Robin Hood, Robin Hood, dum dum dum de dum: financial transaction tax update from Max Lawson

The Robin Hood Tax campaign to fund development and climate change adaptation via a small financial transactions tax (FTT) is potentially one of the campaigning success stories of recent years – an object lesson in how to seize the moment (global financial crisis and fiscal horror story in the rich countries) to promote a good policy (redistributive taxation that can unlock significant new resources for development). Why potentially? Because nothing has yet been agreed, but progress towards real agreement is starting to look increasingly solid. Max Lawson, Oxfam’s man in the green tights (but not the guy to the right – I think that’s Javier from Oxfam Intermon in Spain), has this update for wonks, from the heart of the Robin Hood Tax campaign.

“An agreement on an FTT of some sort at the level of the Eurozone is now the most likely possibility in 2011, under pressure from Germany and France. They would then be joined by a group of nations from the G20, including Brazil and South Africa, which already have some form of FTT.  It is most likely to be a compromise in the shape of a transaction tax on shares (STT) and their derivatives, known as Stamp Duty. An FTT at Eurozone level could raise $10-20 billion annually, depending on the rate and transactions covered. EU-wide progress (i.e. including non Eurozone countries) is possible, but less likely due to objections from the UK, Sweden and others.

Everything depends on the Germans and French reaching an agreed compromise proposal.  The French still prefer a tax on currency transactions or foreign exchange. The Germans currently prefer a broad-based FTT on shares and bonds and their derivatives, but not on currency transactions. The two finance ministries are working very closely together, but have it seems yet to agree a compromise.

The Financial Activities Tax (FAT) tax remains the favoured option of the European Commission and the UK. However no country is actively pursuing the FAT, the French oppose it and the Germans have now turned against it for constitutional reasons.”

[But will the money get spent on development and climate change, or be swallowed up by rich countries’ fiscal deficits?]

“The French actively support the use of revenues for development and climate change.  The German finance minister has said twice publicly that he could see the revenues from their FTT being spent on development and climate change in order to secure a compromise.  Pressure needs to be increased on Germany and other supporters of the FTT like Austria to ensure the revenues are used for poverty and climate. Pressure from G20 nations and leaders of African countries will be critical in this regard.

Outside of the EU, President Sarkozy has put Bill Gates in charge of preparing a report and recommendations on innovative financing mechanisms on behalf of the G20.  Bill Gates is yet to be convinced of the FTT.  The US remains opposed to implementing an FTT themselves, but are not actively against others pursuing it.  Countries in the G20 that already have some form of FTT such as South Africa are likely to be supportive and can be persuaded to publicly call for the revenues of a European FTT to be used for climate change and development.

As in the Eurozone, the most likely compromise is around a tax on share transactions (STT), or Stamp Duty. Eight countries in the EU have such taxes already (including the UK), as do South Africa, Brazil, Korea, Australia and India making a coalition within the G20 around the Stamp Duty the most likely step. Extending these taxes to derivatives, as is done in India and Taiwan, would increase revenue. Whilst not a full FTT, this compromise would still set a major precedent and raise significant revenue.  At 0.5% the UK Stamp Duty is one of the largest in the world and raises $4 billion dollars each year, and this is one form of FTT that the UK could not oppose. 

So what would be the ideal process over the next six months?

· African ministers and key figures call for an FTT for development and climate change at the Spring Meetings this week
· 1000 economists write to the G20 and Bill Gates calling for an FTT at the G20 finance ministers’ meeting on April 15th (we can tick that one off – see here for letter and full list of signatories)
· South Africa, France and Germany announce their support for the FTT for development and climate change in the run up to and margins of the G8 in May
· Eurozone leaders announce they will push ahead with an FTT in June, ahead of the European Council, following the second global day of action on FTT.
· At the Annual Meetings other G20 nations show their support, including Brazil and South Korea.
· This is further built on at the final G20 finance ministers meeting, building on the full report from Bill Gates.
· At the G20 in France heads of state from the coalition of willing nations agrees to the implementation of their FTTs and the use of the revenues to help fight climate change and development and a clear timetable to make this happen. 
· At the UN climate change summit in Durban, South Africa in December, the contribution of the FTT to climate finance helps unlock negotiations.”

In a few months, we can compare this Lawsonian dream to reality …….

