The BBC website has a head-to-head debate between a supporter and opponent of a financial transactions tax, more commonly known as a Tobin or Robin Hood tax.
Here is a flavour:
There are (at least) three fatal flaws in the plan. Firstly, it will not be the banks but savers and pensioners that foot the bill. Secondly, tax revenues could actually fall not rise as trade moves elsewhere, jobs are lost and the economy shrinks. Finally, instead of promoting stability, it could make markets far more dangerous … The tax did not work in Sweden, and it will not work now.
versus
The International Monetary Fund, the European Commission and the Gates Foundation have all found that unilateral transaction taxes are feasible. Ironically, the best evidence for this can be found in the UK, where a Stamp Duty of 0.5% on transactions from anywhere in the world in UK shares raises £3bn per year … Lets bring greater balance by raising taxes on an under-taxed sector that has benefited most from globalisation, to fund global public goods that benefit us all.
You can read the full Tobin tax debate here and then why not add your view in the comments below?
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30 Comments
Of course it could work, the salient questions are a) who collects the money and b) to what end?
the best evidence for this can be found in the UK, where a Stamp Duty of 0.5% on transactions from anywhere in the world in UK shares raises £3bn per year
I might be missing something, but how does that compare to the tobin tax?
the ‘worldwide’ part is the problem. With the stamp duty, it doesn’t matter where the transaction takes place (so the only way to avoid it is to avoid buying any UK share. But if you want a UK share, then you pay it wherever you are). With the Tobin tax, it DOES matter and so is avoidable just by relocating the transaction.
Apple and Oranges seems to me.
also: ‘Robin Hood’ tax to tackle poverty..
excuse me if I’m cynical about that. it’ll just go straight into the treasury coffers, nothing about having a dedicated purpose (taxes that start that way anyway always end up into general taxation).
Now that is not necessarily a bad thing if it helps reduce the deficit.. but then it may just end up being used to give tax breaks (mostly to the richest) whilst the cost is being shouldered by the banks customers (including the smaller, poorer ones).
By the same argument we could say that we could not abolish slavery. Those industries which use slaves would just move to other countries where slavery is still legal. All you would do is hurt those whose own jobs and income rely on industries which use slaves.
“By the same argument we could say that we could not abolish slavery.”
Perhaps unfortunately, I do not consider the people who generate £50b in taxation, for care-bear types to spend on their multitude of socially ‘worthy’ projects, to be the modern equivalent of slavers.
I’ve always felt that the argument for the Tobin Tax is to rebalance the economy away from speculative financial transactions. The Tobin Tax is primarily a tax on speculation. The speculators would go elsewhere, but it isn’t so easy to speculate against an economic block from outside.
Pension funds might be better off. They often take longer term positions in shares, currently subject to stamp duty which would be cut if a Tobin tax was brought in. When UK stamp duty was brought in the volume of shares traded dropped by 50%, and yet London still went on to overtake NY. If the markets worked the way the opponents of a Tobin tax say, London would have closed by now. I’m not in favour of a Tobin tax if its levied here and collected by Brussels, but if we raise it and can spend it its all good.
I agree with Alistair – the bit in the ‘anti’ article about pensioners just read like scare tactics. Given that pension funds (as I understand it… and I really hope I’m right!) aren’t involved in high-frequency transactions, they would be unlikely to be overly hit by an FTT. The small cost on pensions that resulted would likely be worth it for the benefit it brought of discouraging speculation and the collective benefit we would derive from the tax revenues.
The scary ‘they’d all go elsewhere’ line also doesn’t seem overly convincing – the high frequency traders might, but they’re only a small minority of the city, which is itself only a part of the financial services industry. London has a lot of other things going for it that make it an attractive destination for financial services, including: ease of getting people in (relative to the US); time zone (overlap with both US and Asia); English-speaking so easy for anyone to move and operate there; international flight hub and, most of all, the fact that everyone else is there. Upping sticks and leaving would present a huge collective action problem that would mean the cost of the tax would need to be pretty high to outweigh the cost of moving. So the speculative operations might move – but would we really miss them?
As for Sweden – I know approximately nothing about Sweden in the 1980s. Happy to be illuminated, but not going to take a financier’s word for it.
A Tobin tax is essentially a “sin tax” like those on tobacco or alcohol. It’s proper purpose is thereforeto change bahaviour rather than raise lots of money.
