Financiers break ranks to back RobinHood Tax


12:31 pm - June 21st 2012

by Owen Tudor    


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Tomorrow the finance ministers of Europe will gather in Luxemburg to discuss the problems besetting Europe’s economies. It will be a grim meeting.

But at the end of the agenda, like ‘hope’ at the bottom of Pandora’s Box, there is a potential solution to at least some of Europe’s economic woes: the Robin Hood Tax.

So now is a great time for 60 current or former financiers to break ranks with the anti-Robin Hood Tax consensus in the financial sector, and back the financial transactions tax in an open letter published today .

They say:

“As individuals with first-hand knowledge and significant experience in the financial industry, we urge you to introduce small financial transaction taxes (FTTs). These taxes will rebalance financial markets away from a short-term trading mentality that has contributed to instability in our financial markets. They also have the potential to raise significant revenue.”

And while they rightly stress the revenues that can be generated to spend on global public goods – combatting poverty at home and abroad and tackling climate change – the authors are actually more interested in the impacts of a Robin Hood Tax on the markets they know so much about:

“Concerns have been raised that FTTs could damage growth. But a growing body of evidence suggests that by reducing volatility and raising much needed revenue, the overall effect would be positive. Critics have also wrongly associated trading volume with efficiency-enhancing liquidity and failed to sufficiently take into account market resilience and trust that are undermined in a world where very short-term trading dominates the financial system. As many notable economists have observed, a modest transaction tax will actually improve the functioning of markets.”

The letter gives further backing to a tax which is already clearly popular with electorates, as the ITUC’s multi-country opinion poll demonstrated earlier this month, and has the endorsement of a thousand-strong list of economists.

It’s unlikely that we’d ever get a majority of the financial sector to support the Robin Hood Tax (although the unions representing bank workers do, here and globally), but the fact that some people who know the sector inside out back the tax makes it all the more urgent that the EU finance ministers make progress this week.

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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


Do you think you could find a current financier to support the idea because, as has been pointed out endlessly, it’s absolute madness.

It’s “free money falling out of the sky” economics and Tim W or Richard W or Luis E will be along shortly to explain why that’s the case better than I can……….

2. Planeshift

“Do you think you could find a current financier to support the idea”

Wasn’t the point of this article that 60 of them have done so?

@2

I think you will find them described as “former financiers” in some cases, described somewhat creatively………

4. Luis Enrique

I think this is actually a potentially substantive argument for an FTT, as opposed to all the usual rubbish about it being paid by bankers.

But afaik the evidence with respect to the impact on volatility is ambiguous and possibly very context sensitive, so hard to say how a blanket FTT would pan out. There’s evidence that speculation actually reduces volatility in some markets. But perhaps the FTT would mean that lots of short-term financing transactions (overnight lending etc.) become unprofitable and would disappear – that might be a good thing from a stability pov. I don’t off the top of my head know of any really good evidence on this.

The revenue-raising argument is also a substantive argument – there’s nothing wrong with looking for new tax handles at a time when more tax revenue would be useful – although if you think EU governments are going to use it for global public goods, I think you’re nuts. I know some think the revenue raising argument is misleading because they think the revenue raised will be offset by a reduction in growth caused by higher costs of capital, personally I think that fear is exaggerated.

Owen Tudor….determined to ignore the evidence presented to him.

As it has been said many a time already:

An FTT will not be paid for by banks – costs will be transferred to end users.
An FTT will likely lower growth and cost revenues – even according to EC research
An FTT will increase volatility in markets as bid/offer spreads increase – adding even a 0.01% tax would double the transaction cost of most securities.

6. Evan Price

Again … will someone please provide me with some evidence that the existence of SDLT (a transaction tax on land) has had any ameliorating effect on the asset price bubble on land in the UK that we have just been through (and in some parts of the UK continue to go through)?

In addition, there is nothing to stop France, Germany and other financial centres in the EU from introducing their own equivalent to SDRT (Stamp Duty Reserve Tax) in their own countries, at whatever rate and for whatever transactions they choose to apply it. They would merely replicate what happens in the UK and while it raises some revenue for the UK Govt, from memory the sums invovled are relatively tiny (about 0,2% of GDP?) – so this is not going to be a money spinner …

We should remember that the scope of Stamp Duty has been significantly reduced in the UK – indeed many of the remaining stamps were removed in 2003. We have Stamp Duty on some shares – but since most are now traded electronically, the tax paid is SDRT. The combination of Stamp Duty and SDRT raises very little for the Treasury – and they are applied at a rate that is a multiple of what is proposed for the FTT in the EU.

The proposal to introduce an FTT unilaterally in the UK or even by the EU is daft. The transactions would be simply moved to a jurisdiction that did not charge the tax – and so would not take place here – raising no revenue here – producing no income here.