Update: some nice media coverage for the 1000 economists’ letter on the front page of The Guardian and the Telegraph

What is happening on global bank taxes? Robin Hood reports from the frontline

Earlier this year, I posted a fair amount on the new Robin Hood Tax campaign for a financial transactions tax to fund aid and the fight against climate change (start here and follow the links). In a guest blog, Oxfam’s top RHT obsessive, Max Lawson, updates us on the subsequent behind-the-scenes progress

“In today’s aid-speak, Robin Hood was a pretty outcome-focussed kind of guy. He didn’t much care how he got the cash from the rich, as long as there was plenty to hand over to the poor. So it is with the fate of the tax that bears his name – a bunch of proposals are now in play, all of which could become ‘Robin Hood Taxes’ – compared to where we were even a year ago, the progress is astonishing. The key issues will be how big the eventual tax or taxes will be, and whether any of the revenues will be used to fight poverty and climate change. 

So what’s the state of play? First the G20: in the face of another set of bumper bank profit announcements  (see graph), in Canada the G20 failed to take action or agree a co-ordinated tax or taxes on the financial sector.  The Canadian government actively opposed any tax on banks, and as chair of the summit ensured it was barely discussed.

But don’t despair – agreement on a tax or set of taxes on the financial sector in the coming months still looks likely, partly because the G20 kicked the can down the road by agreeing a set of principles that will enable those countries that wish to do so to press ahead with a tax.  The leaders of four of the major G7 economies, the US, UK, France and Germany, have publicly backed a tax or taxes on the financial sector in the last two months. This is critical since the vast majority of financial transactions take place in London, New York and Frankfurt.

The IMF has quietly released its final report on taxing the financial sector, which puts numbers on its proposed (and wonderfully named) financial activities tax, or FAT. Set at 5%, it could raise $93 billion dollars annually.  It also reiterates two powerful points from its draft report – that the financial sector is arguably ‘under taxed’ and ‘too big’. The IMF also confirms that government debt in advanced OECD nations will be 40% higher largely as a result of the financial crisis and new Oxfam research shows the poorest nations face a $65 billion dollar shortfall in their budgets due to the crisis.

Three types of tax are proposed and supported by different countries.  The US, UK, France and Germany (along with most of the EU) want a levy on bank liabilities.  The UK is pressing ahead with a small levy of £2.5 billion a year, and also has said publicly it is in favour of a further tax on profits and bonuses (i.e. a FAT).  The German government has said it favours a further tax, and this could either be a FAT tax or a tax on financial transactions (FTT).  The French support an FTT, which the Robin Hood Tax campaign still sees as the simplest, easiest and fairest way to raise sufficient cash.

A lot depends on whether or not the Obama administration succeeds in implementing its proposed bank levy before the new congress takes office in January.  This will be tough as they are short on both time and political capital.  Separate bills proposed by different congressmen for transaction taxes will help increase the pressure though. Whilst not huge ($10 billion a year), or linked to good causes, if implemented the US levy would still free up space for additional taxation in Europe without fear of undue US competitive advantage and an exodus of banks to New York.

Looking to the next few months, the G20 in Korea in November will definitely see further discussion and potential agreement between a ‘coalition of the willing’.  The French have also indicated that this will be a central part of their G20 presidency in 2011. Parallel discussions at the EU level will also be important, pushed by the Belgians who hold the EU presidency and have called an emergency finance ministers meeting on September 7th to discuss financial sector taxes. 

A potential compromise could be a tax on currency transactions only (rather than all transactions), which is hard to avoid, easy to collect and would not affect competitiveness.  A tax on just the euro and pound of just 0.005% (half a basis point) could raise $17 billion annually.  If the dollar and yen are included this rises to $40 billion. As the IMF would say, this kind of amount is ‘nontrivial’. This is the preferred option recommended by the Leading Group of experts, representing 12 governments including the UK, France and Japan.

Trapped between big promises and big deficits, the EU nations are also the most likely to push for using this revenue being used in part to pay for aid and climate change, and many have already made this link publicly (though notably not the new UK government as yet).  A tax on the financial sector is being investigated by a UN-convened Advisory Group on Climate Finance including George Soros, charged with looking at ways to finance climate change adaptation and mitigation.

What is certain is the political climate will remain propitious, with profits, bonuses and champagne continuing to flow in the unrepentant financial sector (see video) whilst hundreds of thousands of people face cuts, tax rises and job losses to pay the bill for the bankers’ folly.

