The economic case for the Robin Hood Tax
This blog originally appeared on Bright Blue.
The Robin Hood Tax campaign for a Financial Transactions Tax is a bit of a global phenomenon. Two years ago we began to suspect we were onto a winner when Bill Nighy helped us launch the campaign and the website flooded with support, but now our roll call of support is pretty impressive by anyone’s standards: Nobel Prize winners Joseph Stiglitz and Paul Krugman, Earth Institute Director Jeffrey Sachs and 1,000 other economists from around the world. Bill Gates; Desmond Tutu, Rowan Williams, the Vatican and Jesse Jackson; Global voices such as Ban Ki Moon and Kofi Annan as well as the financial voices of Adair Turner, George Soros and Warren Buffet have all called for a tiny tax on financial transactions to tackle domestic and international poverty, and fight climate change.
And now, the introduction of this tax by some European states, led by France and Germany, looks increasingly likely. In just the latest example of these discussions, this Wednesday will see European leaders sit down together to discuss the question of the times: How to create growth? And one of only three items on the agenda is the Financial Transactions Tax.
In the UK the tax retains a great deal of public sympathy. An April 2012 IpsosMORI poll shows that more than three quarters of the UK public do not think the Government has done enough to ensure we are “all in this together” with a large majority saying that banks and the richest have not been asked to make a fair contribution. Despite this the UK government has pretty much removed itself from the discussions: opposing any tax in the UK but powerless to stop a core group of European countries going ahead. This opposition (echoed, unsurprisingly, by the financial sector) has been based on the argument that it will hurt growth, forcing financial institutions overseas.
So did the EU President know something we didn’t when he put the FTT on the agenda of a meeting designed to promote growth? Well maybe so. Figures from the European Commission’s latest impact assessment show two things. Firstly that simply implementing the tax will have an almost negligible effect on growth – perhaps reducing it by just 0.2% by 2050 (that’s just 0.004% per year). And secondly, that growth could actually be enhanced by up to 0.4% were some of the revenues from the tax invested in high growth sectors of the economy. Research from City think tank Intelligence Capital conducted in March 2012 echoes this more optimistic appraisal in a UK context too – concluding that “GDP and employment in the UK could be boosted by 0.25% or the equivalent of 75,000 jobs.”
But there are other reasons for those with a hard head for figures to welcome an FTT. Because the cost of the FTT is disproportionately high for short term trades (buying and selling assets every hour) and negligible for long term trades it is likely to reduce the amount of high frequency trading in particular. If the FTT reduces these financial market distortions and volatility, and thus systemic risk, it can create more stable economic conditions encouraging a more responsible, less speculative, form of capitalism to aid the productive economy.
The same logic shows that the claim that an FTT would hit pension funds hard is disingenuous. Pension funds, on average, turn over their portfolio only once every 2 years. A high-frequency trader on the other hand turns over its entire portfolio in a day and would therefore pay 1,666 times more in transaction taxes than the average pension fund.
A sober look at the growth numbers above shows that they are not huge. A Robin Hood Tax is not the miracle answer for growth and proponents should not claim it is. But it has a benign influence on growth; it would go some way towards making markets work better; would encourage capital that is currently engaged in unproductive high-frequency trading to be put to better use. The crucial fight for the Robin Hood Tax campaign is to then ensure this tax can be used to help the very poorest in the UK and overseas, who did the very least to contribute to the financial crisis in the first place.
Simon Chouffot is spokesperson for the Robin Hood Tax Campaign.