antics:lite>robin hood tax

>>In the wake of the global financial crisis, new forms of transactions taxes on financial institutions have achieved growing popularity as a means of recouping government support. Here, Nick Maxwell argues that the ‘Robin Hood Tax’ debate should be credited with more progressive thinking amongst policymakers, while Allen Simpson suggests a ‘Robin Hood Tax’ will penalise the wrong people.

a young fabians future of finance network special

When I was younger my mother was very keen to impress upon me that I should stop arsing

around in shops because ‘if you break it, you’ve bought it’. A similar, pretty persuasive logic is behind the Robin Hood Tax, although without so much threat of a slap from a tiny Kentish woman.

Levying the cost of the bailout on the people responsible for the crisis is a sensible place to start and certainly it’s a better place than abolishing child trust funds and Regional Development Agencies.

But a ‘Robin Hood’ transaction tax won’t achieve what those of us looking for progressive solutions want it to.

My first concern is that the types of activity which led to the crisis - such as over-the-counter trading in structured debt instruments - are almost impossible to reach with a transaction tax and in fact, tax avoidance is often a major motivation for designing these assets in the first place.

My second concern is that the City is largely exempt from transaction taxes. On the Robin Hood Tax website, next to the bit where the chap from Love Actually cures the essential contradictions in the

capitalist system, it says the Robin Hood Tax is a tax on bankers. But the City wouldn’t be liable because they enjoy ‘intermediary relief’ when investing other people’s money. Instead, it would be paid by pension funds and other end investors.

And if the tax was levied directly onto banks, the costs would be passed onto the customer in increased fees, meaning that the effective cost would hit exactly those groups worst affected by the crisis – responsible savers.

The UK is fortunate enough to have a case study of how this works, through our existing stamp duty levied at 0.5 per cent of each share trade.

It gouges up to £18,500 out of the average family’s savings, reduces our national pension pot by £403 million a year, and reduces the amount of investment in UK businesses by £7.5 billion a year. Stock brokers don’t pay it.

At the moment this tax is levied purely on equity trading. If we extend it across currency, bonds, gilts, and other assets the effect will be even worse.

None of which is terribly fair, or for that matter progressive.

But there is a third, systemic problem. If the tax is set at behaviourally altering levels, it makes the on-exchange, transparent, boring investment that had nothing to do with the crisis a lot less attractive, and encourages the sort of tax-avoiding, hyper-complex securitisation that proved so damaging.

And it would make capital markets less stable. By reducing the amount of trading in a market, each individual trade has a greater impact on prices meaning greater volatility and risk of price shocks.

Even if the tax was levied at non-behaviourally altering levels (which in the strictest economic sense is impossible) there is no way to take $400 billion out of an industry without massively impacting on its stability, regardless of whether the cash is taken in big million pound chunks or taken in tiny penny-per-trade slices.

It is hugely tempting to look for magic bullet solutions to problems as serious and complex as the Western budget deficit and global poverty. But any tax which hits savers and responsible investment while leaving complex derivatives and irresponsible lending almost wholly untouched is unlikely to be the answer we are looking for.

The Robin Hood Tax might help us to pay for the last crisis, but it makes another one just that little bit more likely.

Allen SimpsonYoung Fabian and Future of Finance Network member

A Robin Hood Tax may make another financial crisis more, not less likely

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Any tax which hits savers and responsible investment while leaving complex derivatives and irresponsible lending almost wholly untouched is unlikely to be the answer we are looking for.

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> Hitting the wrong target

A Robin Hood Tax might end up robbing the merry men, but it’s onto something.

The financial sector is important. A healthy financial sector means jobs, investment, savings, pensions, capital for businesses and entrepreneurs. For those looking for a tax to punish the bankers, the uncomfortable reality is that the financial sector is fantastic at passing on costs to their consumers. On top of that, the failings of the financial crisis – be they poor risk control and or the inflation of markets around essentially worthless financial products – will not be cured by taxation.

