Robin Hood Tax? Beware the men in tights

Robin Hood Tax logoI want to support the new campaign for a “Robin Hood Tax” – really I do. I understand the logic behind the Tobin Tax and have a lot of sympathy for the idea. But there’s something about this campaign… Actually, there are four problems I have with it:

Firstly, the name “Robin Hood Tax”. On LabourList, Sarah Hayward has already suggested that inviting comparisons with your tax and thievery may not exactly be a great idea. But more to the point, it just isn’t accurate. This isn’t a case of robbing from the rich to give to the poor; it is a case of robbing from the banking system – which we, the companies we work for and the pensions we hope will look after us in old age all participate in – and giving to the government. I don’t wish to sound like a swivel-eyed libertarian, but I need to hear a stronger argument for how that would be genuinely redistributive before I sign up. There is certainly an issue surrounding bankers awarding themselves unjustified bonuses, and you might call that a reverse Robin Hood effect, but it is by no means clear how this tax will tackle that.

Secondly, my old sparring partner Andy Mayer makes an interesting point on his Facebook page:

The figure for global banking profits comes from the campaign website itself $788bn and refers to the year 2006, at the height of the boom. Using the same source as the campaign more recently, the 2008/09 profit figure is just near $120… hence this Tobin tax, if implemented, would be akin to a special corporation tax of between 50-350%.

In the last 8 years I there would only be 3 years where the industry could have afforded to pay it from profits. In the last year it would have had to have been taken direct from bail-out funds, a somewhat circular exercise for government.

Now the Robin Hood Tax is not a tax on profits so there is a danger of comparing apples with oranges here, but the simple fact is that a charge has to go somewhere. It either cuts into profits or it gets passed on to the customer. I’m not, I have to confess, entirely clear what would happen precisely – there are lots of variables – but the Robin Hood Tax website doesn’t seem to want to enlighten me. Perhaps the 0.05% level is too high? Perhaps there should be other restrictions? I have an open mind and would like to hear a debate; instead I’m just being asked to add a mask onto my twitter profile pic.

Thirdly, and this is where I really start to get nervous, the Robin Hood Tax is not the same thing as a Tobin Tax. James Tobin’s proposal was intended specifically to attack currency speculation – not to raise revenue. The Robin Hood Tax, according to their own blog is intended to do the exact opposite.

Why does that make me nervous? Well because when it comes to taxes, I’m highly dubious about taxes on economic activity. Economic activity is a good thing: it gives people jobs (and meaning). Markets aren’t perfect and can create all sorts of anti-social problems but it isn’t the economic activity itself which is the problem but, generally, monopolisation and speculation. Taxing all financial transactions equally won’t tackle bad economic activity any more than the good – it’s just another way of screwing money out of the rest of us. What’s worse is that unlike the Tobin Tax, this idea isn’t about discouraging what is arguably a bad economic activity but profiting from it. Speculation just ruined your economy? Dont worry, here’s a sticking plaster courtesy of the Robin Hood Tax.

Let’s introduce taxes that don’t create perverse economic incentives (such as land value taxation) before creating new ones that do.

Fourthly, there is the Richard Curtis factor. Okay, maybe it is a bit harsh to pick on Curtis, who does seem to mean well, but there’s something about his “love, actually” world view that makes my skin crawl. To promote the campaign, he’s made this video starring Bill Nighy:

Like most of Curtis’ films, on a basic level it is harmless enough but as soon as you start thinking about it the more pernicious you realise it is. Ooh, what a nasty greedy banker! Boo to him! This from the man who gave us the all white Notting Hill (which has now become a self-fulfilling prophecy courtesy of David Cameron and his pals).

Okay, maybe that last point isn’t a particularly strong one, but it is this sort of superficial, anti-intellectual marketing that has got the world in the mess it is today. Is the Robin Hood Tax a brilliant idea? Feel free to try convincing me, but spare me your celebrities, your claims that you can get money for nothing and your *gag* guerilla marketing exercises (a protest at 4am? Edgy!).

Further reading:

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18 comments on “Robin Hood Tax? Beware the men in tights
  1. Niklas Smith says:

    This isn’t a case of robbing from the rich to give to the poor; it is a case of robbing from the banking system – which we, the companies we work for and the pensions we hope will look after us in old age all participate in – and giving to the government.

