I was astonished to see that the Robin Hood Tax is now launching a campaign in the United States. We’ve been discussing this in the UK for several years now and I thought everyone was aware that the tax does absolutely none of the things claimed for it. And does many other undesirable things as well. Don’t get me wrong: I don’t think that the world of finance is perfect either. But the Robin Hood Tax isn’t the answer to any question other than “How do we make everyone poorer?”

I admit that I’m really not quite sure why it’s the leader of National Nurses United who is asked to write about the campaign for The Guardian. It’s not a position that I would have thought required a deep knowledge of the economics of taxation and so it proves in her piece:

A Robin Hood tax is a sales tax on speculative Wall Street trading. A small tax, 50 cents per $100, on trading in stocks, and even smaller assessments on bonds, derivatives and currencies, could raise hundreds of billions of dollars each year in the US alone.

Sadly, no, the tax won’t raise a penny, not a single red cent. In fact it will reduce tax revenues in aggregate.

Not only will this tax produce badly-needed revenue in meaningful amounts, it will help limit reckless, short-term speculation that threatens financial stability – such as JP Morgan Chase’s notorious gambit.

No, a US tax would make no difference at all to the recent Morgan losses for all of the trading took place in London. Further, Morgan’s losses came not from short-term speculation in the sense that you mean. They took positions that ran for months not the minutes or hours of short-term speculations.

A Robin Hood tax also serves to curtail speculation in essentials, as in food and fuel, and start lowering the costs that are devastating families.

There is absolutely no evidence at all that speculation has been raising the costs of essentials. In fact, not even the Robin Hood Tax people themselves claim that. Their claim is that speculation makes such prices more volatile, not higher. And that’s wrong as well anyway.

A Robin Hood tax will inject critical revenue into our economy that can help people struggling with loss of their jobs, homes, and those unpayable medical bills.

I’m sorry but this is ludicrous. Taxing people does not inject money into the economy. It might move money around a little, from one group of people to another but this just isn’t the same as increasing the amount of money or revenue in the economy as a whole.

Those who would be paying this new sales tax can certainly afford it.

Compensation pools at the seven biggest US banks totaled $156bn in 2011, a 3.7% increase over the previous year’s record-breaking number.

It isn’t either the banks or the bankers who will pay the tax. Sorry, it isn’t.

It is only fair that financial transactions incur a sales tax – just as the rest of us pay – and put some Wall Street resources back into Main Street.

The Robin Hood Tax is not a sales tax. A sales tax applies on the transaction with the final consumer. The RHT is a tax on intermediate transactions, a very different and very much more dangerous thing.

Today, 23% of our nation’s GDP, or $3.6tn, is sitting in banks’ and non-financial corporate accounts: this is an unprecedented cash reserve in the face of overwhelming national need.

I beg your pardon? Can I get this straight in my head? Because people are not making transactions with their money, because they are just leaving it where it is, you want to tax transactions, make transactions more expensive, so as to make people do more transactions?

As a serious piece of advice if I were running the Robin Hood Tax campaign I’d find someone else to write the newspaper Op/Eds about it.

But the people in the actual RHT campaign seem just as confused. Their site is here. This part describes all of the lovely things that could be done if they had lots more tax money. They might be right and they might be wrong, that rather depends upon your view of how efficient government is at spending tax money. It’s when they start talking about how the tax works that they go so very, oh so very, wrong.

This small tax of less than ½ of 1% on Wall Street transactions can generate hundreds of billions of dollars each year in the US alone.

Half a percent? Good grief, that’s over ten times what the European Union itself proposed. And yes, the effects would therefore be worse.

It won’t affect ordinary Americans, their personal savings, or every day consumer activity, such as ATMs or debit cards.

This is absolutely, flat out, untrue. All of the research that has been done into other financial transactions taxes shows that one of the major losers are pensions. As the tax lowers stock and bond prices, thus lowering returns from investment, and as the pension funds themselves have to pay the tax when they buy or sell stocks and bonds. And yes, I do think that it is fair to state that a union or corporation pension, a 401(k) or an IRA is the “personal savings of ordinary Americans”.

The Robin Hood Tax is just. The banks can afford it. The systems are in place to collect it. It won’t affect ordinary members of the public, their bank accounts or their savings.

The banks won’t be paying it, consumers of financial products will be. That means that it really will affect ordinary people as absolutely everything we do is intermediated by the financial system in some form or other.

In more detail their website seems to have been written by someone deeply deluded about how taxes are “passed on“.