But this isn’t a ‘pro’ Robin Hood Tax campaign (RHT) article. Sensibly, the leaders of the RHT campaign are not pushing for punishment but have set out to debunk some myths and lead a quite sophisticated and radical debate about the viability of financial transaction levies.

First, on debunking myths, the idea that crafty financiers can move, reinvest or redefine assets and products to their heart’s content to avoid the taxman needs challenging. As does the constant threat that the sector will pack off to Jersey at the slightest displeasure with the tax authority. The truth is financial sector taxation has

Nick MaxwellYoung Fabians Networks and Schools Officer

been around, in all sorts of forms, for a very long time.

The UK Stamp Duty on shares and securities dates back to 1986 and is a favourite in HM Treasury because it rakes in over £1.5bn from foreign investors at very low collection costs. Similar stamp duties exist in Ireland, Singapore and Hong Kong. The Brazilian ‘Tax on Financial Operations’ places a 2% tax on financial inflows and is projected to raise US$15bn in 2010. Following the financial crisis, we’ve also seen financial sector bonus taxes in France and the UK – both nice little earners.

Second, and this is the dry stuff, the real debate around the RHT campaign is about whether new types of financial transactions taxes (sometimes referred to as Tobin taxes) are credible tax policy options – i.e. is it technically possible and cost-effective to raise the levy, with limited scope for avoidance and limited impact on economic behaviour?

For some transactions, the answer is no. Over-The-Counter (OTC) derivatives - essentially bets between financiers - would be very difficult to tax. While some of the RHT campaign literature suggests taxing OTC derivatives and that huge amounts could be raised from entirely ‘notional’ amounts of money, some transactions are unfortunately just too slippery for it to be worth trying to tax them.

However, the golden nugget appears to be currency (or foreign exchange) transactions. All the major players in the foreign exchange market now operate through one single global

central settlement system called the Continuous Linked Settlement (CLS) Bank, which is essentially an insurance mechanism against one of them going bust. A global tax through the settlement bank would be hard to avoid and could be marvellously efficient at levying global business, while also catching a slice of the dastardly speculative trades. Even better, a levy through the CLS bank would cover currency transactions even if they were taking place from one Cayman Island Bank to another. What’s more, it would be difficult to set up alternative settlement infrastructure because you need support from Central Banks around the world for it to work.

An Expert Committee feasibility study, reporting to a body called the Leading Group on Innovative Financing, recently found that a Currency Transaction Levy at a level of 0.05% (5p for every £1,000 exchanged) would not make a significant impact on ‘real economic behaviour’ and could raise over $30bn globally. The Institute for Development Studies said recently that a Tobin tax is more credible than they once thought.

So there you go. Green velvet archers at the gates of RBS ready to snatch a stash of cash for the poor? Perhaps not. A credible new form of global taxation that is difficult to avoid and could raise large sums of money? Absolutely.

The Robin Hood Tax campaign should take a lot of credit for keeping the debate alive and challenging the financial sector and politicians to think in a radical and progressive way.

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Proponents of the Robin Hood Tax have changed the way policymakers think about managing risk in the financial sector

> Taxing times

links

young fabians future of finance network

further reading

Anticipations:Lite, like all publications of the Young Fabians and Fabian Society, represents not the collective views of the Society but only the views of the indivdual authors.

© Young Fabians 2010. First published August 2010.www.youngfabians.org.uk and www.youngfabians.org.uk/blog

The Young Fabians ‘Future of Finance’ Network aims to better connect so-cially-minded individuals from the City and finance with progressive politics.

We hope that the Network will provide an empowering opportunity for progressives, of all shades, from the front edge of industry to contribute their expertise to the effort to respond to global policy challenges.

If you’re interested in getting more involved, join the Network at http://youngfabians-networks-fof.ning.com/, or contact Nick Maxwell (nmaxwell@youngfabians.org.uk), Young Fabians Networks and Schools Officer.

Robin Hood Tax campaign

Institute of Development Studies “The Tobin Tax: A review of the Evidence”

UN Millennium Development Goals Conference

Leading Group on Innovative Finance