    Exactly. And as for your question as to whether the tax would come out of profits or be passed on to consumers, I would say it would definitely be passed on – after all, if it is global and compulsory there is no way consumers can find any institution not subject to the tax – it would be even harder to avoid than VAT (which is passed on to consumers, as we know).

    There is another reason the tax is bonkers: it will actually encourage speculation. A lot of basic financial markets activity carried out by investment banks (such as market making and underwriting) have very low profit margins (a fraction of 1% for market making) and are only a significant money-maker because they have enormous volumes. In contrast, proprietary trading uses leverage or risky bets to magnify profit margins (as well as firm-specific and systemic risk, which is what got us into this mess in the first place). A 0.05% transaction tax would disproportionately reduce profit margins where they are already thin: in the boring but (socially) useful business of providing liquidity for other investors (such as pension funds) or helping companies raise capital for investment.

    The result would be simple: banks would do less of the useful business and become more like taxpayer-backed hedge funds. I can’t think of a worse outcome. I completely fail to understand why this deeply flawed idea has become so popular, even with our Great Leaders who ought to know better.

  2. Thanks for the linking.

    Interesting blog, definitely food for thought. However, hopefully you may be persuaded to see the benefits of a Tobin Tax…

  3. James Graham says:

    I’m not against a Tobin Tax per se – that’s a different debate as the Robin Hood Tax campaign is keen to make clear.

  4. …I should really give an example of how that may be so. In terms of your reservation around bankers bonuses not being tackled around the tax I think that shows the need to make sure that the retail and the investment banking sectors are split up. There would also need to be other safeguards to stop ‘unexplained’ increased charges on individuals if the tax got introduced. However, it would be idealistic to assume that this would be the only way to help reduce bankers’ bonuses, instead we need to assure proper reform of the bonus culture so that we have a more fairer banking system. However, the key argument for the tax is that it can help provide another source of income to help social, economical and environmental deprivation – surely that could persuade you?

  5. Good point actually. I have been using the words inter-changeably and it slipped my mind when i wrote that comment that you had commented on the difference. That is rather interesting, as it seems as though they are the same thing in the way they are being reported. Could you explain the difference a bit more please?

  6. James Graham says:

    I refer you to the Robin Hood Campaign’s own blog:

    The Robin Hood Tax differs fundamentally from James Tobin’s original concept as its principal motivation is the raising of revenue as opposed to being a way of regulating speculative financial activity.

    As for the argument that the problems could be solved by applying it only to speculative banks rather than high street banks: it will be the speculative banks that our pensions, etc. will continue to be invested.

    I don’t find the argument that the revenue could be spent on “good things” persuasive either. That’s an argument for raising the general level of taxation, not for a specific tax.

  7. Even though the concept of what the tax sets out to achieve differs, the actual way of achieving it does not differ. So the means are the same, the ends are just defined differently, and to be honest I prefer the Robin Hood Tax’s to the Tobin Tax’s end values. Furthermore, the fact that the Robin Hood Tax goes further is even more impressive, as they cover a range of financial transactions.

    I didn’t say the tax should only be applied to one part of the banking sector, I just think breaking the banks up into two would help.

    Yes, but surely to raise the general level there needs to be specific taxes that you focus upon?

  8. James Graham says:

    Jane Watkinson:

    I prefer the Robin Hood Tax’s to the Tobin Tax’s end values.

    I don’t. The Tobin Tax is designed to reduce a bad thing; the Robin Hood Tax is designed to profit from it. Niklas Smith’s comments above are worth bearing in mind: one of the effects of the Tobin Tax would be to push investors into other areas of investment. The Robin Hood Tax would mean that they couldn’t make that distinction and might take even more risks in the pursuit of profits.

  9. I guess we will have to agree to disagree here :) . I personally see it as a good opportunity to turn a bad into a good, but i know you are against that. Obviously, there needs to be more work into it and proper safeguards etc etc, but at the moment it looks rather promising.

  10. Foregone Conclusion says:

    “Why does that make me nervous? Well because when it comes to taxes, I’m highly dubious about taxes on economic activity. Economic activity is a good thing: it gives people jobs (and meaning). Markets aren’t perfect and can create all sorts of anti-social problems but it isn’t the economic activity itself which is the problem but, generally, monopolisation and speculation.”

