A Financial Transactions Tax, the Robin Hood Tax, apologies to those who haven’t been thinking, but this is an entirely insane idea. No, really, flat out and clear lunacy.

There are all sorts of technical points that can be made, that one on currency trading would probably be illegal under current EU laws (it would interfere with the free movement of capital), that speculation itself reduces price volatility, not increases it, that passing tax revenues to the unelected has never proven historically sound, even the effects of those FTTs that do exist (the UK one on share transactions is known to reduce pensions and raise the cost of capital to companies, neither being desirable outcomes).

But the largest and most important point is that of “tax incidence”. If you don’t know what this means then you’re not competent to be taking part in this debate. But because I’m a nice guy I’ll explain it for any politicians or other ignorants who happen to pass by.

Who hands over the cheque for a tax is often not the person who is really carrying the economic burden of a tax. Studying who really does carry that economic burden is known as the study of tax incidence. Economists have been doing this for a long time: we’ve known since 1899 (Seligman) that it absolutely is not a company which pays corporate taxation for example. For a company is only a legal fiction: a tax must, in the end, mean some lesser amount of money in the pocket of some live human being.

So, we’ve known for over a century that whoever ends up paying the FTT it absolutely will not be the banks. Banks are, as you may have noticed, companies, and companies cannot and do not pay taxes.

So, everyone shouting that “the banks must pay” and that an FTT will make them pay is either deluded or ignorant. Or a politician, but I repeat myself.

So who will actually pay this tax, carry the economic burden? We’re left with three possible groups: the shareholders in the banks, the workers in the banks or the consumers of the products of the banks. Rather than take you through all of the various arguments I’ll just recommend that you read the various IMF, OECD and EU reports on this idea. All of them make exactly the same point. The people who will pay this tax will be the consumers of financial products.

That’s you and me, that’s us, the average man and woman in the street. The banks don’t end up paying this tax, it’s not even the bankers, it’s us.

Two further technical points: Sir James Mirrlees (you know, Nobel Laureate, man who knows what he’s talking about on tax) tells us that we should not use transactions taxes when there are other methods of achieving the same goals. This is because transactions taxes cascade through the economy and in doing so multiply. Joe Stiglitz (another NL, worth listening to on matters economic) has shown that the incidence of a tax can be higher than 100% (he was talking specifically about the corporate income tax but that’s quite similar to this FTT). That is, that the amount that you and I have to pay is greater than the amount of money actually collected in tax revenue.

And yes, it’s a trivially easy process to show that this is likely to be true of an FTT.

So, the Financial Transactions Tax. It’s not banks who pay it, it’s the citizenry. We will almost certainly end up paying more than the tax will actually raise. It’s an absolutely terrible tax except for one unfortunate point.

The politicians will tell us that it’s the banks being taxed and we’ll often believe them even as they pick our own pockets for that money.

Bad economics and great politics. No wonder politicians love the idea.

Tim Worstall has nailed it. Anyone care to debate against him?

A financial transaction tax (FTT) is a plausible idea as it offers the impression of “taxing” the rich to “feed” the poor. However it is never that simple and in our case the FTT confuses virtue with vice. Of course the cocktail parties and the bonuses of those who make billions in profit should not be paid by the the other parts of the income distribution as is the case today, however a FTT might not be a social measure as some wish to present it. To understand why that is most probably the case we need to consider two very important parameters that can make the FTT yet another measure that will deprive the vast society from a portion of its income.

First parameter is the scope of application of the FTT. Should the tax be implemented on all financial transactions it will directly affect almost everyone in the society, from the business community, which includes both small family businesses and large corporations, to the ordinary depositor and even to the ordinary tourist (if the tax is applied on currency exchange). So it is important to know which transactions will be affected and to what degree.

I cannot think of any transaction that is purely confined within the banking sector, thus so far it seems to me that this tax treats all parts of the income distribution and all sectors of the economy, horizontally, unless there will be progressive taxation which is quite complex and not easy to implement and again the results are dubious.

