The Robin Hood Tax9

I wrote about the Tobin Tax for City AM back when Gordon Brown first brought it up in November.  The scheme has been a favourite of anti-capitalist protesters and the radical Left for a long time, the Tobin Tax Initiative was set up in the United States in 1998.  It promotes the tax as a way to "tame hot money and fund urgent global priorities."

Now it is being promoted under the faintly ridiculous title of "Robin Hood Tax" by a range of charities and, on Friday, Tory PPC and leader of the Conservative Group on Swansea Council René Kinzett on the ConservativeHome Platform.

The Tobin Tax has been adopted by people looking to do a number of things.  Originally the plan was to curb fluctuations in exchange rates by preventing foreign exchange traders moving money around too fast.  Then it was adopted as a way of funding various things like the United Nations.  Most recently, it has become a way of getting money out of the financial services industry in retaliation for their incompetence leading to the financial crisis.

The original case for a Tobin Tax designed to restrain exchange rate fluctuations faded, and we stopped talking about the proposal for quite a long time, because worries about foreign exchange speculation have subsided.  More countries have moved towards floating exchange rates.  That means we get relatively fluid shifts in exchange rates rather than the dramatic movements that we saw in earlier years when speculators sensed that a peg such as the European Exchange Rate Mechanism (ERM) could not be maintained.

The most credible evidence suggests that Tobin Taxes tend to increase volatility in financial markets. The European Central Bank sets out why that can happen:

Empirical studies of the effect on volatility are often behind the academic firewall, but most of them find that a transaction tax increases volatility, at least in the short term (page 18 of this document).

The problem is that most advocates for the Tobin Tax have the mistaken view that trading and speculation are a bad thing.  The truth is that trading helps the process of price discovery, makes markets work better, enhances liquidity, ensures that resources are priced correctly and generally helps oil the cogs of the global economy. Charles Goodhart, an economist at the LSE, sets out why there will be big problems if we impose a transaction tax on the foreign exchange markets, in particular:

So the Tobin Tax fails to deliver on its original objectives.  But for some time, well before the financial crisis, it has also been seen as a means of funding various things.  The Tobin Tax Initiative I mentioned earlier see it as a way to "meet urgent global priorities, such as preventing global warming, disease, and poverty."  The new "Robin Hood Tax" campaign argued that a transaction tax would "give billions to tackle poverty and climate change, here and abroad."

The problem is that the Tobin Tax, as it was designed to change behaviour, is an incredibly inefficient way of raising revenue.  An efficient tax is one that takes relatively little time, effort and money to collect and enforce and that is relatively hard to avoid.  The Tobin Tax fails on both counts.  Again, the basic problem is set out by Charles Goodhart:

Of course, collecting the tax would be relatively cheap.  It could be collected at the exchanges through their systems.  But the bigger challenge and expense is the process of putting in place and enforcing a global tax.  If the tax wasn't global, it would just give a big competitive advantage to tax havens.  The tax would be completely unworkable if a major financial centre wasn't included, and it seems unlikely that the Chinese – and therefore Hong Kong – will play ball.  Doing anything at a global level is monstrously difficult, as the failed and expensive negotiations over a climate change deal at Copenhagen show.  Enforcing it would also be a diplomatic nightmare; what if we don't think Dubai is properly enforcing the tax?

Ordinary taxpayers will pay an even heavier price in the long term if we let politicians establish an international tax cartel.  There will be nowhere to run when a global government puts in place bad policies, and that major pressure to keep down the burden imposed on families and businesses will be undermined.

The tax is also easy to avoid.  Economist James Tobin initially proposed it as a one per cent tax on short term currency trades. Since then, the proposed rate has fallen, most proposals now suggest about 0.1-0.2 per cent, but the scope has been expanded to include other transactions; because otherwise the tax can easily be avoided by trading via other cash-equivalent derivatives.  But the advocates for a Robin Hood tax want it to only apply to certain types of transaction "The tax will apply only to wholesale, not retail financial transactions.  So you won’t pay it when you change money on holiday, or nip into your local bank or building society."