Tuesday, February 16, 2010

Robin Hood Tax

I've been following this developing campaign, uniting charities, NGOs and trade unions, with interest. Politically, it taps into a very good instinct. The bankers got rich pursuing speculative profits through various intricate schemes that placed national economies in tremendous danger (example of which), and have been rewarded with bail-outs. If there is going to be a shortfall in funding for public services, they should pay for it. This isn't the only justification for imposing such a tax. A letter signed by 320 economists addressed to the G20 argued that the tax would "calm excessive speculation". Joseph Stiglitz maintains that it is an excellent idea to tax what is a socially useless and sometimes harmful activity.

The proposed level of taxation, at 0.05% on all speculative financial transactions, seems to be very small. (Though it seems it is larger than the micro-tax [pdf] proposed by the TUC and the Tax Justice Movement). Perhaps that extreme modesty of ambition is one reason why the basic idea has been able to get the support of right-wing governments in France and Germany, by New Labour, by former CBI head Lord Adair Turner, by Nancy Pelosi, Jeffrey Sachs and Warren Buffet. Then there's the pay-off. Supposedly, the tax would raise £250bn each year, with "tens of billions" of that available for public services in the UK. If that could be counted on, and if the measure was likely to be passed over the objections of the Obama-Geithner treasury (not a chance in hell), then there's an extremely seductive riposte to those who say we have no choice but to make deep and painful cuts in the public sector. Nonsense - it's easy! We can raise tens of billions for public services with a minute tax on, not to put too fine a point upon it, a wunch of bankers. That would more than cover the cuts proposed by both New Labour and the Tories.

There are some objections to the tax that are superficially appealling, but don't appear to withstand scrutiny. For example, the banks will only pass on the costs to consumers, some say, thus vitiating the distributive argument for the tax. Well, aside from the fact the consumers of such services are disproportionately wealthy, any form of corporate taxation can potentially be passed on to consumers, assuming that consumers are able and willing to bear the cost. That isn't a case against taxing corporate profits. Put simply, the wages of workers which enables them to be consumers are substantially determined by market forces: higher prices tend to drive up wage claims. Hence, the aggregate effect would be the same: the tax would impact on profits, not consumers. Of course, there's the aspect of class struggle that it seems vulgar to even notice, and it is true that in general companies will try to take every opportunity to externalise their costs onto workers and consumers, but that applies with any cost, not just taxes. That's not an argument against taxes, it's an argument - at the minumum - for having an organised and combative labour force which can use its bargaining power to resist such efforts.

Another objection I have seen, from a liberal economist, is that the tax is actually not as small as it appears to be. He maintains that a 0.05% tax on currency speculations would be about six times the current broker's fee. "No industry survives that," he suggests, comparing it to a sudden increase in the cost of a cinema ticket to about £50. But this is a ridiculous, illogical comparison. The booking fee isn't the cost of the product to be consumed in this case. The product is currency, for which you pay with your own commensurate currency. And when you trade in currency, you expect to both consume the purchased product and gain a premium - the profit. A cinema ticket, in contrast to a booking fee for currency transactions, just is the cost of the product. And no cinema-goer expects to both consume the product and get a cash bonus at the end of it. (Unless they stick the place up, which might make the comparison slightly more apt). Currency transactions levied at 0.05% are thus expected to pay a fee that is proportionate to an expected return, so they would still have a motive for engaging in speculation.

He goes on to add, however, that it could wipe out all transactions where the anticipated profit is smaller than the transaction tax, thus eradicating the proposed income that would be gained from it. It's a very intimidating argument, with graphs and talk of pips and spread and so on. This is difficult for those with no specialist knowledge to assess, but let us not succumb to our natural phobia of numbers and argot. We are mere autodidacts, but we have a duty to struggle on, you and I, and try to understand what is at stake here. Perhaps one way to approach this is to consider known examples of similar practises already taking place. It has been noted that the UK already imposes a 0.5% stamp duty on share trading, which gathers £7bn in revenues and could be extended to other transactions. It doesn't seem to have had a catastrophic effect. A number of countries have already imposed a financial transaction tax. Brazil has imposed it since 1993, at an initial rate of 0.38% (this was reduced in 2008), much higher than the proposed rate of the 'Robin Hood' tax. It didn't result in a collapse in currency trading or speculation, but it did result in significant additional revenue to cover the costs of maintaining the country's healthcare system. Moreover, the information gleaned from imposing it enabled the government to prevent other forms of tax evasion. There are also a number of financial transaction taxes already imposed in Australia, India, South Korea and elsewhere. These examples don't appear to bear out the idea that a financial transaction tax would be a sufficient, sudden shock to the system to wipe out most speculative activity. The burden of evidence suggests that such taxes are actually very bad at constraining speculative activity, but quite good at raising money.

There is a problem, though. The aims of the tax are apparently contradictory. One is to throw a bit of grit in the wheels of speculation, thus reducing the chances of harmful high-risk transactions taking place. The other is to raise a lot of money with a relatively insignificant tax that wouldn't really make any difference to the scale of speculation. If it does affect the scale of speculation, then the anticipated revenue would have to be revised down in precise proportion to its effifacy in doing so. If, on the other hand, the main aim is to raise and redistribute money, then the idea of damping down speculation can be dispensed with. But that would leave an apparently progressive tax complicit in what we are agreed is an often dangerous speculative system, and one that we ought to be discouraging or dismantling. But this comes back to the objection that the tax lacks ambition. It does. But that doesn't mean it wouldn't be a good start, and there's no reason why the government could not extend existing taxes on financial transactions to help fund public services.