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).

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.

Tobin tax update: how momentum is building for a Financial Transactions Tax

The momentum behind the Financial Transactions Tax (a tiny levy of 0.005% on all financial trades would raise about $30bn a year for climate change, development and/or filling fiscal holes) continues to grow since my last post (Why has the Tobin Tax gone mainstream?).

The French government, which as far back as 2003 was the first to seriously propose the tax, portrays it as one of the innovative financial instruments needed to finance development and climate change response. See for example the recent op-ed by the Finance and Foreign Ministers, Lagarde and Kouchner, in Le Monde saying they support an FTT to finance development.

In advance of its recent pre budget report, the UK government issued a report supporting exploring the FTT as one of a number of options. On 10 December, President Sarkozy and Gordon Brown wrote a joint op-ed in the Wall Street Journal calling for ‘examination’ of an FTT, among other measures, to contribute to climate change response and achieving the MDGs. The European Commission President Jose Manuel Barroso has also weighed in in support.

In the US House Speaker Nancy Pelosi expressed qualified support on the FTT on the 7th December, while various heavyweight economists have come out in favour, including Paul Krugman in the New York Times. A democratic congressman, Peter Di Fazio has introduced a bill in Congress calling for a tax on financial transactions, to help pay for job creation in the US. This is supported by 25 other congressmen, and calls for a 0.25 percent tax on every applicable transaction, which its proponent believe would generate nearly $150 billion a year. In response Treasury Secretary Tim Geitner moderated his initial opposition to an FTT, saying merely that ‘he has not seen a version of this tax that would work for the US’.

The worry in all this is the role of the IMF, tasked by the G20 in Pittsburgh to look at ‘ways in which the financial sector could be made to contribute to the cost of the bailouts’ and report back to the G20 meeting in April 2010 (a draft report will also be presented to the G7 finance ministers in February). At the IMF meetings in Istanbul, Dominique Strauss Kahn, the Managing Director of the World Bank, appeared to say that the IMF would not be looking at transaction taxes, or ‘simplistic tobin taxes’, but pressure from the Europeans has made him adopt a more open-minded position. At least in public. But there has to be doubt over whether the Fund has made up its mind before conducting the analysis – watch out for some ‘policy-based evidence making’ over the next few months. A lot will depend on the calibre of the external inputs to the IMF from technical experts outside of the fund.

Movement at the political level is being pushed by a nascent global campaign by NGOs, campaigners and economists:
· Health groups around the world are already very organised and working together on campaigning for a currency transaction levy (CTL) for health
· In Germany a major campaign has been launched to press for the FTT that has already gained the 50,000 signatures required to ensure hearings on the tax in the Bundestag.
· French campaigners have already met with government and are working on next steps.
· In the UK a broad coalition is forming to support a campaign, running intensely from January to April 2010, to the G20 finance ministers meeting in Washington. Their joint campaign will launch in January just before Davos.
· Richard Curtis (Film director and creative energy behind the Make Poverty History Campaign) is very interested in a short FTT campaign. He was behind the idea of the white band in 2005.

The next few months could be crucial if the FTT is to become the Fast Track Tax. If the momentum builds, then the G20 discussion in April could be a turning point. My one query is that I still haven’t heard anything from developing country governments, economists or civil society organizations – any news?

Why has the Tobin Tax gone mainstream?

So the Tobin Tax finally went large at the G20 finance ministers’ meeting last weekend. Gordon Brown supported a financial transactions tax to repay some of the costs of the bailout and provide extra cash for development and climate change action, and a predictable backlash promptly consumed the finance pages. I won’t rehearse the press coverage (try Heather Stewart or Larry Elliott in the Guardian for that). My question is ‘why now?’ Alex Evans on the Global Dashboard blog has a nice discussion on the apparent conversion of the UK government. More generally, what light can a ‘how change happens’ analysis shed on all this? One useful change framework on these kinds of shifts in public thinking is the ‘3I’ model of ideas, interests and institutions.

