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New study shows a Robinhood tax would boost growth


10:45 am - February 8th 2012

by Owen Tudor    


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A new report, launched in Brussels on Monday by the Socialists and Democrats in the European Parliament, shows that a European financial transaction tax (FTT) would boost growth in Europe by at least 0.25%.

It would also raise revenue to combat poverty and climate change at home and abroad, and help re-balance the economy by making long-term investment more worthwhile than short-term, high frequency trading.

This new report by noted economists Prof Avinash Persaud and Prof Stephany Griffith-Jones comes on top of revised estimates from the European Commission who originally produced some of the data that fat cat financiers pounced upon.

The Commission’s original assessment was based on a flawed model which shows all taxes as harming growth, whatever the revenues are used for.

Welcoming the new report, Socialist MEP Anni Podimata, who will draft the European Parliament’s report on the Commission’s proposed FTT, said:

“This study confirms what we have been saying all along. The financial markets have to make a fair contribution to the crisis they provoked. An FTT will reduce the fragmentation of the internal market. Put together with other tools, it will act as a disincentive to high frequency trading and other practices which increase risk without ensuring liquidity.

This would contribute to a better financing of the real economy, encourage investment and job creation in the EU. The S&D Group is against putting the entire burden on ordinary taxpayers, and calls for measures to boost growth. In this sense, an FTT is an integral part of this approach.”

The Commission’s new approach was set out last week in a combative article in several national newspapers around Europe by EU Tax Commissioner Semeta – only a year ago an FTT-sceptic – who wrote:

The more the financial transaction tax approaches implementation, the shriller – hardly by chance – the rhetoric of its opponents. They twist the Commission’s official data and thereby invent apocalyptic scenarios concerning the impacts of the tax on growth, employment and competitiveness.

The FTT will neither damage growth and competitiveness nor lead to more unemployment.

The paper also disproves the suggestion that an FTT would hit pension funds or pensions.


A longer version of this post is at Touchstone blog

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About the author
Owen Tudor is an occasional contributor to LC. He is head of the TUC’s European Union and International Relations Department and blogs more regularly at the Touchstone blog.
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Reader comments


“This new report by noted economists Prof Avinash Persaud and Prof Stephany Griffith-Jones”

Tims W and J, Are these two economically illiterate as well then?

The Commission’s original assessment was based on a flawed model which shows all taxes as harming growth, whatever the revenues are used for.

The assumptions that this study employs to demonstrate that the FTT would increase growth are:

1. The reduction in financial transactions caused would reduce volatility, and therefore make another crash less likely;
2. The reduction in employment in the financial sector would mean that bright people would become structural engineers;
3. If revenues go to deficit reduction, then the cost of borrowing will diminish – leading to higher growth;
4. If FTT is fiscally neutral, then it could be used to cut income/consumption taxes – leading to higher growth; and
5. If it’s spent at the EU level, then the wisdom of the investment spending by the Commission would lead to higher growth (or at least “fairer” growth).

I’m not sure any of these are slam-dunk arguments.

Sounds good to me. We know that the European Commission is far better at spending our money than we as individuals are. Why not go the whole hog and have 100% income tax with benefits distributed by the EU?

In reference to Tim’s point 2 above, I’d quote this from page 7 of the report:

People with similar educational qualifications become financial engineers in London and mechanical engineers in Dortmund and the long-term statistics suggest the latter is better for long-run productivity growth.

Please note there is no support given for this statement (this is clearly not peer reviewed, as that would be unacceptable…).

In effect, one of the key assumptions of this report is that one form of economy is desirable – despite the fact that if we all adopt the same from of economy, there is likely to be a distinct fall in GDP as we compete over the same limited market. The authors may be rights that German productivity growth is impressive (although it appears to have been won at the cost of workers’ wages of late), but they seem to further assume the same model will work for the UK, Greece and Malta.

This seems reflective of a one-size-fits-all aspect to this report, which does not anywhere consider quite what happens if one or more countries do not implement this proposed tax.

here:

“would boost growth in Europe by at least 0.25%”.

the report

“the impact of introducing an FTT on the level of GDP could be positive, at around +0.25%”

do I need to explain how important this distinction is?

Just having a read through it, but this stands out to me as a warning sign;

“If the financial sector is as competitive as many bankers argue, it may absorb
at least part of the costs of the tax.”

Noww, for sure the banking sector will absord some of the costs of an FTT. But that has bog all to do with levels of competitivness.

An FTT is, pretty obviously, a raise in Marginal Cost, imperfect competition relates to the ability to raise prices above MC. In fact, a monoploist (by definition) prices at the most elastic proportion of the demand curve, so surely imperfectly competitive markets are likely to absord more of a tax raise?

It’s not killer, by any means. But little mistakes like that do undermine your confidence.