Second parameter is the geographic application of this new tax. There are two possible scenarios. A eurozone-wide application or an EU-wide application. If it is confined withing the eurozone, then what will happen is that the 17 countries of the eurozone will openly adopt a “beggar thy neighbor policy” on all the rest European economies that comprise the EU. That will firstly make everyone outside of the euro area, who trades with that area, worser-off but at the same time it will render the euro area a less favorable destination for investment, thus making it less competitive on the global level.

The first scenario will create a two-tier EU with countries in and out of the Euro having huge dissimilarities while being part of the same market.

The second scenario, that of an EU-wide application, which will make the Union a far less competitive on the global level, where capital moves freely and knows no “homelands”. So it will further worsen the position in which European countries are now into, by preventing a considerable amount of foreign capital from entering Europe. I am sure you all heard/read that emerging economies are now willing to invest in Europe so it would be unwise to discourage them.

Geographic application is of cardinal importance in today’s globalized world. But then again do not forget that banks just like any other company will see the tax as a cost that they can easily pass on to the consumer (so in the end the extra tax is paid by everyone not just the banks).

These are some issues that need to be taken into serious consideration. However I am afraid that we all get stuck in the nice rhetoric politicians tend to use and in the smart use of popular myths such as “Robin Hood Tax” and fail to see that most of it is only serving for the campaigns of certain politicians who will soon have to run for elections.

I personally am in favor of placing stable rules and regulations in our ill regulated European banking system, yet I am afraid that an FTT does nothing to regulate the system and produces adverse effects for the society and the economy.

As for speculation: in our current case speculation exists because the European banking system is in a mess (filled with toxic paper), because our leaders are failing to understand the systemic nature of the crisis and because their policies so far been ineffective in containing the crisis and preventing it from spreading to the core of the euro.

The citizens, the poor, the workers -everyone- will be better off when our leaders solve the real problems that plague Europe. An FTT will not solve any of these problems, it will only accumulate more of them.

“However, until there is global agreement on the implementation across the major trading nations…”
Sorry, Jeremy, but it’s somewhat of a mystery what you mean by this.
If this was a regulation one could understand why it might be desirable but it’s a tax. I can understand why the EU apparatchiks might want to get their hands on some lose change & possibly Obama & a few other spendaholics but what happens to countries who don’t want to raise more taxes? Why should the Independent Nation of Zog have to filch from its citizens pockets money that it doesn’t need simply to cater to Europeans who can’t balance their books. That seems pretty close to theft to me. Unless it’s going to redistribute the money back to the Zogese it’s taken it from, which rather defeats the object of the exercise.

I left this over on Tim’s site as well (where he highlighted the link) The Robin Hood Tax is also [resented as one that can raise lots of money for politicians to give to their friends without really hurting anybody. The reality is that the things it tries to tax – high frequency trading and FX will simply move out of its range and destroy the financial service industry where they do try and apply it, thus raising zero tax but losing lots of income and other tax. Even worse, the one thing that can not easily move – interbank lending – will become prohibitively expensive (try compounding up even 0.005% overnight on your liquid balances for a year) with huge consequences for liquidity in the economy as a whole. So net result is kill liquidity, kill jobs and raise no money. Genius.

“why not take a glance at Worstall’s credentials and interests and compare these to his many superiors, who promote working on a Tobin tax. Clever, but simple of him to say ‘banks don’t pay tax’,”

How about this as an even better idea? Why not deal with the actual argument presented? You know, instead of haring off down after “cui bono?” style insults?

1) Do corporations pay tax?

2)If they don’t who does?

3) Who will end up paying the FTT therefore?

Of course, if you’d rather play dirty with rhetoric and insinuation, I’m game. I assure you I’m better at it than you are.

We did not expect the Finance Industry to cheer in the wings while governments discuss taxing financial transactions. But we do hope that they are willing to undertake some self-reflection on their role in society.