The Robin Hood Tax campaign in the UK has plenty of oomph with over 200,000 supporters on Facebook and dozens of high profile actions planned for the autumn, together with campaigns in Germany, France, the US and increasing numbers of other countries.  The Sheriff of Nottingham should continue to watch his back.”

The IMF pronounces on the Robin Hood Tax

Yesterday, I discussed the IMF’s fascinating new proposals for two international taxes on the financial sector  – a ‘financial stability contribution’ (FSC) and a ‘financial activities tax’ (FAT). But the leaked interim report to the G20 also discussed the financial transactions tax (FTT), better known as the Robin Hood Tax. What did it say?

First the good news: ‘The FTT should not be dismissed on grounds of administrative practicality. Most G-20 countries already tax some financial transactions’. So could all those people who argue that the FTT is unworkable please shut up now?

But the IMF does not endorse the FTT for the purpose of the mandate set out by the G20, namely exploring ‘how the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system’.

Why not? The report’s author, Carlo Cottarelli, gives a succinct explanation in a blog on the IMF website:

“We don’t think this is the best way of meeting the two key objectives set out above. An FTT is not  focused on reducing systemic risk and it isn’t effective at taxing rents in the financial sector—much of the burden may well fall on ordinary consumers. [So the IMF disagrees with the recent finding in a paper by Sony Kapoor of Re-define that the Robin Hood Tax would be highly progressive].

Moreover, the financial services industry is very good at devising schemes to get around such a tax and (this is also true, to be fair, of the FSC and FAT, but we suspect to a lesser extent).

One way to think about the comparison is that just as a FAT is like a VAT, an FTT is like a turnover tax—and most countries have long found that the VAT is better at raising revenue: in the jargon, more efficient. All this doesn’t mean we rule out an FTT in other contexts—but it is not the most effective way to address the task at hand.”

That last sentence is important – the IMF is saying the FTT is workable, and could be applied in other contexts, like raising the hundreds of billions of dollars desperately needed to combat climate change and poverty. It just doesn’t think it’s the best way to tackle financial sector volatility (which is a view I share).

Oh, and the Robin Hood Tax campaign has clearly had an impact on the Fund – Carlo’s blog notes ‘the last few months have left us in no doubt as to the seriousness of the public support this enjoys.’

Stand back a bit, and I think the Robin Hood Tax campaign can allow itself several pats on the back. We now have the IMF feeling the heat and pushing international bank taxes, establishing important precedents on the financial and social responsibilities of a sector that has been allowed to get away with murder for far too long (and is now back to mega-profitability, leaving the rest of us to clear up the mess). The Fund is also acknowledging the practicability of FTTs for other purposes like financing for development (although we need to nail the issue of incidence). In the end, the acronym – FSC, FAT, FTT or whatever – matters little if it raises the cash for development and climate change. As Deng Xiaoping once remarked “It doesn’t matter whether a cat is white or black, as long as it catches mice.” I’m sure Robin Hood would echo the sentiment.

A global taxation system, as proposed by the IMF

IMF suggests
Global taxes on all banks
History is made

What have they put in the water supply at the IMF? First they see the light on capital controls, and now they’re putting out ground-breaking ideas on the international taxation of banks. I’ve been reading the supposedly confidential (but available on the BBC website – if you have problems with this URL, just search on BBC + title of report) interim report to last week’s IMF Spring Meeting with a growing sense of astonishment and delight. There are some potentially historic shifts in thinking going on. Apologies in advance for a long post, but I think it’s worth it for this issue. To keep some kind of ceiling on size, I’ll post tomorrow on what the report says about the Robin Hood Tax.

The report, titled ‘A Fair and Substantial Contribution by the Financial Sector’, was commissioned by the G20 ministers, who at their summit in Pittsburgh last year, asked it to ‘“…prepare a report for our next meeting [June 2010] with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system.”

The mandate is important – the IMF effectively stretched it to include the indirect costs of the crisis in the rich countries – fiscal stimuli, quantitative easing and all the rest, as well as the direct costs of bank bailouts, but unfortunately, stopped short of extending it a bit further to include the indirect costs of the crisis on poor countries, in the shape of a large fiscal hole that will need to be filled. And it was never going to extend it all the way to the wider need for innovative financing to meet aid targets and the big money needed to deal with climate change.

As widely reported in the press last week, the paper proposes two kinds of tax: a ‘financial stability contribution’ (FSC) and a ‘financial activities tax’ (FAT – the IMF has even acquired a sense of humour). The FSC seems to be based on the US ‘Financial Crisis Responsibility’ fee, and the FAT on the British and French Governments’ bonus taxes.

