original question was based on very frequent transfers. A small tax looks like it would be an incentive for longer-term trading.
In fact the way I’d imagined it was that it would have a dampening effect, but not so much that financial trades representing real trade would actually outweigh speculative and hedging trade.
I know that many knowledgeable economist-type people don’t like the Tobin Tax, and it’s one reason I’m not on the campaign for it. However I’ve yet to hear a convincing argument against it – at least in the form I’ve described, where the amounts are enough to hit short-term speculation but not enough to dramatically remove liquidity. Whether that’s even possible is beyond the scope of this discussion, I suspect. (My intuition says it should be possible, but my intuition is not highly knowledgeable about economics.)
The idea of tax burden being higher than tax collected looks significant. I notice you don’t say that’s a sure thing, and I don’t know what the factors are that influence the outcome (I’d guess that the level of the tax would be a central factor.) And I’m not in a position to assess the “decent calculations” you refer to. So you may well be right, but I can’t see the reasoning.
I guess a key point I’m making is that you seem to blur the difference between “less speculating” and “no speculating” which means very low liquidity. There may be good reasoning going on behind the scenes but… these look like very different things.
“hat speculative trade exceeds real trade many times over”
This is always true when there are derivatives markets (OK, sorry, when there are effective derivatives markets. The futures and options turnover has to be larger than the underlying cash market otherwise those derivatives aren’t liquid enough to actually be effective.)
“In fact the way I’d imagined it was that it would have a dampening effect,”
Whether speculation destablises (increases volatility) or stabilises (reduces volatility) is still argued. A reasonable summary (but then of course I would say this) is that those arguing split into three camps. Marketeers say it stabilises, those who don’t like markets all that much say it destabilises and the balance of evidence seems to favour the marketeers.
“where the amounts are enough to hit short-term speculation but not enough to dramatically remove liquidity.”
It’s those last three words that matter. Which is an empirical question. Without actually putting it into effect and seeing what happens (a very expensive thing to do if it does remove significant liquidity….and the papers *supporting* the tax indicate, dependent upon the market, reductions of between 25% and 75% of current turnover) we have to go by analogy. What were spreads in the FX markets when volumes were 25% less than today? What were spreads in derivatives when liquidity was 75% lower than today?
Quite a lot higher is the answer.
“I notice you don’t say that’s a sure thing, and I don’t know what the factors are that influence the outcome”
How much do margins rise is the significant factor. If they rise by more than the tax then the burden is over 100%. People a great deal more knowledgeable than I (Giles Wilkes, Freethinking economist blog) think that margins would rise by more than the tax in the FX market for example.
Think of it this way. A reasonable margin in FX these days is 1 basis point. We add a 0.5 bps tax. This scares liquidity away to the extent of 25%.
If margins stay at 1 bps (plus the tax, so 1.5 bps) then we’ve got a great little tax. If margins move out to 2 bps (plus the tax, so 2.5 bps) then the costs of the tax on consumers is 1 bps for each 0.5 bps raised in tax. We’ve a tax burden of 200% of revenue raised.
It’s not all that long ago that typical margins in FX were 10 bps……
Thanks Tim – I can see the case against the tax much more clearly now (though I’m still not informed enough to have a strong opinion on it).
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A Fine post – thanks very much.
I took the liberty of quoting from it at my blog:
Is this really asking you to be part of the World’s Greatest Bank Job (ha ha ha ha) or a conniving way to encourage you to be a part of the Worlds Biggest Con Job?
I just have to wonder how many folk actually have heard about the ‘Robin Hood Tax’ ? – (RHT) and more importantly have taken the time to find out what it is? where it comes from? what is actually involved? Let me tell you right now it involves BILLIONS OF DOLLARS, and of course, should it come to pass, just who will administer it?
http://just-me-in-t.blogspot.com/2010/04/men-in-tights.html
[…] Harford and Owen Barder both point out that while the tax rate may be tiny (0.05%), the size of tax base (i.e. financial […]
I thought your article was brillant and excellently constructed.
However do question your following comment
“You could close loopholes for non-domiciles and people who use trusts to avoid inheritance tax; or simply raise the top rate of income tax. You could treat all inheritance as income in the hands of the beneficiary, and tax it accordingly.”
The theory of the Leffer Curve seems to suggest that this solution could actually produce less tax revenue despite high tax rates. What do you think to that point?
[…] https://owen.org/blog/3092 […]
[…] explained in February why I am not a fan of the so-called Robin Hood tax. The idea is superficially attractive because it […]
A fantastic article.
On a slight sidenote, I would like to speak up for the Robin Hood tax, but in its original form – the famous ‘tobin tax’.
What James Tobin originally proposed was an altogether different beast to this robin hood tax, with a fundamentally different aim and intention.
The original point of the Tobin tax was to limit speculation in foreign exchange trading. The idea was that by imposing a tax on trading in domestic currency, the government would make it prohibitively expensive to trade in that currency for purely speculative intentions. Thus, it would only be worth your while if you were a large company or institutional investor who was purchasing a sufficiently large amount of foreign currency to make the transaction cost-effective.
Thus, Tobin visualised, the determination of the domestic currency would revert to fundamentals of world trade – demand and supply for goods or services. This in turn would reduce uncertainty, further promoting trade and all the benefits that ensues.
The point was not to raise money, indeed the tobin tax as visualised would make very little money at all. Neither was the point to improve social equality or redistribute wealth. The idea was to revert floating exchange rates to a more rigid arrangement, improving macroeconomic stability by removing the volatility of speculators.
While I’m not 100% sure of the merits of the original tobin tax, it was a fundamentally more interesting idea that this new reincarnation.
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Excellent piece. So much more temperate than my own splutterings.
To me the crucial point is the incidence of this tax. The Robin Hood bods insist that no actual consumer will be hurt i hte collection of this tax. They also refer directly to an FTT that already exists: stamp duty on share purchases in London (the Baker paper).
Yet there are several papers around looking at the incidence of said stamp duty. Two major carriers of the burden are pensions in the form of lower pensions for those who have been saving and companies in higher costs of capital (which, if we take that incidence further, almost certainly feeds through into lower wages for the workers. It was Joe Stiglitz who showed that, in theory at least, the incidence of taxes which make corporate capital more expensive can cost workers more than 100% of the tax raised in the form of lower wages).
So, if this FTT is like stamp duty, if the incidence is like that of stamp duty, then the people who will pay this tax is us. The peons.
Somewhow I expect the reaction to “let’s tax the bankers $400 billion” and “let’s tax ourselves $400 billion” to be different. Everybody loves taxing someone else, few like being taxed themselves.
[…] Owen barder further elaborates on these points as can be read here https://owen.org/blog/309 […]
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