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.

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.

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.

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).

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