Finance is an instrument directed towards improved wealth creation that should finally serve to sustain true development. True development enables human potential to unfold to its fullest, without damaging the environment which we depend on to survive and thrive. The FTT is the opportunity for the financial sector to have a major positive impact on people’s well-being and that of the planet, as a recent CIDSE report ‘The FTT for people and the planet- financing climate justice’ (http://bit.ly/m35LL4) sets out. CIDSE is an international alliance of Catholic development agencies.

It is beyond a shade of a doubt that the FTT does need to be designed carefully, drawing on the lessons from past and existing taxes of a similar nature. Designers of the FTT should rely on technical expertise and the years of academic research on the subject that has been comprehensively compiled in a recent piece of research by Neil McCulloch from the UK’s IDS (http://bit.ly/niLdrP). All stakeholders -and I mean not only the financial sector, but also those whose jobs and livelihoods are directly and indirectly impacted by the FTT (which I would argue would by and large be positive impacts) also need to be involved at some stage of the policy formulation.

So, rather than screaming doom and gloom, if our friends from the big trading houses that claim that they stand to lose so much from the FTT were to constructively engage in designing the FTT…

And beyond the FTT, if they were to spend some time to rediscover the genuinely ethical foundation of their activities…

…We would not need any Robin Hoods anymore.

Jean Saldanha
CIDSE Policy and Advocacy Officer

the UE must consider seriously how to introduce a FTT without

ideological prejudices

“Tim Worstall’s statements (not the FTT) are arrogant and unbalanced…actually clear lunacy (his own words).”

Ah, the insult direct. Good, this is getting interesting.

“He uses techno-speak to frighten-off the non competent reader. ”

Try again. I go to great lengths to explain technical matters in language accessible to the general, non-specialist, reader.

“So far we have had bad economics as well as bad politics. ”

Detailing the incidence of a tax is not bad economics. It is simply economics. My apologies is this point hasn’t quite reached Continental Europe yet but economics is a science. We can use it to predict certain things. One of those being who will actually carry the economic burden of a tax. That you do not like the answer is of no more import than your not liking Newton’s Equations would be important. Apples will still fall out of trees whatever your personal prejudices on the matter.

“Bankers have their share of responsibility and sought risky private profits counting on governments and taxpayers to socialize their subsequent losses.”

The connection between this and an FTT is not apparent. In fact there is no connection: the answer to the socialisation of losses is of course not to socialise them. Let failing banks go bust. Still nothing to do with an FTT of course.

“Banks used to be intermediaries between savers and investors. They have become speculators with their clients and also with their own money, have betrayed the trust society had put in them, and weakened the capitalist system. They are sawing the very capitalist branch we are all sitting on.”

This all might be entirely true but so what? It’s irrelevant.

“Bankers are perhaps the biggest obstacle for measures improving the efficiency and transparency of financial markets, alleging Armageddon for additional financial market regulation as well as the introduction of a FTT (e.g. that high frequency trading would emigrate destroying the financial service industry where the FTT is applied).”

Gosh, that’s an interesting one. an FTT will remove liquidity from the markets, widen spreads, increase price volatility and cost consumers vastly more than it will raise in revenues. Yet you say that an FTT will increase efficiency? More volatile more expensive capital markets will be more efficient? Clearly the last couple of centuries’ worth of work on markets and the joys of them haven’t quite reached parts of the European Mainland as yet.

“Admittedly, FTT alone, without regulatory reform, would not control speculation, but would be at least a signal that excessive short-term speculation is unhealthy;”

This is something that you must prove, not assert. And as yet, no one has shown that it is even possibly true, let alone vcertainly so, to the satisfaction of economists. You know, economists, the people who are the experts in the science of economics? Just like you go to the physics wallahs if you want to know why apples fall down out of trees?

Speculation increases liquidity and reduces price volatility. Both highly desirable things.

“it would recognize that Keynes’ warnings against liberalizing world financial markets were justified,”

That’s the Keynes who spent decades speculating in the commodities markets, is it? That one?

