JFP Siivonen brought up the Robin Hood tax - a fractional impact on every banking transaction that would raise money to help fight poverty and deliver aid to the world’s poorest countries. The gist of it is that a very tiny percentage – something on the order of 0.05% or less – of every financial transaction that does not involve human beings is paid into an aid & relief fund. This could be the IMF, UNHCR, World Food Organization, Doctors without Borders – you name it.
Now, I’m not a big fan of the international financial system. I’ve had an investment banker try to convince me to give her my money, showing me numbers that the world stock market has historically always grown at an average of 12% annually – factoring in all the crises and recessions (although not this last one). I couldn’t challenge the numbers, but I’m a big fan of the TANSTAAFL concept, so I went and looked at historical GDP growth numbers, which are something like 4% globally. The difference between the amount of sheer stuff produced, and the amount of money being made, seems to be compensated by the losses of individual investors; thus the stock market is a massive pyramid scheme. All of this is to explain to you, the reader, that if the European Court of Human Rights institutes mandatory hangings for hedge fund managers, I will be right there, kicking the chair.
However, I also remember that the Robin Hood tax has been suggested before, and was never implemented – despite all the political will that followed the economic crises of the late 90s. The reason why most people are not aware of it is because it was only ever discussed by specialists in the field. It’s a lot easier to explain the Robin Hood tax to a mass audience than it would be to explain the nature of a collateralized debt obligation or a credit default swap, so if never came into the public eye, there must be a good reason, right? (I think we can safely assume that even before 2008, the world was not short of crusaders in search of banker blood.)
The first thing you will need to do your own research is to get the name right. “Robin Hood Tax” is a very evocative title, but it’s recent (the Wikipedia entry describes a different thing entirely). It’s properly known as the Tobin Tax, as it was first suggested in 1972 by James Tobin, a Nobel laureate in economics.
[WARNING: Boring economic theory follows.]
The second thing you need to know is that the Tobin Tax was never designed to have anything to do with the funding of international aid. Its purpose is to make speculation unprofitable. Tobin was thinking about ways to prevent financial meltdowns caused by the very fast disappearance of large amounts of liquidity – exactly the same thing that happened with the mortgage crisis. In ’72, the collapse of the Bretton Woods system (backing currency with gold) caused investors to change their assets from one currency to another very swiftly. This was not because of any country’s objective weakness, but because of panic and speculative profiteering, and it had a hugely negative effect on national economies. Tobin was looking for a way to prevent sudden and huge upsets to the value of any single currency, and had two solutions. The first was to integrate economies and institute a common currency, which he thought to be politically improbable. The second, which he disliked, was to institute a tax on every exchange of currency. It would be small enough to not bother human beings who are just getting some Guilders for a weekend in Amsterdam. But big financial companies, the ones that can actually crash a country’s economy, would find that it is too expensive to suddenly withdraw all their money.
This makes the Tobin Tax a decent enough measure to prevent another credit crunch. If a tax that is most troubling to hyperactive speculators – the bad guys in the economy – is used to collect a cash reserve, which is then used for bailouts that compensate for the effects of hyperactive speculation, that’s fine. The IMF is financed by taxes, and so are government bailouts. If this money is collected from a Tobin Tax, the potential (indeed, inevitable) offenders create a cash buffer to pay for the damage they will cause; and there is even a decrease in administrative overhead, the amount of bureaucrats it takes to shuffle tax money from one pocket to another.
Incidentally, there is a real-life example of a Tobin tax working in practice, on a smaller scale, but pretty well. In Estonia (and probably in other countries), car insurance companies contribute a percentage of every customer’s payment to a common traffic insurance fund. If an accident results in damage to third parties, but the car that caused it is not insured or was not found, the cost of repairs is covered by this fund. Banks have a similar system of guaranteeing people’s deposits – they pay a small amount into joint responsibility funds that are used to pay back people’s deposits if the bank goes bankrupt.
There is also a benefit in that a Tobin tax would place a burden of reality on every transaction. The credit crunch got so bad because the financial institutions convinced each other they had assets worth a lot more than they really were. The money on their books was largely imagined. If a banker has to convert 0.0005% of a transaction into liquid cash and give it away to someone, he will only make a transaction that generates enough real, cash profit to cover that payment.
[Boring economic theory ends.]
Long story short: the Tobin Tax is designed to make certain behavior undesirable. Generating money for the government is a bonus, not a purpose.
Given that, let’s look at how the Tobin Tax, now renamed the Robin Hood tax, can be applied to international aid.
Question one: Is the lack of money really the biggest problem? Are we just a hundred billion pounds a year away from achieving the Millennium Development Goals? Because if that’s the case, you don’t need a bunch of bloggers, you need Bono.
Are we guaranteed to end poverty by 2015 if we can just get a pile of cash the size of Greenland? Or is poverty caused by something more than starting out without money?
Question two: Where does the money come from? As I said above, a lot of the money in the financial markets is imaginary. This is why the bailouts were needed: the economies of the developed countries run with the lubrication of credit, promises, and the trust that the money will be there by the time someone needs it. Most of the time the money isn’t actually there. The trillions of dollars going back and forth between banks and countries every day are numbers on paper, the worth of promises.
A Robin Hood tax that takes a hundred billion dollars a year – of tangible, liquid assets that you can give to a Polish farmer in exchange for the grain you’re airlifting into Sub-Saharan Africa, or a German industrial worker making a wind-turbine generator – is a reverse bailout. The numbers, the sums piled into the financial sector by governments and the sums expected to be generated by a Robin Hood tax, are actually roughly the same. Except the bailouts are money borrowed by the government against future taxes – essentially, more promises, just slightly more credible ones. There is a huge difference between obligations and cash.
Even if you ignore that removing a hundred billion dollars in cash from the financial markets would instantly trigger another meltdown – the exact same effect as everyone removing their savings from a bank simultaneously… Even then, you cannot successfully apply and collect a Robin Hood tax, because the money probably just isn’t there.