JFP Siivonen started some discussion on the basic concepts and questions behind the idea of a Robin Hood Tax which would levy a small tax on transactions by financial institutions and create a fund for foreign aid. Simple, right?
Andrei Tuch continued with the idea, giving a history of this type of tax while calling out supporters for being “light on the details.” But let’s face it, most of us wouldn’t care to delve into the economic delicacies of the matter. It doesn’t mean the details or studies don’t exist, just that making them exciting enough to market to the public is difficult.
Andrei went on to pose some good questions and, in an effort satisfy my own curiosity, I’ve aggregated some of the responses I found to help me (and hopefully you!) understand what people are saying about the tax.
Where does all this money come from? And who will really bear the cost of the tax?
Because this is a financial transactions tax (FTT), Owen Barder argues that you will—financial institutions will undoubtedly have to pass the burden of the tax on to their employees, customers, and stakeholders. On top of this, Tim Harford emphasizes that the tax is large and the money will be taken out of someone’s pockets but we just don’t know who exactly since it, again, depends on how the burden is distributed.
Duncan Green disagrees and explains it better that I can:
“Because it is levied once per transaction, the FTT acts as a kind of frequency filter. If a financial institution turns over its whole portfolio once a day, it will pay 365 times as much tax as one that turns over its portfolio once a year. So in the first instance, the tax will fall on high frequency traders like hedge funds and the proprietary trading houses of investment banks, not on low frequency traders like retail investors, people changing money to go on holiday, or high street banks.”
This means that the tax will be progressive, affecting those able to pay for it, who will have to absorb some of the costs. However, it is possible that this will affect some pension funds depending on its size and range, and we still don’t know if major institutions will pass the cost to someone else, despite the fact that they can afford it.
Will the tax reduce financial speculation and instability?
Tim Harford is skeptical since there is little evidence one way or another. It could potentially even increase volatility if “the tax might encourage bigger, more irregular financial transactions.” Barder argues that it may reduce small-scale, short-term price discrepancies but will have little effect over any massive speculative bubble.
A recent paper from the Center for Economic and Policy Research sums up some of the arguments on FTTs, indicating mixed evidence from both sides. Green also admits to having “some sympathy” for these arguments since additional regulations are needed to curb reckless financial behavior.
But Paul Krugman goes so far as to say that FTTs “would have helped prevent the current crisis.” Although Krugman is speaking of FTTs in general and not a redistributive tax like the Robin Hood, he underlines that the centralized nature of the type of transactions we’re talking about would make them easy to identify and tax.
Does aid even work? If not, what’s the point?
That’s another issue entirely, although what’s important to recognize out of this is that aid isn’t the only solution to everything. Having more money won’t allow us to check off the MDGs, but it will be a great help when combined with other measures as well.
Ok, so should I support the Robin Hood Tax or not?
My reaction is to say that it seems like a good option, depending upon how exactly it is executed. I am a bit tentative, however, since the lack of definitive evidence one way or another means it would be a bit of a gamble. Similar transactions taxes, like the UK stamp duty, already exist but no one has done anything on this scale before. In any case, I would argue that the huge potential gains for aid are most likely worth the risk.
What do you think?
I really like the concept as an idea, but mr. barder is probably right - financial sectors would not like it, and it would be a very difficult political fight to impose something like this on the City.
Maybe a better idea would be to refrain from any kind of bail outs, and let bansk bear the full responsibility of their actions. I think that would improve things a lot in the world, and free tax money for aid also.
We can not have a system which preaches liberalism and creative destruction to its citizens, but accepts that some banks are “too big to bust”. If we can’t afford them to bust, we should never allow them to grow so big, or make ourself so dependent on the financial sector in the first place.
The best quote is the one from Tim Hartford’s article, about how the tax would impact legitimate financial transactions that don’t actually have any real money behind them:
“For instance, I might buy car insurance which could – if I knocked somebody down and permanently disabled them – trigger a payment of £1m. My insurance company might want to reinsure that million-pound risk, a perfectly sensible, socially useful and non-speculative transaction. But at a “tiny” tax rate of 0.05 per cent, that’s a £500 tax on a face value of £1m.”
So, your insurance cost instantly goes up by 500 pounds (a year, let’s say). Hell, even if it goes up 50 pounds a year, that’s still a lot. And the same increases would show up in all aspects of commerce, compounded and trickling down.
Beyond all that, I am personally against the idea of taxing something just to discourage it. Taxes should be levied only when there is a need to raise money for specific activities - not when they’re used to change behavior.
really good article. I think that it being dificult or the banks not really liking it aren’t reasons not to do it. The banks caused a huge crisis that affects people all over the world. Every time reform is suggested we get told that it can’t be done. Something needs to be done to rebuild the social contracts with the bank and this tax could be it.
Great work Maria!
I’m leaning a bit towards Ian’s opinion. I can imagine the complexity behind Robin Hood Tax, or any other FFT in this case, and fully recognize the facts for and against, but I’m curious about new ideas that try to find solutions to offset this unbelievable unequal distribution of wealth between north and south.
@Daniel: If we’d let banks try to bail themselves out in the previous crisis, then I think all of our economies would have really gone under (more than they did). But past that, you are absolutely right to emphasize that there should be more pressure and accountability on financial institutions to curb continuing irresponsible behavior.
@Andrei: I like that example, too, because it shows us that the effects are large and no one can say how they’ll be distributed. I think Green’s counterargument to that would be to say that financial institutions are capable of internalizing the cost without raising prices, but (in my opinion) just because they are capable doesn’t mean they will!
And I totally agree with you about “taxing something just to discourage it.” It may help with specific behaviors in specific industries but as per the financial sector, regulations are needed and I definitely don’t think a tax would solve all the problems. I think the redeeming factor is that the money would go to aid, but there are so many political/logistical problems attached to that idea that could potentially make it useless.
@ Ian: Thanks! I definitely think that a tax can be a positive step but, as I said above, I do feel that other regulations would be necessary in the long run. I think the “volatility” argument is in a way secondary to this whole idea and that regulations could do much more than a tax.
@ John: That is exactly my feeling, too, even if I am still a bit skeptical of the tax’s effects.
I agree, it would not have been a realistic option to let banks fail in this crisis. Politicians could maybe not have done otherwise, but once the worst crisis is over, I think we should discuss how to not end up in this situation again. In the next crisis I would like the banks to deal with it themselves.
Well,Daniel, hopefully there won’t be a “next.” But if regulations aren’t imposed/don’t work well enough then I won’t hold my breath!