“that the related uncertainties for the budgets and finance of whole countries can have catastrophic consequences and disrupt national and regional economies, if not the world economy;”

Eh? That governments are spending money like drunken sailors on shore leave is a result of those dastardly speculators? Not the result of politicians be constitutionally fiscally incontinent? We have a useful word in English to describe such a position: “nonsense”.

“and that the FTT-related revenues would be the smoothest way to deal with widespread budgetary problems worldwide.”

What? Haven’t you seen the revenue projections from the EU document about the FTT? There will be no additional revenue! A bit comes in from the tax, yes, but it shrinks EU GDP by 1.7%. Meaning that all other tax revenues *fall*. By more than the new revenue. The FTT simply does not provide any extra revenues at all: it shrinks revenues. And no, not even in European economics is a fall in tax revenues a method of dealing with budgetary problems.

“If those actually paying the FTT would be the consumers, let them decide (the majority don’t have the means to be consumers of the financial products banks offer to financial investors).”

Make the tax voluntary? Now there’s an idea. That would be letting the consumers decide, yes. Pity no one thought of that before imposing income tax on us all, eh?

“It could notably help governments affected by insufficient economic growth to grow out of the mess,”

No, you haven’t read the EU report, have you? It says that an FTT will shrink the European economy.

“and the EU to find an own resource”

That’s not something that is convincingly in favour of any tax you know. “Let’s send money to an unelected supra-national bureaucracy” is not known as being a wise move. Quite apart from it being undemocratic of course.

“which would have wide popular support, preventing governments from continuing to act as shop-keepers with a calculating machine to check the net- contributing or net-receiving effect of every EU decision.”

Well, quite, an “oqwn resource” would mean that no one at all was looking over the shoulder of that bureaucracy. This might be how it’s done in Padua, or Potsdam, Senor, but it’s not the way that we are used to dealing with our affairs.

English political history has been described as a 1,000 years of our gaining the power to insist that the State ask us nicely for our tax money, ask for it every year, tell us where it goes and give us an opportunity to say “No”. Quite why we should have to give that up just so that Germany doesn’t invade France again I’m not sure. Perhaps you could explain why keeping a bureaucracy accountable would increase the risk of war?

“If bankers then succeeded to pass on the tax to the consumers, governments should intervene on the latter’s behalf, starting with decent limits on bonuses of bank leaders unrelated to performance.”

You’ve entirely missed the point of tax incidence. Please go and read Seligman (1899) so that you can see what is being said. There is no conscious attempt to “pass on” a tax. Rather, people’s behaviour changes as a result of the existence of the tax. This change in behaviour leads to certain people having less money in their pockets than they would in the absence of the tax. Thus these people with less money are those who bear the incidence of the tax.

My apologies, but really, what are you doing commenting upon the incidence of taxation when you don’t have the very first inkling of a suspicion of an idea of what is being talked about? Is this how things are done in your corner of the Continent? That the ignorant are asked to make public policy?

“Come on, Tim Worstall, how can a 0.005% FTT have the mammoth impact on the economy that you predict?”

Sigh. The FTT is variously predicted to raise €50 billion (some EU estimates, before the tax losses from a shrinking economy) to $400 billion (Robin Hood Tax people). Anyone who thinks that you can raise $400 billion in tax revenues without changing the way the world works just isn’t thinking, are they? You know, even in government circles $400 billion a year is though of as pretty fat money. If we stuck $400 billion on cigarettes we’d all assume there’d be some change in behaviour, wouldn’t we?

“Whose interests are you defending with your spurious arguments?”

Actually, mine. No, not as a producer of anything, but as a consumer. As one of the people that is going to have to pay this tax. I’ll end up paying £10 so that £1 can be raised in tax for Mr. Rumpypumpy to spend as he pleases. This does not please me, I do not think that this is good public policy. In fact, as I say at the top, I think that this is insane.

“As Jean Letitia Saldanka commented, I hope that the finance industry reflects on its role in society before it is to late for all of us, including that industry itself.”

Myself I hope that the political classes and their shills and lickspittles stop trying to impose entirely insane, expensive and counter-productive taxes on us.