Would a financial transactions tax in the EU also cure baldness?

I expect the Swiss and Wall Street operators would really welcome the EU imposing the proposed FTT, as would some of the banking havens.

Btw it seems not to be widely appreciated that in Britain there is already a stamp duty of 0.5pc on “paperless transactions” in shares:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnSavingsAndInvestments/DG_10013514

It would also be the right thing to do. Feel good factor wise too – it’s a boost for people enduring benefit cuts/being forced to move house to somewhere overcrowded due to housing benefit being slashed. And those in banking could at least show some willing and contrition to put right the massive wrong they did.

“The assumptions that this study employs to demonstrate that the FTT would increase growth are…..”

I’m not sure any of those assumptions are any more unreasonable than the idea consumers have perfect information, transport costs are negligable, markets are perfectly competative and a whole host of other assumptions that standard economic models make.

Planeshift,

I’m not sure any of those assumptions are any more unreasonable than the idea consumers have perfect information, transport costs are negligable, markets are perfectly competative and a whole host of other assumptions that standard economic models make.

I sincerely hope that policy-level models are not making those mistakes though – comparing a document that advocates a specific policy through making questionable assumptions with the macroeconomic models of economics as an academic discipline is hardly a sensible argument.

And anyway, even if all economic arguments are equally unreasonable, that does not make this report any more reliable – probably less so if anything.

@ Planeshift

Are these two economically illiterate as well then?

If they are really suggesting that an increase in taxation will promote growth and increase GDP they undoubtedly belong with the loons at NEF.

12. Luis Enrique

planeshift

[some small points just in case you are interested]

standard economic models do not assume perfect competition. Industrial organization would use oligopoly, macroeconomics has used imperfect competition as standard since about 1980.

The way to decide whether an assumption is reasonable or not is not to consider whether it is true or false that “transport costs are negligible”, for example. It’s to figure out whether including/excluding transport costs makes an important difference to the question in hand, so that’s context specific. By necessity, models must exclude very many things that are both true and important, in a more general sense, and brutally simplify the complex.

my tuppence worth is that this report is right to focus on the assumptions that link the FTT to investment and growth – which comes under the heading of both dubious and of great importance to the result – and also the exclusion of some mechanisms via which healthier public finances might be helpful right now.

Although puzzlingly much of their analysis concerns a fiscally neutral FTT – i.e. one that replaces other taxes – meaning it raises no new revenues. Very much at odds with what FTT campaigners are after. Also, another tuppence worth: I don’t buy the arguments that the FTT would make the financial system safer, which underpins a lot of this report.

13. Northern Worker

Is this is the same Brussels presently sending Greece back to the middle ages? You know, austerity and an EU placeman didn’t work so lets have more austerity and appoint EU people to run the government. And if that doesn’t work, we’ll keep on doing more and more of the same until Greece is totally ruined and its people are starving on the streets.

What makes you think these people have any idea at all about anything considering everything they have done in the last few years has led to one disaster after another. It’ll be too late when all the financial businesses have relocated outside the EU, hundreds of thousands are out of work here, and no taxes are raised at all.

“shows that a European financial transaction tax (FTT) would boost growth in Europe by at least 0.25%.”

As already stated, no, it doesn’t. The report says it would boost GDP by 0.25%.

And even that’s not really true. What is true is that they make a number of assumptions which lead them to the conclusion that it would, What matters is those assumptions.

One major one is that the tax would pretty much eliminate high frequency trading. Which it probably would. However, they assign a significant value to the absence of HFT. Actually, it’s pretty much what gets them into positive territory in their numbers. The absence of HFT will make markets more stable and thus reduce the likelihood of a financial crisis. Financial crises are expensive, thus having fewer of them would be one of those positive things that we can count.

That’s all just fine, so far. It’s just that we have to ask, will the absence of HFT mean that we don’t have financial crises? It’s pretty much the crux of this point, isn’t it?

And there’s absolutely no evidence at all that it would. Indeed, they only mention one problem that has been caused by HFT: the flash crash. Given that that was over in about three hours and doesn’t seem to have had any longer term effect at all it’s difficult to see where the value of not having HFT is.

HFT did not cause the 2007/8 problems for example. It’s nothing at all to do with mortgages, CDOs, CDSs, FX, options, derivatives, mad insurance companies (AIG) or, in fact, anything at all that can even be plausibly related to what happened.

No one at all, not even you Owen, has blamed 2008 on the way in which shares were traded too often……and shares are where HFT is, not any of those other markets.

“The Commission’s original assessment was based on a flawed model which shows all taxes as harming growth, whatever the revenues are used for.”

No, that’s not right either.

This is:

“The Commission’s original assessment was based on a model which shows all taxes as harming growth”

All taxes do harm growth as they are collected.