In an excellent blog on the IMF site, the paper’s lead author Carlo Cottarelli explains the reasoning:

On the FSC: “One reason the crisis was such a painful mess was that many governments did not have the tools to wind down failing institutions in a quick and orderly manner. All too often their only options, both hugely unpleasant, were to either (1) let a systemic institution fail and bear the chaotic fallout or (2) pump in enough public support to keep it alive, so confirming the prior suspicion that these institutions were indeed too big to fail. Governments lacked a way to ‘resolve’—a new word even for many economists—large failing institutions.

Resolution means equity holders would be wiped out, management replaced, and unsecured creditors take a loss—a ‘haircut’—on their claims. All this should be nasty enough for owners and managers to reduce any problems of ‘moral hazard’ (taking too much risk in the expectation that someone else will bear the costs if things turn out badly). But most countries still don’t have such a mechanism. Financial stability requires creating them.

So where does the idea of a contribution come in? Resolution requires upfront cash, to reduce uncertainty for creditors (and the creditors’ creditors…) by quickly giving some value to their claims. And the industry should pay for this: it is, or should be, a cost of doing business just like paying for deposit insurance, or maintaining their information systems. This is what we call a Financial Stability Contribution (FSC).”

On the FAT: “FAT is just a tax on the sum of the profits and remuneration paid by financial institutions. Profits plus all remuneration is value added. So a tax of this kind would be a kind of Value-Added Tax or VAT. And that could make sense because current VATs don’t work well for financial services, which are largely VAT-exempt.

This means that a FAT of this kind could make the tax treatment of the financial sector more like that other sectors and so help offset a tendency for the financial sector, purely for tax reasons, to be too large—or too fat.

Now suppose that the base included only remuneration above some high level, and only profits above a ‘normal’ rate of return. Then the base of the FAT may not be a bad proxy for taxes on ‘rents’—return in excess of competitive levels—earned in the sector. Some might find taxing that excess fair.

Or one might include only profits above some level well above normal. Taxing away some of these high returns in good times may help correct for any tendency to excessive risk-taking implied by financial institutions not attaching enough weight to outcomes in bad times (whether because of limited liability, or because they think themselves too big to fail).”

Might have to adjust that message

Why does this matter?

1. The most orthodox of international financial institutions has just set out the basis for an international taxation regime

2. That sets precedents for how public goods other than financial stability could be funded – like climate change and development

3. The FAT explicitly aims both to shrink the financial sector, which has grown so large that minor fluctuations imperil the much smaller real economy, and to change behaviour to reduce excessive risk-taking.

4. The FAT’s idea of a windfall tax on rents could easily be extended to other sectors – like the suddenly super-profitable oil and gas industry (see BP’s latest jump in profits)

5. All this is a wonderful counterweight to widespread pessimism on financing for development following the crisis. If the IMF thinks we can rustle up 2-4% of global GDP as a resolution fund, suddenly 0.7% for international development doesn’t look such a big deal.

One big question that the IMF paper ducks (but will hopefully answer in its final version in June) is what level of rate (and thus revenue) a FAT could raise. For the FSC, 2-4% of GDP corresponds to $1.2-2.4 trillion, so to fill up the resolution fund over a five year period, it would have to raise about $400bn. Coincidentally, that’s how much the Robin Hood Tax campaign reckons is needed for climate change and development. So when the resolution fund hits its target, there’s a ready-made use for further revenue…..

The danger is that in the negotiations that follow, the FAT will be sacrificed to get the FSC. That would be a shame, as it’s the more interesting of the two proposals. The final version of the IMF’s paper will go to the G20 summit in Canada in June. In the UK, income tax was introduced in response to a crisis - William Pitt the Younger put it in his budget of December 1798 to pay for weapons and equipment in preparation for the Napoleonic wars. Could international taxation be the biggest legacy of the 2008-10 global crisis?

Robin Hoodies and Robbing Oil Revenues: two fine new youtubes

Here’s the latest youtube treat from Richard Curtis for the Robin Hood Tax campaign (whose Facebook fan club just topped 150,000 people). OK, we oldies recognize Ben Kingsley, but test your yoof credentials by naming the rest of them…….. See here for more considered (if less enjoyable) posts on the subject.