The “sin” it seeks to control is excessive trading which is popular in the City because they make money out of volatility and it has reached extraordinary levels with superfast computers dealing in nanoseconds in some cases. This has no economic rationale whatsoever. From the City’s point of view what is so wonderful about it is that each individual trade, in isolation, can presumably be justified as in the interest of clients such pension funds. But in aggregate overtradig is clearly not in clients’ interests since each trade leads to a charge to client funds.
And if the tax does change behaviour then the City slickers claims that it will be a big additional cost to be passed on to clients is false. Instead they will get their brokers focussing more on long term appreciation than on zero sum casino games. Incidentally, if the claim that it would be passed onto clients were to be true then the brokers should be referred to the OFT because in a properly competitive market they would not be able to pass on costs.
I think of it as being like a compass on a yacht. It needs to be free to point north but at the same time it must not jiggle about so much with the motion of the boat that I can’t get a true reading off it. Compasses use oil to damp the swinging of the needle, markets should use a Tobin tax.
Millennium Dome, Elephant – with help from Richard Flowers – went into the pros and cons in expert detail last week. In short, he reckoned that if something sounds too good to be true, it probably is…
Laura – this is a reasonably good summary of what happened in Sweden
http://publications.gc.ca/collections/Collection-R/LoPBdP/BP/bp419-e.htm
A FTT is a bad idea because it is just a flat tax on financial transactions. It taxes people at an arbitrary rate on the basis of how much money they trade and how frequently, not how much profit they make, not how socially useful or otherwise their trading is, not any useful or relevant measurement. Unless you’re convinced that the more and larger trades someone does the more evil he is then it is just nonsense.
Because it is a transactions tax (as opposed to a VAT) it will also hit companies increasing the costs of any company that uses financial services (i.e. nearly all, especially if they have international operations) raising the cost of finance and making markets and business operations less efficient. Because of this the cost WILL be paid by everyone as companies across the economy pass on higher prices.
The correct answer to the problem is NOT to introduce a tax on transactions but to introduce a permanent tax on profits and wages in the financial sector. A Financial Activities Tax would act like VAT, and as such would not be paid by companies using financial services for business operations and so would not reduce economic efficiency in the same way. It would hit banks on the basis of the profits they make and the bonuses they hand out not just arbitrarily on the basis of how many trades they do. And it would bring the financial sector under the scope of VAT (effectively) meaning that they actually pay the same taxes as all other businesses at last.
It’s the option supported by the influential IFS as the more efficient, more sustainable means of improving economic efficiency, reining in the financial sector without just driving it offshore, cutting the cost of finance for businesses, raising extra revenue and rebalancing the economy. Abandon this Tobin nonsense, abolish stamp duty, abolish VAT exemption and introduce a FAT Tax. http://www.ifs.org.uk/mirrleesreview/design/ch8.pdf
Robert Peston has a good (better) article on this – http://www.bbc.co.uk/news/business-15148590
I think one of the key questions is whether this huge volume and rate of transactions is socially useful.
When stocks are retained for only a few weeks rather than decades, where are the incentives for long-term investment and development of a company and its employees?
When computer algorithms buy packages and sell them milliseconds later to cash in on the difference, does that really help small businesses or pension funds? Is designing the necessary software and hardware a good use of our engineers and scientists?
@jedibeeftrix
“Perhaps unfortunately, I do not consider the people who generate £50b in taxation, for care-bear types to spend on their multitude of socially ‘worthy’ projects, to be the modern equivalent of slavers.”
I’m sorry, but that’s just economically ignorant. They do not ‘generate’ the money they pay in taxation, they simply take money off other people in return for services provided. The question any economist would ask is: does the service they provide justify their income (money taken from other people)? I know what the answer is too.
However, the City isn’t even a net contributor of tax: the size of the bailouts is in excess of the total tax ever paid by the City. Your argument is doubly wrong.
High Volumes lead to hign volatility, which serves no economic purpose except some will win and others will lose but the customer always loses.
The other point is that the FTT would be neither the miracle cure nor the economic armageddon that some people fear.
If charged at a sufficiently low level that it genuinely does not radically damage either financial services or raise the general cost of finance then it will not raise vast sums of money. If brought in at such a high rate that it does ‘in theory’ raise significant sums then it will damage financial services and the wider economy by raising the cost of finance and thus in the long term not raise much money either. We are talking about perhaps another £3 billion a year (the amount raised by Stamp Duty again).