“, whatever the revenues are used for.”

No, what they are spent on might well increase growth more than the burden of raising the taxes produces.

The earlier report looked purely, you are correct, at the effects of levying the tax. Which is how we are supposed to analyse taxes. Is this a good place to get the revenues we need or not? Should we tax transactions, or incomes, or consumption, or capital, which of the various alternatives gives us the revenue we need to find the spending we want to do?

And this report, although it doesn’t say it directly, is still showing that an FTT is a bad way to raise revenue. We could get many of the positive aspects they talk about by raising revenue in other, less burdensome, ways, but still spending it on the same things they’re talking about.

That is, they’re trying to justify the tax by what it will be spent on: which ain’t right. You justify spending by what it will be spent on, you justify taxes by the effects of the taxes.

In the end though I will admit I’ve been waiting for this. If at first your model shows your proposal to be insane don’t modify the proposal, naaah, much easier to get the model redone, isn’t it?

All taxes do harm growth as they are collected

No they don’t.

BenM,

No they don’t.

I think something so counter intuitive demands an explanation surely?

As Tim points out, whilst the resultant government spending may bring about growth (and may even therefore be more effective than not collecting the taxation – theoretically at least), taking the tax out of the economy means it cannot be used for consumption or savings, and so there is less money in the economy, hence less growth. Pretty obvious.

It may be you missed Tim’s qualifier and read this as the normal right-wing ‘all taxes harm growth.’ If so, I’d agree with that (just because government is not effective at spending money for growth), but it is not what was said.

17. Luis Enrique

The Truth and Taxes and Economic Growth

(and interview with Joel Slemrod, who really knows his onions)

no real empirical support for claim taxes reduce growth, as a general statement.

while I’m on the topic, this interview
public finance scholar (and text book author) Jonathan Gruber on public finances more generally is v interesting.

what economics actually has to say about these topics is usually misrepresented in blog comments arguments.

18. Luis Enrique
19. Tax Obesity, Not Enterprise

So the EU bureaucrats offer to two compliant academics lots of cash to devise a model that broadly comes up with the results that the EU bureaucrats wish to hear. It’s the oldest campaigning trick in the book: hire consultants, claim they are independent and then publicise the largely pre-determined results you have commissioned. All very tedious – the ‘Today’ programme is full of such reports – and used by both the left and the right.

I do not see how it can damage growth, for example the tax would raise the transaction costs of a 1 week 25 ml swap from €279 to €5,279, this is penuts to the corporations, as for stocks what,with every stage of the transaction taxed and bid ask increase, 2% for a round trip, again this is penuts.

This is such a small price for some one else to pay to provide a feel good factor for people enduring benefit cuts, there is enough money to end poverty, bring an end to global warming, end the EU debt crisis, fund many amazing projects, cut and in some instances totaly do away with taxation, a rise in economic growth and as people are not in the market stealing any more the long term investors will get a greater return, meaning all our pensions will be larger.

And if the sectors taxation revenues should suffer in anyway and for instance we struggle to pay for the NHS or benefits, we can just raise the tax.

“what economics actually has to say about these topics is usually misrepresented in blog comments arguments.”

Except it’s usually misrepresented by the libertarian/classical liberal brigade who label their opponents, including actual nobel prize winners, economically illiterate. My personal favourite remains the libertarian who called Paul Krugman economically illiterate.

Its a rhetorical attempt to silence debate by pretending people who still want a mixed economy with state provision of public services are the equivelant of flat earthers. This debate over a FTT has followed exactly this pattern, and is blatantly absurd given the credentials of the authors of the report referred to in the OP.

Right, so raising this tax will boost the European economy by 0.25%. So why not levy the tax at a higher level and aim for 25% growth?

In the UK we already have 2 transaction taxes – one on shares and another on land.

Please will someone have a look at the impact on GDP, as I have very real doubts that the existence of either or both of these taxes increases GDP by anything at all. But I am willing to be persuaded – but remember from my University days (admitedly some time ago and before SDLT, although there was Stamp Duty on property transactions at the time) that the effect was somewhere between a reduction of about .25% ro about 1% of GDP in the UK.

While we are at it, can anyone point to any effect in reducing the boom in property prices that we have recently been through by the existence of SDLT? Indeed, I note that in some parts of the South East, the boom continues. Is there really a modulating effect with SDLT at 0 to 5% as Tobone suggested?

There is no Stamp Duty or equivalent in France and Germany – let’s see them introduce an equivalent tax in their jurisdictions first and see the impact of that first before we promulgate a tax that is theoretical and for which the only real practical experience (the Swedish experience) is entirely negative.

Planeshift: “I’m not sure any of those assumptions are any more unreasonable than the idea consumers have perfect information, transport costs are negligable, markets are perfectly competative and a whole host of other assumptions that standard economic models make.”