Ideas: first, and most obvious, is the Tobin Tax proposal itself, which has 

James Tobin

bubbled away on the margins of the debate for 3 decades, in no small part thanks to some dedicated campaigning and thinktankery from a coalition of NGOs such as War On Want and Stamp Out Poverty.

But the recent evolution of the idea has also improved its chance of success. Tobin’s original idea of a relatively high (1%) tax to throw ‘sand in the wheels’ of financial speculation was always less convincing than the role of the tax simply to raise cash. A 1% tax would not curb major speculative raids on currencies, and raising it even higher during periods of volatility (as advocated by the Spahn tax variant) is actually just capital controls dressed up as a tax. Now the tax is discussed largely in terms of its fund-raising potential – a much more plausible aim (have you ever actually tried killing two birds with one stone?). At the same time, the tax has been expanded in scope to all transactions, not just currency trades (hence the switch to the more forgettable ‘financial transaction tax’, or FTT)

The wider shift in ideas provoked by the crisis has also helped, leading to a  rebalancing of the financial sector’s rights and responsibilities and the eclipse of ‘just leave it to the market’ thinking.

Interests: The conversion of financial sectors from political asset to liability has driven a wedge between governments and banks, as a recent FT article argued. Governments faced with a huge fiscal hole have to cut spending, borrow or raise tax – and politically the more invisible the tax (in terms of voters), the better. The FTT fits the bill.

The financial sector is predictably vociferous and dismissive and remains a formidable opponent, as we’ve seen from the row over bonuses – this battle is only just beginning.

Institutions: Whether the shift from G8 to G20 is a driver of the new interest is less clear – all the political support has come from old G8 countries such as Germany, France and now the UK. Has anyone seen anything about what China and India say on the proposed tax?

What is clear is that the slowly accreting system of global governance in areas such as climate change and overseas aid is generating massive new financial commitments (see Larry Elliott article on this) and a number of governments, led by France since the Landau Commission of 2004, have been seeking new ways to raise the cash.

The counter-arguments are looking threadbare, but are being trotted out nonetheless.

1. ‘It only works if every financial centre participates’ (not so – are banks really likely to up sticks and move over a 0.005% tax?). Even Larry Elliott fell for that one. You need a critical mass, for example the major centres of Europe, but not everyone.

2. ‘Even if you corral the US, Europe and Japan, it will just drive the financial institutions offshore’ – same argument applies. It may have been true at 1%, but not at half a basis point.

3. ‘It’s just too difficult to police, due to computerization.’ The post 9/11 international effort to track and crack down on terrorist funding pretty much nailed that one, and you hear this line less often than during the last major burst of interest during the Asian financial crisis of 1997-8.

So what happens next? The Pittsburgh G20 tasked the IMF with reporting back to the next G20 (in Canada in June 2010) on ‘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 burdens associated with government interventions to repair the banking system.’ After Pittsburgh Nicholas Sarkozy and Angela Merkel were clear in the press that the study would look at Tobin taxes, but the IMF seems to have other ideas. Its head, Dominique Strauss-Kahn, responded to Gordon Brown’s speech at the weekend by repeating his long-held position that a Tobin tax is “a very old idea that is not really possible today” - DSK appears to be going way beyond his brief in trying to close down the debate before it has begun.

In general, there will be battles over feasibility, desirability and scope (if the tax shows any sign of being adopted, the financial sector’s plan B is likely to include keeping it to as narrow a range of financial transactions as possible). Should it be introduced, there is no guarantee that any of the cash raised will be spent on climate change or development, rather than paying down the massive debts incurred by bailouts in the rich countries.

And of course, there is always the danger that if green shoots prove genuine, the tax will return to the intellectual wilderness, as it did after the Asia Crisis. But the level of interest is far greater than in the late 90s, and has reached a far higher level of political leadership, so it feels like this is really game on for a big new source of cash. And as we know from campaigns on debt relief, access to medicines etc etc, they always say no. Until they say yes. And then claim they supported the idea all along.