Examples –
In the 70’s the US Government introduced changes to their own banking systems and unilaterally created additional costs for transactions in US$ – the growth of the EuroDollar market in Europe and in particular in London was a direct result of those decisions in the US. Whilst not a transaction tax issue, it is a demonstration of the risks of unilateral action – even when you hold the world’s reserve currency. For this reason, I suspect that the US would never agree to a world wide transaction tax on financial transactions.
In Sweden, they introduced a financial transaction tax unilaterally in 1981. The immediate result was a fall in the value of Swedish stocks and trading volumes. The result was the tax failed to raise the expected revenue and while the rate was doubled in 1986 it was substantially reduced subsequently before being abolished as the failure it was in 1991.

UK’s European Scrutiny Committee citing the EU Commission’s FTT Impact Assessment that want the tax so badly for their own extravagant funding:

“a 3.43% fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.”

UK’s Economic Sub-Committee of the House of Lords, “The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax.”

<blockquoteI know some think the revenue raising argument is misleading because they think the revenue raised will be offset by a reduction in growth caused by higher costs of capital, personally I think that fear is exaggerated.

That’s the working assumption in the European Commission’s own assessment isn’t it? When you couple that with the lost revenue from UK Stamp Duty and similar taxes, the total revenue raised is (officially) likely to be negative.

http://www.cliffordchance.com/content/dam/cliffordchance/PDF_2/Client_Briefing_The_Financial_Transaction_Tax.pdf

Evidence against the Robin Hood tax (aka Tobin Tax) far exceeds that in favor.

James Tobin’s co-writer, Berkeley Economics Professor Barry Eichengreen, said current forecasts wildly overestimate potential receipts from a financial transactions tax. He wrote, “If the aim is to augment revenues, a Tobin tax is the wrong tool.”

A recent study by The World Bank concluded: “… neither the revenue nor the efficiency gains hoped-for by big picture tax reformers are likely to materialize.”

About 10 of the 27 EU countries will agree to the tax. A significant majority of European countries will be smart enough to abstain.

http://financialtransactiontaxes.com/

Much of the evidence against the FTT needs taking with a pinch of salt. The Oxera study that the financial industry is trumpeting about today, which is based on the EC’s economic modelling, fails to account of the behavioural benefits of reducing pension churn.

If your pension fund is churned unnecessarily over many years due to agency bias in the fund management market, there are two effects:

First, a large portion of the economic gains earned on your investments will be diverted to financial intermediaries in fees leaving you with significantly less income when you retire, perhaps as much as a third less. Secondly, as the time horizon over which investments are now overseen by fund managers shortens, the companies you invest in will make shorter term decisions about capital investment.

These effects have social and economic costs.

The cost of excess intermediation from portfolio churn transfers future spending power from tomorrow’s pensioners to today’s financial workers. This reduces aggregate demand in future years by at least as much as it increases it now, probably more given the spending patterns of each group. It could also create social hardship and calls on the treasury in future years. In the meantime, trust in equity markets continues to fall, harming their ability to fund business and job creation.

Secondly, the reduction in investment time horizons that goes with higher churn erodes stewardship and oversight of corporate cashflows by owners and their agents, which discourages managers from making long-term capital investments. This promotes short term projects and financial engineering, such as share buybacks, over capital investment, lowering long-term profitability among companies. For society, it means wasting resources, failing to capture productivity growth from new technology, and the long-term loss of competitiveness and jobs.

By reducing portfolio churn, an FTT would bring significant social and economic benefits just by reducing these two effects, before counting any of the revenue raised. The benefits are hard to quantify because the effects are diffuse and long time, but few people would deny that they are real. To exclude them from a cost-benefit analysis of the FTT and rely only the macro-economic predictions of a controversial economic model (DSGE) seems a poor way to make policy.

The financial transactions tax fell on its face in Europe.

“A plan for European Union countries to tax financial transactions and use the proceeds to fund future bank bailouts ran aground today. Just nine out of 27 countries were ready to support it, raising the prospect the tax will be implemented in the end only by a subset of EU countries.”

http://www.timesofmalta.com/articles/view/20120622/world/eu-finance-tax-scheme-stalled.425500

12. Planeshift

“I think you will find them described as “former financiers” in some cases, described somewhat creatively”

Oh I get it. They weren’t the right type of financier….. in the same way that Paul Krugman can win the nobel prize for economics and still be described as ‘economically illiterate’.

Interesting.

I wasn’t aware Robin Hood took from the poor (most everyone with a bank account in this case) to give to the rich (the government and the big three).

An FTT can be designed in such a way that it gives little incentive for banks to relocate overseas. The UK’s own 0.5% tax on share transactions (the Stamp Duty) is one of the best examples of a successful FTT raising the Exchequer more than £3billion each year without a significant loss of business from London. If you want to own the shares of a UK-traded company, regardless of where in the world you are when you buy them, you have to pay the UK stamp duty. If you don’t, then your ownership of the shares is not legally enforceable.

And there are other factors that also make relocation from London difficult and unlikely. These include the City’s stable and well developed financial and IT infrastructure, lack of corruption, ancillary services such as lawyers, accountants and IT specialists, and location. Many cannot afford to ignore London’s pool of highly skilled workers, who in turn are attracted by the culture, language, world class education and variety of things to spend their money on.

Finally I think that “Blinx” has misunderstood the tax, it would not be on ordinary people withdrawing money from their accounts but rather on speculation in the markets.


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