Meanwhile Oxfam America’s animated short “Follow the Money” has been selected as one of 16 finalists for YouTube’s DoGooder Nonprofit Video Award. 

And now that you have seen it, click here to VOTE. (Winners will be announced on April 10, so the deadline is today at midnight)

Finally, if you want to learn more, check out Chris Hufstader’s blog about the time he actually tried to follow the money from a gold mining project in Sadiola, Mali.

Whatever happened to Robin Hood? Update on the Financial Transaction Tax

From deep inside the boilerhouse of the Robin Hood Tax campaign, this helpful update comes from Max Lawson, Oxfam’s man in the green mask…..

The weeks up to the G20 Finance Ministers meeting in Washington DC on 23 April (on the margins of the IMF and World Bank Spring Meetings) and the UK election (almost certainly on 6 May) will determine whether there will be a tax on banks which delivers money for good causes, and whether the idea of a tax on transactions continues to gain momentum. The chances of success and failure seem evenly poised, and will depend in part on the success of public campaigning on the issue.

Momentum is gathering pace for a tax on banks to be agreed by the G20, but this is not the same as the Robin Hood Tax – this tax would not be on financial transactions but on bank assets, and so far is only targeted at paying the costs of bank bailouts. The serious risk is that the bank tax will be kept relatively small and will not raise any money for good causes at home or abroad.  At the same time the political space for a more substantial tax on financial transactions could be closed down by the move.

Success by May would be either a group of key countries (France, UK, Germany, US) or the whole G20 agree an Obama-style bank levy and that a substantial proportion of this goes to fight poverty and climate change.  At the same time the IMF concludes that financial transaction taxes are possible and should also be taken forward, and the French and Koreans agree to continue to press for an FTT during their G20 presidencies. 

In the UK the main parties have begun to compete over how and in what ways they are going to tax the banks – a campaigner’s dream!  The Conservative opposition announced that if elected they would implement a tax on banks unilaterally, albeit at a smaller rate than if it was global.  This brings them into line with the other major party, the Liberal Democrats.  This sadly led the ruling Labour party to try and outflank the opposition on the right, by instead saying that only a global agreement would count, and that the Conservatives by pushing unilateral approaches could risk jobs in the city. 

At the same time there was minimal mention by any party of linking the bank levy to good causes, and no mention of this in last week’s UK budget.

In quick succession this week the German and then the French finance ministers both came out in favour of an Obama style tax on bank assets to raise money for protection against future bailouts.  The Germans said their levy will raise 1billion euro, adding that though would have preferred a transaction tax, this had to be global and there was no appetite to do this ‘as the moment’.

French finance minister Christine Lagarde predicted fast agreement on a bank levy, and added that both a bank levy and an FTT could happen: ‘They are not necessarily mutually exclusive, but the one that is likely to progress fast is the levy on banks, rather than the financial transaction tax’.

At their meeting on Thursday 25th March, European Leaders said the following in their communiqué:

“Rapid progress is required on the strengthening of financial regulation and supervision both within the EU and in international fora such as the G20, while ensuring a level-playing field at the global level. Progress is particularly needed on issues such as capital requirements; systemic institutions; financing instruments for crisis management; increasing transparency on derivative markets and considering specific measures in relation to sovereign credit default swaps; and implementation of internationally agreed principles for bonuses in the financial services sector. The Commission will shortly present a report on possible innovative sources of financing such as a global levy on financial transactions.”

The next step in Europe is the emergency finance ministers meeting in Madrid on 15th and 16th of April, where the bank tax and the FTT will be discussed. 

Outside of the G7, other G20 countries remain largely observers on this topic, although there was some talk of China setting a currency transaction tax (one particular kind of FTT) in place at a zero rate to deter speculators.

The IMF study, mandated by the G20 in Pittsburgh, (see previous post) remains keenly awaited and is due out on 23rd April.  Whilst the tax on assets at a small rate is likely to be the favoured option, there remains a good chance that the IMF will give transactions taxes a fair hearing and conclude that they too are technically feasible given political will. 

Meanwhile FTT campaigns are growing globally. Campaigns have been running in Germany and other European countries for some months. In Germany the campaign is called the Tax Against Poverty (Steuer gegen Armut) and they have their own version of the Richard Curtis-Bill Nighy film (included below yet again, just because it’s so brilliant).  Supporters in the US have been pushing for action in Congress and the White House, as well as protesting outside banks all over the USA, and are planning a mid-April campaign launch. The Italians launched their zero-zero-cinque campaign last week and other campaign launches are being planned in Australia, France and many other countries.