Traders can also be legally barred from passing on costs to consumers.

No one is arguing that the traders will say that consumers are going to have to pay the tax. Rather, that the tax will reduce liquidity in the markets. In fact, that’s one of the things the tax aims to do, reduce liquidity. When you reduce liquidity your raise the margin, the difference between the buying and selling price. Thus everyone buying or selling has to pay this increased margin: that’s how the tax gets passed on and you cannot write a law to stop that happening.

There’s one other point that they seem to have missed. They say that the tax will raise “hundreds of billions” of dollars. Also, that the financial sector can afford it because the financial sector makes 30% of all profits in the US. Well, OK, but all profits are about $1.6 trillion, 30% of that is $480 billion. What does hundreds of billions mean? Has to be more than $200 billion, arguably more than $300 billion (otherwise it would be “a couple”). Hands up everyone who thinks that taking 50% or more of financial sector profits isn’t going to change things rather a lot in ways not yet foreseen? Especially as that $480 billion includes the tax that the financial sector already pays…..

Now OK, so far it’s just been my unsupported word about these things against the campaign. And I agree that the idea of raising hundreds of billions in revenue without anyone really noticing is tempting: the problem is that it’s simply not realistic.

As I said at the top we Europeans have been talking about this tax for some time. In fact, the UK Parliament had a look at the subject a little while ago. Here is the file of all of the evidence that was submitted. I did find it interesting that one group used a post from this very blog as part of their submission.

It is also true that I wrote one of the submissions on behalf of the IEA, the Institute for Economic Affairs. If anyone from the Robin Hood campaign wants to take me up on any of my arguments then please do. Be delighted to debate your contentions. But I would warn you: I do know what I’m talking about here.

What follows is that submission of evidence to the House of Lords Committee. It’s worth noting that the committee agreed with one point at least that I made:

Now the Lords’ European Union Committee has attacked the FTT, questioning its viability. In a letter to Treasury minister Mark Hoban, Lord Roper, the Lords committee’s chairman, said: “We note with concern the EC’s impact assessment concludes that the tax is likely to induce a loss in GDP between five and 20 times larger then the revenues raised.

The full submission starts on page 149:
Institute of Economic Affairs (IEA) – Written evidence
This paper is a short introduction to the ever-burgeoning literature on the proposed financial transactions tax (FTT). It does not attempt to be either all-inclusive or definitive. Rather, the aim is to provide answers to the common questions asked about the FTT.
A financial transactions tax is, as the name suggests, a tax on each and every financial transaction. Such taxes have been proposed by economists of the stature of J. M. Keynes and James Tobin in past decades and interest has been revived recently by the Robin Hood Tax campaign and a variety of official bodies such as the European Commission.
Keynes thought that excessive speculation could be damaging, although that did not stop him being one of the most aggressive commodities speculators of his day. Tobin was worried about exchange rates in the context the tail end of the Bretton Woods system in the late 1960s and early 1970s. Fixed exchange rates (which could only be changed by agreement and in extremis) were giving way first to various ‘dirty’ floats and then to the more free market approaches of recent decades. Specifically he proposed his Tobin Tax on currency transactions in order to reduce the liquidity of currency markets. His point was that governments ought to be able to determine the exchange rates and speculation made this more difficult so speculation should be discouraged through taxation.
This particular reason for an FTT rather goes away if it has already been decided to have freely floating exchange rates. Once this has been done there is no reason to limit speculation, a policy which would result in movements coming in discrete and large steps. It is preferable to have deep and liquid markets so that changes are incremental and smooth.
The Robin Hood Tax campaign seems to think that hundreds of billions of dollars can be extracted from the financial markets without anyone really noticing very much: a rather naïve if cute idea. The European Commission is continuing its decades-long campaign to have its ‘own resources’. Under its proposal, FTT revenue would be sent to the Commission, which would thus become less dependent on national governments for its budget. This is neither unusual nor reprehensible in a bureaucracy. It is the nature of the beast that it would like to have its own money to spend without being beholden. We should be aware of this background though when evaluating justifications for an EU FTT.
Despite these motivations it is still possible that an FTT is desirable and that the incidence will fall on the desired targets; even that it might reform the financial markets so that current economic woes will be less likely to occur in the future.
The rest of this paper asks and then, as far as the literature already does so, answers the following questions about an FTT.
• Is it feasible?
•
How much revenue will be raised?
•
What will be the incidence?
•
How will it change financial markets?
•
Will it make another financial crash less likely?
•
Could it be extended to currencies?