    This expresses my thoughts exactly. Tobin taxes and banker-bashing may have a part in a wider economic solution, but unfortunately they seem to be sidelining what, for me, should be our main focus – getting the market to work, and to work long-term in the interests of everyone. Instead, we seem to have been taken off down the road of attacking banking and bankers per se. I’m no libertarian (when I say that I want to make the market work, that probably means a major restructuring). But impeding trade does nothing except impede trade – it doesn’t address root causes. I suppose that’s what’s what makes me a liberal at the end of the day.

  11. tim leunig says:

    very pleased to see you back in business here. very good post. What is critical is that 0.05% is a much bigger % of profit, and therefore has to be passed on, by definition.

    If this is global (and that means Cayman Islands as well) much of the tax received in Britain will be passed onto foreign consumers, because we export finance. So we can get the French and the Germans and the Kuwaitis (and those in less developed countries) to pay our taxes for us. That has a narrow appeal to me as a Brit!

  12. Joe says:

    I’m all for a tobin tax but I think the claims of the amounts that would be generated by this tax are greatly exagerated, it appears that they have said X traded and if we took 0.05% of X we would make Y however they dont take into account the fact that the tax would change X, its kinda like a buisness expecting to double their prices and double their profits

    That said I’m still all for it, it would still make a reasonable amount of tax and the only area that it would really hurt is automated high frequency trading which arguably serves no socialy usefull purpose a all, probably the greatest waste in the banking sector is that many of the greatest minds are trying to work out algorithm’s to work out what a stock will be worth in a few seconds rather than what is a good genuine investment, a tobin tax would definately change that

  13. James Graham says:

    Joe,

    It isn’t clear from your comment if you’re in favour of a Tobin Tax or the Robin Hood Tax, something which its own website states would have the exact opposite aim of the former (ie raise a lot of money and not change behaviour as opposed to raise a small amount of money and change behaviour).

  14. Marc says:

    The original purpose of the Tobin Tax was to stop speculative financial transactions, like when George Soros sold sterling short leading to Black Wednesday. Normally such speculators are working on very small margins so they have to buy and sell vast quantities of currency. The movements in the market caused by such speculation can lead to panic selling and the speculation that a currency is going to collapse becomes self fulfilling. With a Tobin tax that initial speculative selling becomes uneconomical meaning the currency has far more chance of remaining stable.
    As a method of preventing markets from overheating through speculation the Tobin tax seems a good solution.

  15. Robin Hood says:

    Firstly, the branding of the campign while not to everyone’s taste has been a great success and proved a great way to take an idea that is normally the preserve of economists into the public sphere.

    On the question of the costs being passed to consumers this is a real concern and one we have givem lots of thought to. Robin Hood Taxes can easily be designed to target banker’s profits and bonuses, whilst protecting the investments of ordinary people and businesses. Just like other taxes, specific exemptions and punitive measures can be built in to protect, for example, lending to businesses or exchanging holiday money. Fortunately, there are many precedents to show how financial sector taxes can be implemented in a targeted, accountable and robust manner.

    Yes banks are clever at passing costs on, but they still pay corporation tax, they still pay a transaction tax every time they trade UK shares (Stamp Duty), all we are calling for is an increase in the amount they contribute. The Stamp Duty is a good example because is does not hit pension funds and the like, which tend to turn around investments once a year, but will fall on the higher frequency traders.
    This is one reason the Robin Hood Tax campaign ultimately wants to see a general Financial Transaction Tax implemented – because it targets a distinct area of bank operations – the casino-style high-frequency gambling.

    Even if some of these costs were passed on, it would not be to ordinary customers but their elite clientele of the richest people, banks and funds in the world.

    Banks operate (or at least should operate) in a highly competitive market so they can’t simply pass the costs on as they would be under cut by their competitors. This is one reason why anti-trust legislation that encourages competition is an essential element of tackling the dominance of the financial sector.
    Obviously money doesn’t come out of thin air (although in the world of finance, it sometimes seems to come pretty close), the money raised will have an impact on bank revenue (with highly paid City traders feeling the hit) and these areas of trading reducing in size. We say this is no bad thing and would help rebalance our economy slowly away from our over-reliance on the City of London, a major reason why the UK has faced one of the most brutal recessions since the war.

    Compared to other potential tax increases like VAT, Robin Hood Taxes are much less likely to fall on the ordinary person. They are progressive – being paid by the wealthiest – and a much fairer way of filling the hole in the government finances than any other combination of cuts and tax increases, which will hit ordinary people hardest.