It’s fascinating watching the chance for this kind of major policy shift open up in response to a shock, and the combination of forces – public campaigning, research, politicians looking for answers, blockers, sceptics etc swirling around the issue and determining the outcome. A little bit of history is playing out before our eyes on this one.

The Robin Hood Tax takes off: update, arguments and counterarguments

The Robin Hood Tax campaign has certainly struck a nerve. On the one hand, huge public support (within three weeks of the launch, 300,000 views of the Bill Nighy youtube, 120,000 fans on Facebook, 30,000 signed up on email) and serious political interest (UK parliamentary launch with 80 MPs, lobby meetings with all the major parties). But also a significant amount of ‘pushback’ in the blogosphere and op-ed columns. Criticisms fall into two broad camps: although it’s an interesting phenomenon, I don’t intend to discuss the first – the ‘who does Bill Nighy think he is?’ tendency of policy wonks who clearly resent upstart celebs speaking out (except to say that Bill’s been campaigning for Oxfam for years, and that the policy wonks are presumably jealous at how much coverage he gets). Let’s get onto the substantial stuff. In the initial exchange of fire, two main issues emerged:

1. Who pays in the end, assuming $400bn doesn’t just come out of thin air? Critics like the FT’s Tim Harford claim that calling it a ‘tax on bankers’ hides the fact that ordinary punters will pay in the end.

My response: Because it is levied once per transaction, the FTT acts as a kind of frequency filter. If a financial institution turns over its whole portfolio once a day, it will pay 365 times as much tax as one that turns over its portfolio once a year. So in the first instance, the tax will fall on high frequency traders like hedge funds and the proprietary trading houses of investment banks, not on low frequency traders like retail investors, people changing money to go on holiday, or high street banks. 

But who has their money in the hedge funds? Well up until recently, it was almost entirely ‘henwees’ – High Net Worth Individuals (HNWIs) – so an FTT would have been hugely progressive, affecting only rich individuals ability to ‘use money to make money’. Admittedly, in the last few years pension funds and other institutional investors have started buying into the more speculative investment vehicles, so the boundary has got a bit more blurred. According to a recent report in the FT ‘most UK schemes were now looking to allocate up to 15 per cent of their portfolio to hedge funds’, although the current percentage is well below that. So an FTT could deter pension funds from moving into higher risk investments – arguably no bad thing. But yes, even though overall, an FTT would be extremely progressive, there would be some pass through to pension plans. In practice, however, an FTT would in reality be a family of taxes at different levels on different kinds of transaction,  and could be fine tuned to maximise that progressivity.

2.  If we don’t introduce it in all countries at the same time, it will put those that do at a commercial disadvantage, and lead to a mass flight of financial institutions.

My response: Ideally an FTT would be applied globally by all countries.  But while this is being negotiated at the G20 and elsewhere, there is nothing to stop governments taking steps, either as a group of like-minded countries, or unilaterally.

And here’s what for me is the killer counter-argument to this objection. A range of domestic FTTs imposed by different countries already exist! They show that unilateral action is completely possible, and that fears that introducing a tax makes firms go elsewhere are overblown:

- UK: a 0.5% Stamp Duty on share transactions raises more than £3.2 billion each year
- US: a small transaction tax finances the Securities and Exchange Commission
- Belgium: An FTT on the transfer of shares, bonds and other securities. At a rate of 0.5-1.7 % it raised Euro 147 million in 2005.

So if the UK investment houses are willing to stomach a 0.5% tax on share transactions, are they really going to flee these shores over a tax 10 or even 100 (in the case of currency transactions) smaller? Unlikely.

There are a number of other points that get picked up with less regularity: there are other taxes like a wealth tax that are even better (see my previous response); an FTT wouldn’t necessarily curb volatility (I have some sympathy with that one); we should go with an expansion of President Obama’s levy on banks instead (as well, maybe, but not instead – you won’t see much cash for climate change or development out of a bank levy).

And the question that’s been nagging at me for weeks finally surfaced at the parliamentary launch last week. Suppose an FTT were to be be introduced – what guarantee would there be that the revenue would not all go straight to filling fiscal holes in the North, rather than half of it going to climate change and development, as proposed? Two responses: firstly, moral suasion – governments would need pretty thick skins to raid the money destined for development. But thick skins go with the job description, so we also need to think through the mechanics of how the tax would be levied, and see if there is a stage before it reaches the hands of finance ministries, where it could be channeled into arms-length escrow-type accounts that would then distribute it in pre-agreed proportions.