This is not really an argument for or against. Just an honest assessment. It’s possible that a modest FTT will improve over-all efficiency, but it is also possible that on-net it will slightly reduce it. It’s difficult to say. Personally I think on balance the FAT is a better way to go.
There seems to be a view that high volume trading leads to high volatility. There is no evidence of this in fact quite the opposite.
Suppose the proponents of the tax are right and it raised 35bn a year. Where do thru think the money is coming from ?
@roger – the relationship between volumes and volatility is not quite that straightforward. You actually get high volatility when there is a great shortage of either buyers or sellers.
What none of these anti Tobin tax pieces explain is why London has won so much business from NY and Frankfurt when it has the highest tax. One theory is that the burden of US legislation like Sarbanes Oxley pushed business away from NY. Another is that the high stamp duty in London was what drove “innovation” in the form of things like CFDs, which are effectively ways of betting on stock markets without paying any stamp duty – these would be hit by FTTs. Whatever the reason – if people want to oppose a Tobin tax they need to develop more sophisticated arguments than just “all the trading will go abroad”
Incidentally I don’t believe that an FTT will tackle poverty – that is nonsense. I do believe it will act as some kind of damping on speculation. I do think that derivatives should be taxed, and that simple ownership of shares should be taxed less than it is currently.
The question about taxing financial transactions is difficult, in a situation where we’re also trying to encourage the banks to invest more of their capital. It would have to be more a speculation tax, aimed at reducing the number of rapid share transactions. This would be a good thing, one because it would raise money, and two because such rapid sharing is one of the key amplifiers for fluctuation on the markets. Makes the whole thing more volatile. But any transaction tax that turns out to be more an investment tax, would harm the recovery.
There are other tax ideas on the table that are more interesting, though. Asset taxation is one interesting one – the problem is that too many wealthy organisations and people have decided they’re not confident enough in the economy to invest, so they’re saving. The banks are using any new liquidity we might create as a shelter against their exposure to the European economies and so on, and the very wealthy just aren’t spending.
Asset taxation at a low level with a fairly high threshold would ‘punish’ hoarding like this, and bring in revenue to pay for re-investment. I would argue in favour of channelling all the money so raised not into the general taxation pot, but into the credit easing scheme, directly reinvesting the revenue into the economy. The asset tax could then be mothballed along with credit easing until the next time Labour or the Conservatives wreck the economy.
@TJ ” But any transaction tax that turns out to be more an investment tax, would harm the recovery.”
An FTT would be levied per transaction – so you would pay it if you buy shares or derivatives to invest for the long term, but the level would be so low that it would be unlikely to affect your investment decision. If you’re trading at high volumes and high frequency, then the small levies would add up and it would be prohibitive – which, as you note, would be a good thing
Thank you Hywel, an excellent link:
http://publications.gc.ca/collections/Collection-R/LoPBdP/BP/bp419-e.htm
This particular quote drew my eye:
“The City of London has had great success in attracting financial services activity from other countries as a result of regulation and taxation. Thus it is no wonder that one of the most ardent supporters of an American FTT is the London financial community.(16)”
Imagine if we made two tiny modifications as shown below:
“The City of London has had great success in attracting financial services activity from other countries as a result of regulation and taxation. Thus it is no wonder that one of the most ardent supporters of a British FTT is the European financial community.(16)”
Make more sense now people?
I get angry each time I read someone claiming this type of tax will reduce volatility by reducing the number of transactions. Anyone with any economic knowledge knows that it is in fact the opposite which is desirable to reduce volatility – more transactions lead to increased knowledge and a more stable price.
I would go into detail but as Alex linked to above, the Millenium Dome Elephant does it so much better:
http://millenniumelephant.blogspot.com/2011/12/day-3992-tobin-or-not-tobin-why-paddy.html
@Matthew Lambert – True that you need transactions for the markets to reach a stable price and true that transactions provide information, but some transactions provide better quality information than others. High frequency algorithmic trading is not necessarily bringing quality information to a market and can result in price changes overshooting.
There is some real nonsense in that blog post you linked to which makes one question its overall value. For example “Bankers … do not play the City Casinos with their own money. They invest money on behalf of clients…” Hedge fund managers do invest their own money alongside that of their clients.