Is a financial transactions tax feasible?
A financial transactions tax is certainly feasible. It is possible to tax just about anything from head of population through transactions to windows. That the last UK attempt to have a poll tax led to riots and the results of the taxation of windows can be seen in the blanks on nearly every Georgian house in the country does not mean that feasible is to be equated with desirable and so it is with an FTT.
An FTT can be imposed with varying effects depending upon how many other governments do so at the same time. A purely EU FTT would see much trading leaving the EU, as happened to Sweden when it unilaterally imposed such a tax in the 1980s and 90s. A global tax would not have the problem of trading moving but would still have all of the other associated problems.
The feasibility or not of the FTT is something of a red herring: the UK government does say that it would only consider one if it were universal but this is much less important than the longer list of things which are wrong with an FTT in principle, however widely it may be levied.
How much revenue will be raised by an FTT?
No net revenue will be raised by the specific proposals that have been put forward. This will sound strange to those who can see that there will indeed be revenue coming from the tax, but that is because while there will indeed be revenue from the tax itself there will also be falls in revenue from other taxes. The net effect of this is that there will be less revenue in total as a result of an FTT.
But of course, do not just take our word for it. That of the European Commission should be sufficient:76

‘With a tax rate of 0.1% the model shows drops in GDP (-1.76%) in the long-run. It should be noted that these strong results are related to the fact that the tax is cumulative and cascading which leads to rather strong economic reactions in the model.’ (Vol. 1 (Summary), p. 50)

Revenue estimates are as follows:

‘[A] stylised transaction tax on securities (STT), where it is assumed that all investment in the economy are financed with the help of securities (shares and bonds) at 0.1% is simulated to cause output losses (i.e. deviation of GDP from its long-run baseline level) of up to 1.76% in the long run, while yielding annual revenues of less than 0.1% of GDP.’ (Vol. 1 (Summary), p. 33)

A reasonable estimate of the marginal rate of taxation for EU countries is 40-50% of any increase in GDP. That is, that from all of the various taxes levied, 40-50% of any increase in GDP ends up as tax revenues to the respective governments. Thus if we have a fall of 1.76 % in GDP we have a fall in tax revenues of 0.7-0.9% of GDP. The proposed FTT is a tax which collects 0.1% of GDP while other tax collections fall by 0.7-0.9% of GDP. It is very difficult indeed to describe this as an increase in tax revenue.
There are, however, bureaucratic reasons why the European Commission might still suggest such a tax move. The revenues from the FTT would be designated as the EU’s ‘own resources’, that is, money which comes to the centre to be spent as of right; not, as with the current system, money begrudgingly handed over by national governments. The EU bureaucracy therefore has a strong interest in promoting such a change. What’s in it for the rest of society is harder to spot.
This result is not unexpected. When the Institute for Fiscal Studies looked at the impacts of the UK’s own FTT, Stamp Duty upon shares77, they found much the same result – from the same cause too. Such a transactions tax upon securities lowers securities prices. This then makes the issuance of new securities more expensive for those wishing to raise capital. More expensive capital leads, inexorably, to less of it being used and thus less growth in the economy.
Please note that this is not some strange application of the Laffer Curve argument. It is not to say that lowering all taxes, or any tax, leads to such extra growth that revenues increase. Rather, it is derived from Diamond and Mirrlees (1971)78 that transactions taxes multiply then cascade through the economy. They are therefore best avoided if another method of achieving the same end is available. Indeed, they point out that taxation of intermediate inputs is to be avoided if possible – better by far to tax final consumption or some other final result of the economy. This very point is acknowledged in the way VAT is structured. Rather than a series of sales taxes which accumulate as one company sells to another along the production chain, there is a value added tax which amounts to one single rate at the point of final consumption.
That this point is recognised in a major part of our taxation system suggests that it might be wise to recognise it with regard to the FTT.
What will be the incidence of an FTT?
Incidence refers to who really bears the economic burden of a tax, not who hands over the cheque for that tax. More formally, the legal incidence is not always the same as the economic incidence. The most obvious example of this is with employers’ national insurance contributions. It is the company which hands over the cheque but almost all economists are united in saying that much (and possibly all) of the economic burden is carried by the worker in the form of lower wages. Quite how much depends upon the elasticity of the supply and demand of labour and quite how much is still an area where economists argue – but some to all being ‘really’ paid by the worker is the general conclusion. The worker might believe, however, it is really the company paying, which is arguably what makes such payroll taxes so appealing to unscrupulous politicians.