Finally, some stick is being handed out to the Robin Hood Tax campaign for the (over) simplicity of its messages (see Tim Harford’s follow up post). To which I would respond, duh, there’s a clue in the title – it’s a campaign, not a seminar. Campaigns need to have clear messages that inevitably do violence to some of the detail, but the groups that constitute the RHT are busily having detailed grown-up policy discussions with decision makers, reading the research, commissioning new work etc etc.

So where do I think the criticisms are justified? I think there are two places. Firstly, we should have made it clear that we were always talking about banks and other financial institutions, not just the banks, and that we recognized that money does not come out of thin air (but that this is a very progressive way to raise it). Mind you, ‘a tiny tax on wholesale transactions in financial markets’ isn’t quite as catchy – back to campaigning again.

Secondly, we should probably have devoted more attention to putting forward our thinking in policy wonkland, perhaps with a separate geeks website for debate, exchanges of information and research etc. That’s something we need to sort out as the campaign develops. But there should be no let up on the public campaigning – Bill Nighy. Richard Curtis et al have brought this discussion to a level of prominence that ‘undercover economists’ could only dream of. All power to them.

Last word to Einstein: ‘We should be on our guard not to overestimate science and scientific methods when it is a question of human problems; and we should not assume that experts are the only ones who have a right to express themselves on questions affecting the organization of society.’ I’m with Albert.

Update 2 March: for more on ‘who pays the tax’, read this excellent paper by Sony Kapoor (who also gives Tim Worstall a good going over in the comments to this post).

Why Owen Barder is (mostly) wrong to oppose the Robin Hood Tax

Owen Barder has a thought-provoking post setting out his objections to a financial transactions tax (FTT) in response to the launch of the Robin Hood Tax campaign. I’ll run through the areas where we disagree, then where we agree, and finally the areas where I am still sitting painfully on the fence.

Where we disagree:
First the framing: Owen claims the FTT tries to kill three birds with one stone – redistribution, curbing speculation and finding money for climate change adaptation and aid. I would argue that one of the reasons why the FTT has got so much more momentum than it’s forerunner the Tobin Tax, is precisely because it has abandoned the effort to throw ‘sand in the wheels’ and curb things like currency speculation. Owen is right that a 0.005% tax on exchange trades would hardly have deterred George Soros from breaking the pound in 1992.

The Sun explains currency speculation

So the FTT is actually a progressive tax, used for filling fiscal holes in the rich countries, paying for climate change adaptation and mitigation in developing countries, and funding aid pledges to the poorest countries.

Next the issue of ‘incidence’: All taxes get paid by someone  – obviously money doesn’t come out of thin air, (although in the weightless world of finance, it sometimes seems to come pretty close). The money raised will of course have an impact on the banks. But NGOs’ own analysis and research by long time (and heavily scrutinized) FTT wonk Rodney Schmidt suggests that the banks could contain a large part of the initial burden of taxation without passing it on to consumers. Rodney has looked into previous fluctuations and found ‘it is not at all clear that there is a strong correlation between trading volume and bank profits.’ He adds:

‘In the wholesale foreign exchange market banks themselves will pay the tax, because there are a lot of them trading constantly with each other in a competitive market. However, in the equities market, there is no wholesale market at all, so it will be much easier for big banks to pass on the cost of trading, including the FTT, on behalf of clients to the clients themselves.’

So the tax on currency trades and some other bank activities would not have a big impact on the rest of us, but as Rodney says, a wider version of the tax that includes trading in shares is likely to have at least some knock-on effects. This definitely deserves more study both on the likely distributive impact, and possible measures to prevent costs being passed on in regressive ways, but research alone will struggle to find all the answers – why not introduce the tax on currency trades first, then extend it slowly and monitor impact?

In the end, even in share trading, the knock-on effects are likely to be a small proportion of the overall amount raised, so the tax is likely to still be very progressive, unlike many other forms of taxation, such as VAT. Does Owen oppose the UK’s existing 0.5% stamp tax on share trades for the same reasons? Saying ‘there’s no point in taxing banks, they’ll just pass it on’ could equally apply to any form of corporate taxation, yet Owen apparently supports many of those. And let’s not forget that banks are seriously under-taxed compared to other sectors.