How to find $280bn for poor countries this weekend

This weekend the finance ministers of the G20 – the world’s most powerful nations -will meet in London.  While the rich world’s green shootists apparently feel that the worst of the economic crisis is behind us, the poorest countries are being hammered, with those living on the margins of the global economy paying the highest price for the bankers’ folly. Here are 3 easy ways the finance ministers can raise $280bn (the cost of two AIG bailouts) to help ease the pain.

Hold on a minute – ask the rich countries to stump up lots more money for aid in the middle of a recession? Are you crazy? Actually, if there’s one thing the last year’s barrage of bailouts, rescues, stimuli and quantitative easing has shown it is that when they need to, governments can pluck huge amounts of cash out of thin air (and be out of office before the fiscal hangover kicks in).

This year alone, as a result of the economic crisis, between 50-100 million more people worldwide will be trapped in poverty, scraping by on less than US$1.25 a day.  Read that again, $1.25 a day. This means millions more families forced to make impossible choices between buying life saving medicines, or the cost of sending their girls to school, or finding food for the next week. 

The G20 in April this year promised to provide US$240 billion for developing countries to help them deal with the impact of the economic crisis and as part of this, US$50 billion to the world’s poorest countries. It showed the leadership the world needed in the face of this economic maelstrom. But those were largely loans, not grants, (so they’ll add to developing country debts) and since then it has become clear that even that amount is not enough. A second set of bold actions is required from the G20 when its leaders meet in Pittsburgh later this month.

How much are we talking about? The World Bank predicts overall that developing countries will need between $352 billion and $635 billion in 2009 just to stand still; much more is needed beyond this to actually enable these countries to develop and fight other crises such as HIV/AIDS, rising food prices and climate chaos.

But with three steps, the G20 can generate US$280 billion of new financing for the world’s poorest countries, at minimal cost to themselves; in fact they stand to benefit significantly should they do so. 

1. Implement a Currency Transaction Tax (CTT, also known as a Tobin Tax) of at least 0.005% on international currency transactions. At that rate, such a tax could generate a minimum of $33 billion per year if applied to the four major international reserve currencies (US Dollar, Yen, Euro and British Pound). If more currencies were included, this figure could increase to as much as $50bn. A slightly higher rate could also provide more resources for government spending in rich countries facing cuts in services.

2. Transfer half of rich countries’ new allocations of Special Drawing Rights to the poorest countries. SDRs are a form of IMF quasi currency distributed to member countries, which can be exchanged for hard currency. The April G20 agreed to create $285 billion dollars worth of SDRs, but $177 billion of that will go to its richest members.  Why not agree to transfer half of that, US$89 billion, straight to the poorest countries?

3. Deal with tax havens. Put in place a multilateral agreement for the automatic exchange of full tax information and require country-by-country reporting of subsidiaries, sales and profits by multinational corporations, to help developing countries recoup lost tax revenue. This could result in a further US$160 billion for poor countries, and at the same time would enable rich countries to recover their lost tax revenues.

$280bn. A lot of money, no? Yes and no. In fact, it is roughly double what was forked out to rescue the insurance giant AIG, or the cost of two years of US operations in Iraq. It’s all about priorities.

This post is based on ‘Money for Nothing‘, a new Oxfam briefing ahead of the G20 Finance Ministers’ meeting in London

Why my wife is half-right on the Tobin Tax

I’ve always been a bit of a Tobin Tax sceptic, which made for interesting domestic dynamics when my wife Cathy was director of War on Want, one of the main TT advocates in the UK (she’s since moved on to become a psychotherapist – I say it’s a natural progression from NGOs; she doesn’t think that’s funny). Now, however, even Dani Rodrik is weighing in on the issue, so it’s time to have another look. Read More …

Meltdown Miscellany: stats and soundbites on the development impact

Here are a few of the things that have crossed my screen on the impact of the meltdown on developing countries. I would really appreciate suggestions for more sources on this – especially on the distributive impact within and between countries. Read More …