    One issue thios article maybe willing doesn’t address is why this idea has come about and why we should tax the financial sector. The financial crisis and recession have left a massive hole in the UK’s public finances, hitting front line services and jobs. But not just in the UK, the largest recession of a generation has had a disastrous impact on the public finances in many developing countries, as well. Hundreds of thousands of supporters of the Robin Hood Tax campaign believe that banks, hedge funds and the rest of the financial sector should be asked to pay their fair share to clear up the mess they helped create. In the UK we are calling for the financial sector to pay an additional £20 billion in taxation. Globally, we think Robin Hood Taxes could raise as much as £250 billion.

  16. Niklas Smith says:

    @Robin Hood: Thanks for the detailed comment. I’d like to address some of your points:

    Just like other taxes, specific exemptions and punitive measures can be built in to protect, for example, lending to businesses or exchanging holiday money.

    The problem with that is the more exemptions you have, the more the bankers get incentives to find ways of gaming the system rather than simply doing their job. Even VAT exemptions can be gamed (remember when Jaffa cakes went to court to get defined as cakes, not biscuits, in order to get zero-rated? And what about the use of Low Value Consignment Relief as a tax-avoidance wheeze?). And since currency exchange markets especially require lots of wholesale activity in the background for each retail exchange (including holiday money), any exemption for small trades will not make the whole process tax-free.

    As for Stamp Duty, it’s not such a lovely shining example as you make out. “Buy and hold” investors still suffer from higher costs and lower liquidity as a result (liquidity matters if you’re a big pension fund who needs to free up money to buy lots of government bonds in an auction, for example). And Stamp Duty
    reduces investment (pdf) compared with raising the same amount of money through Corporation Tax.

    As I have
    written elsewhere, a significant share of the cost will have to fall on consumers. Some traders would be bound to lose their jobs since the volume of trading will fall, but the remaining ones are likely to be every bit as overpaid because taxing transactions would make basic and useful investment banking services like marketmaking and underwriting more risky for the banks (discouraging new entrants to the market) and more expensive for their customers (all investors).

    That said, I agree that the banking sector is undertaxed given the call it seems to have on taxpayers’ money. But it’s worth separating banks (which got enormous bailouts to prevent them from going bust) from hedge funds (which collapsed in large numbers because of the panic after Lehman Brothers imploded, but never even asked for our cash). For me a balance sheet levy is a better way of raising the insurance premium the state deserves to pay for its guarantees of the banking system, since it reflects the amount of liabilities that the government is standing behind.

  17. Tim Coldwell says:

    @Niklas
    Maybe a small stamp duty on creating / trading derivatives would be more appropriate? Now that more standardization and regulation emerges collecting a small tax would be easy and cheap to do.

  18. Niklas Smith says:

    @Tim
    Derivatives are not all bad, though some can serve to magnify risks (like synthetic CDOs did). The oldest derivatives (such as rice futures in Japan and fish futures in Holland) were invented for very good reasons: they helped to reduce risks for food purchasers, provide finance to farmers and fishermen and generally reduce uncertainty for both sides by fixing prices in advance of delivery.

    Certainly some derivatives need to be penalised by regulators because they serve to increase the size of a bet on a market (synthetic CDOs are a perfect example) rather than hedge risks (like oil futures used by airlines to reduce the impact of fluctuations in the price of jet fuel). The problem is that the same derivative can be used both speculatively and as a hedge (i.e. a sort of insurance policy) – commodity futures being good examples of this. Indeed, some speculators are necessary since hedging needs someone willing to “sell the insurance policy” as well as someone willing to buy it.

    Ultimately, the reason banks can cause so much financial devastation (and the main reason for their very large profits) is that they are leveraged – they operate with borrowed money, which magnifies the returns (and the losses) on their equity capital (shares). The best thing to do to reduce the risk of a repeat of this crash is to separate speculation from banking – make it too expensive by imposing high capital charges on it or simply ban it (the Volcker Rule).

    Leverage is essential in commercial banking (they can’t lend to businesses or home-buyers without borrowing from savers like you and me), so it is reasonable the the government should provide guarantees and a safety net for commercial banks. This should be paid for at least partly through a balance sheet levy and the existing levies for deposit guarantee schemes like FSCS. Then speculation can be left to people who are willing to accept losses if their bets don’t work out.

5 Pings/Trackbacks for "Robin Hood Tax? Beware the men in tights"
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