In similar vein, Matthew Lockwood suggests that a global wealth tax would be more progressive and transparent, to which Owen adds a long list of other progressive alternatives (extending national insurance and the like). This is classic economic debate – identify your ‘first best solution’, and then contrast it in lofty tones with all the ‘second best’ ones. But there’s usually a reason why the first best ones are not already in place – it’s called politics. There is currently a political opportunity presented by the global financial crisis to introduce a (very) small tax that will raise a bundle of cash for good causes. I do not think that window exists for the alternatives that Matthew and Owen are proposing. So guys, if you can’t compete with the combination of volume, progressivity and political viability of the FTT, why not get behind something that might actually happen? This is not an academic exercise, but a serious effort to raise desperately needed cash.

Finally, Owen’s argument that the FTT will be cyclical and so will add to the volatility of aid, doesn’t hold water. Sticking the revenue in a fund and smoothing out the bumps is relatively straightforward, as numerous examples of national commodity stabilization funds have shown in recent years.

Where I agree with Owen is on his view that an FTT won’t have much of an impact in regulating financial markets – absolutely, that needs a separate approach (in fact, the absence of a major impact on the workings of the market is precisely part of the FTT’s viability!) The ‘socially useless’ activities of the sector need to be curbed (thanks Lord Turner), along with volatility, which causes huge damage to the real economy and the ‘privatise gains, socialize losses’ logic of periodic bank crises that ratchet up public debt and inequality. Regulate away, people.

And finally, where I’m agnostic is over Owen’s argument that the FTT is in a way too easy. He wants to join battle with those who oppose aid, win the argument for ‘good aid’, and then get people to willingly cough up the money needed. On the one hand, that’s a strong ‘social contract’ kind of argument, stressing the importance of the political and financial links between citizens and state, (albeit in this case limited to the donor countries), and it forces the aid industry to take issues of quality and accountability seriously. But on the other, it seems a little extreme/purist. Do we just tell the millions around the world they will have to wait for schools, hospitals and relief from climate change until we convince every last tabloid reader (and even more difficult, their editors and owners) of the effectiveness of aid? Of course we need to continue to work on public opinion and the quality of aid – and we do. But presenting this as a choice between supporting the FTT and everything else we do on aid is entirely false – we are, believe it or not, capable of working on more than one thing at the same time! 

One last whinge. A lot of the commentaries on the launch of the tax have been very sniffy about the role of celebs like Bill Nighy and Richard Curtis. I don’t think that’s fair – they have been concerned with development issues for a long while (since well before Make Poverty History) and actually know a good deal. But I would say that, wouldn’t I. Why not judge for yourself on the basis of this clip of them appearing on the dreaded Breakfast TV sofa to launch the campaign.

The Robin Hood Tax campaign is launched today – check it out

I’ve blogged a few times on the momentum building behind the introduction of a Financial Transactions Tax (see here). Today it steps up a gear with the launch of international campaign calling for a ‘Robin Hood Tax’ (much more memorable!), with the full campaign repertoire – op-eds, a letter signed by 350+ economists, a dedicated website with lots of background materials, and a great youtube (see below) with Bill Nighy playing the quintessential shifty banker. Declaration of interest – Oxfam is a core member of the campaign.

The basic backgrounder is here, and there will doubtless be a lot of arguments around the numbers and feasibility of the tax, which the campaign reckons could raise hundreds of billions of dollars a year to put into development, combating climate change, and filling the fiscal holes in Europe and the US.

I will blog on those debates as they unfold, but stand back for a moment and I think there is a bigger picture here. Since the early 1970s, the financial sector has been growing at a phenomenal rate – the volume of financial transactions is currently running at about 60 times the size of global GDP. With that growth has come volatility and crisis – when a beast that size shivers, the real economy catches cold. It was surely inevitable that at some point, that sector would come to be properly regulated and taxed (i.e. beyond that residual level of corporation and income tax that the bankers fail to avoid).  The introduction of other kinds of taxes suggests that is most likely to happen after a shock (e.g. an income tax was introduced in Britain in 1798 to fund Britain’s war with France).

So we have the tectonic build up of pressures and problems and the shock (in the shape of the fiscal trauma inflicted by staving off a global recession) required to shift institutions and politics – that is how change of this magnitude often happens. Whatever the detail of the debate, it feels like taxation of the ever-growing financial behemoth is long overdue.