Simon’s point is the important one. What happens if you just remove* £20-35bn from the economy? (£20bn is I reckon about
You could argue that it isn’t necessarily being removed but I don’t think anyone is particularly clear how this would be spent with different bodies suggesting different uses. My economics isn’t great but I can’t see that as having no effect.
I’m instincitively suscpicious as it seems like there would be a way to raise all the money for EVERY spending proposal in our manifesto (inc raising the tax threshold) at a stroke and without having any impact on the economy
The Noble Elephant refers to the abolition of Advanced Corporation Tax – also a very small sum in itself but one which had big impacts on long term investments like pension funds (and which wasn’t necessarily appreciated at the time)
jedibeeftrix
Perhaps unfortunately, I do not consider the people who generate £50b in taxation, for care-bear types to spend on their multitude of socially ‘worthy’ projects, to be the modern equivalent of slavers.
I assume your use of quote marks around the word “worthy” in intended to convey the belief you do not regard it as worthy, and your use of the word “care bears” was intended to be pejorative. Since you applied the word “worthy” to anything spent from taxation and put it in “irony” quotes, your line must therefore be that no state spending is worthy. For myself I do believe that some social infrastructure is useful. I note that big corporations also do seem to spend a lot of their own money on internal infrastructure things. I’n afraid that since we do not livr in a peasant slash-and-burn society, instead we live in a rather complex one, we do need some sort of infrastructure. If you disagree, go off to Somalia, or Afghanistan or one of those places where the state is virtually non-existent.
I would not regard a thief who stole money from me and then graciously gave a little of it back as a good person who should carry on thieving for the generosity he was able to show from the proceeds. Nor would I regard aristocrats living a life of luxury off the backs of peasants as people to be adnmired and allowed to keep their privileges just because they occasionally gave a little to charity.
The big question here is the extent to which we have been given a false sense of wealth by money just circulating around, an economy based on everyone getting loans to sell houses to each other. And ultimately financed by m,ore and more control of our viotals being bought up by the arms of overseas states. So we end up with state control after all. Only the states are China, Qatar, …
“Since you applied the word “worthy” to anything spent from taxation and put it in “irony” quotes, your line must therefore be that no state spending is worthy”
Nope, i’d like you to consider the word “multitude” when assessing how ironic i was intending to be.
I believe we spend too much, and that this will depress the long-term rate of growth that will preserve our standard of living in the decades ahead, this does not mean that i yearn for Somali style ‘freedom’ from the evils of big-gov’mint.
Specifically, that it i find it beyond ludicrous that when we need to promote growth we threaten a tax that will not damage this ambition, it will fail to collect revenue without destroying the source of that revenue.
Generally, that it find it beyond ludicrous to degree to which some people will demand funding for the pet social ill regardless of the gross burden their combined liabilities demand from the taxpayer.
When we get government spending as a proportion of GDP back to 37% I will be content.
If we get combined departmental spending (i.e. minus debt-interest) as a proportion of GDP down to 33% I will be delighted.
this report makes ugly reading:
http://www.bis.org/publ/work300.pdf
“When we get government spending as a proportion of GDP back to 37% I will be content.”
Why? You haven’t given a single valid reason as to why or how our economy would work better with a smaller state. All the evidence from other countries points to the opposite.
Well Steve, I confess to being a fan of Laffer, and I remain quite convinced that long-term growth will be higher without oppressive levels of government spending.
jedibeeftrix
I confess to being a fan of Laffer
Isn’t it funny how people who are “fans of Laffer” tend to have very different standards required for proof of conjectures on this one and on the global warming one? A bunch of climate scientists were humiliated when they were found to be communicating to try and get data presented in a way that favoured the global warming conjecture. Are there never such similar communications made by economists and “fans of Laffer” to try and get data presented in a way that favours them? Or are such things so normal that no-one realises the hypocrisy of the very different standards required?
@ Matthew
Well, I can’t speak for all “fans of Laffer” but perhaps it is my educational background that leads me to conclude that GCM’s are a fundamentally more complex beast that socio-economic models.
Still, my principle concern is the damage high levels of taxation does to long-term growth, and in this Laffer is really only a contributory factor:
http://ime.bg/uploads/OptimalSizeOfGovernment.pdf
Talking of the Laffer curve here’s a brief examination of how it works out quantitatively speaking.
http://www.angrybearblog.com/2011/10/laffer-curve-and-kimel-curve.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FHzoh+%28Angry+Bear%29