As John Kay reminded us recently in the FT, the late Ely Devons had an apt retort to such assumptions.

In a study relating to horses, economists should sit down and speculate how a horse would think . . .

The recent surge in behavioral economics does not start off with presuming complete rationality and foresight on the part of economic agents. Keynes insisted on macro modelling where uncertainty prevailed and investment decisions were motivated by animal spirits. What mattered in the sort run was what determined aggregate demand. He was famously sceptical about econometric models.

The stupid! It hurts!

How many times do people have to say it. Adding an FTT will massively raise interest rates. Not by the 10bp of the simple FTT, but for every intermediate transaction the hedging bank has to do to cover that risk. For a 10 year bond, loan or interest rate swap that could be as much as 4%.

That will push ALL lending costs higher. It will dramatically affect pensions.

If you think that won’t affect growth you really are dumb, regardless of any views on the FTT raising money (which it probably won’t).

High frequency trading is nothing to do with the crash, and I’d be pretty sure such a thing would lead us directly into another one as borrowing costs suddenly shoot up, pusing a lot of mortgages over the edge into insolvency, let alone small businesses with their loans. Even large businesses would be vulnerable.

There is no Stamp Duty or equivalent in France and Germany – let’s see them introduce an equivalent tax in their jurisdictions first and see the impact of that first before we promulgate a tax that is theoretical and for which the only real practical experience (the Swedish experience) is entirely negative.

It is not negative if it stops some of these transactions from happening at all.

This is not all about fund raising. It is about quashing the massive risks inherent in casino banking.

“This is not all about fund raising. It is about quashing the massive risks inherent in casino banking”

Im afraid not, Goverment bonds are exempt…

29. Luis Enrique

This column about the FTT by very highly respected economist Barry Eichengreen is a must-read. He sees it as a silly distraction that won’t do what it’s supporters want it to do.

http://www.project-syndicate.org/commentary/eichengreen39/English

Can someone explain to me what “casino banking” is please, I have heard that term thrown around to no end recently.

“It is not negative if it stops some of these transactions from happening at all.

This is not all about fund raising. It is about quashing the massive risks inherent in casino banking.”

Let’s analyse this for a moment …

If you remove some transactions from the market, you lose the benefit of those transactions – and if you unilaterally remove them from a market where the market itself is easily moved to a jurisdiction that hasn’t effectively banned the transactions, then all you do is lose the ability to regulate the market in those transactions.

The effect of Sweden unilaterally introducing a transaction tax was for the equities and other markets in Sweden to move to the UK – when the US unilaterally introduced withholding tax, the ‘EuroDollar’ market was created in London and today, the market in currency transactions is dominated by London when it used to be dominated by New York …

So, taxing transactions out of existence in one jurisdiction (even the whole of the EU) would have little or no effect in a globalised market … unless you also reintroduce exchange controls, fixed exchange rates and all sorts of other regulatroy mechanisms that most people think are not advantageous.

as to ‘Casino Banking’ … to what are you referring?

If it is to high fequency trading, the idea that simply taxing it out of existence in the UK is a means to eliminating it in its entirety is bizarre.

If it is to derivatives trading – one of the reasons the derivatives market in the UK is highly developed is because of the existence of stamp duty …

It it is to proprietary trading – we are in the process of limiting the risks associated with this by the introduction of higher capital requirements and other associated regulatory changes … including Basel III.

It is entertaining to shout about the inadequacy of bankers, the injustice of high wages, the unfairness of a globalised world – but the answer cannot simply be ‘enough world, I want to get off’! It won’t work in that globalised world. What is needed, from all sides, is a set of proposals that work … or at least have a prospect of working … rather than a set of proposals that are simplistic nonsense based on a fundamental misunderstanding and ignorance of the workings of that globalised world.

The outcry over the Robin hood Tax is redolent of the rhetoric around the minimum wage. That didn’t bankrupt the Uk nor did it bring about the apocalypse as predicted. In fact the more the Banks and finance sector oppose it the more sensible it becomes.

Yes because, talking production from those who produce to give those who do not produce anything is a great way to promote more production out of the producers… Yeah I got some Ocean front property in the Congo to sell you.

Money not an abstarct idea. It is our means of exchange and how we measure the worth (or value to a society) of our service and goods.

Furthermore your Robin Hood Tax violates the first social sin of Ghandi, wealth without work!
Granted the people who are responsible for the financial crisis, some bankers and politicans violated many more of the principles, they be tried for any and all crimes they committed and punished, not let off with some measly fine (tax).

Finally look at who commissioned this study… Of course they found it will have a positive effect, there is no motive to lie there right? And I have a bridge to Antartica I can convince you to invest in?


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