The following article appeared on ConservativeHome and provoked a good number of comments, mainly in opposition to my points, from the right. I believe in free thought and freedom of expression and that political parties are, by their nature, broad-based coalitions with different strands of thought running through them and my advocacy for the Robin Hood Tax is a personal and considered opinion and does not represent Conservative Party policy.
One of the lines we keep hearing from the Right is that a Financial Transaction Tax (aka Robin Hood Tax) is a good idea but it would never work. Sorry to break it to you all, but we already have lots of transaction taxes and they're working just fine. There's a 0.5% tax on buying and selling shares in the London Stock Exchange. In the US, a small tax on transactions finances the securities and exchanges commission.
So we know it works - and it's already bringing in billions of dollars to governments around the world. The question is really rather simple: do we want to do it?
Let's remember where we are. The actions of the financial sector have wrought havoc around the world. It goes far beyond the trillion pounds or so that the UK Government used to prop up the banks here. People have lost their jobs, export markets painstakingly built up over years have been decimated, and social spending worldwide is set to be slashed. Ideas like the insurance levy are just about setting up a new fund to bail out the banks again should they hit another pothole - it would do nothing to redress the harm that's been done to society as a whole.
As our party’s candidate in Swansea West, I know full well the impact of the economic recession on the poorest people in our communities here in the UK. Swansea has two of the poorest ten wards in Wales, generational joblessness, low educational attainment and a loss of hope for the future are crippling such communities. Without new ways to raise money like the FTT, sooner or later, the people, like my constituents in Swansea, who have already paid once for the crisis through lost jobs and public service cuts will be asked to pay again through rises in income tax or VAT. This really isn't fair.
A financial transaction tax is the only idea on the table that would make sure that banks pay back some of the costs of the financial crisis. The Robin Hood Tax campaign calls for a tax designed in such a way, that banks pay the majority of the tax. It would be charged on 'wholesale' financial transactions - that's the big trades made by banks and other institutions. People changing money at the airport - the so-called 'retail' market - would be exempt. We already know that when prices change in wholesale markets they tend not to be passed on to the retail markets, years of real-life experience bear that out.
Of course it would have an effect on the financial markets. For some people, like Lord Turner and former HSBC Chief economist Roger Bootle, that's exactly the point. Far from increasing volatility, it would dampen down the most risky and volatile trades, and go a small way towards bringing finance back to what it is actually for, which is oiling the wheels of the bits of the economy that make and do things. The sector might shrink a bit too - but given how much it grew before last year's crash, that would just mean getting us back to where we were a few years ago.
In the end some people will always rail at the idea of taxation to help those most in need. Those people probably won't like a financial tax any more than they like any other tax. But for those of us in the real world, where today's politics are all about where the public spending axe should fall and how the government is going to put up taxes to plug the deficit, a transaction tax is a real option.
The Robin Hood Tax - sounds fair to me, not fairytale.
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I think you've got two things absolutely spot on:
ReplyDelete1. The Robin Hood Tax rocks - I paraphrase slightly.
2. Tht political parites are broad tents with different ideas running through them - for too long our politicians have been 3 line whipped iunto voting with the government - if they all follow one set of ideas I don't see the point i constituency based parliamentarians - or having councils.
"There's a 0.5% tax on buying and selling shares in the London Stock Exchange...So we know it works.."
ReplyDeleteAhem...a key caveat being that the UK stamp duty tax gives exemptions to market makers at large banks; it is only the small investor that pays this transaction tax, another classic 'stealth tax' that we have seen so much of in recent years...
But you are right, we do know how a 'Robin Hood Tax' would work, because Sweden had a financial transaction tax between 1984 and 1991, an experience that can quite simply be described as disastrous:-
In January 1984, Sweden introduced a 0.5% tax on the purchase or sale of an equity security. Thus a round trip (purchase and sale) transaction resulted in a 1% tax. In July 1986 the rate was doubled. In January 1989, a considerably lower tax of 0.002% on fixed-income securities was introduced for a security with a maturity of 90 days or less. On a bond with a maturity of five years or more, the tax was 0.003%.
The revenues from taxes were disappointing; for example, revenues from the tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kroner per year. They did not amount to more than 80 million Swedish kroner in any year and the average was closer to 50 million.
In addition, as taxable trading volumes fell, so did revenues from capital gains taxes, entirely offsetting revenues from the equity transactions tax that had grown to 4,000 million Swedish kroner by 1988.
On the day that the tax was announced, share prices fell by 2.2%. But there was leakage of information prior to the announcement, which might explain the 5.35% price decline in the 30 days prior to the announcement. When the tax was doubled, prices again fell by another 1%. It was further felt that the taxes on fixed-income securities only served to increase the cost of government borrowing, providing another argument against the tax.
Even though the tax on fixed-income securities was much lower than that on equities, the impact on market trading was much more dramatic. During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. On 15 April 1990, the tax on fixed-income securities was abolished. In January 1991 the rates on the remaining taxes were cut in half and by the end of the year they were abolished completely. Once the taxes were eliminated, trading volumes returned and grew substantially in the 1990s.
In addition to the Swedish experience with such taxes, there is considerable research that demonstrates that "a transaction tax is likely to amplify, not dampen, volatility in foreign exchange markets."
It is misleading for supporters of a Tobin/Robin Hood Tax to state that it will only impact the banking sector that apparently 'caused the recent financial crisis'. Many entities that played no part in the
recent financial crisis would be put out of business as a result of a Tobin Tax. Mass job losses would be inevitable. The whole financial sector would be hit adversely, especially small traders and investors.
Ultimately, market makers (if they still exist,
that is) would increase their bid-ask spreads to cover the additional cost of transaction taxes, and these costs would simply be passed on and borne by end-users such as investors, savers, pensioners, farmers, airlines, or indeed any other economic agent that chooses to manage its financial risks or exposure to commodity and financial price fluctuations. It is difficult to imagine who would NOT be impacted adversely from the indirect effects. Ironically, it may be the large banks themselves that benefit from the elimination of competition in the shape of market makers that played no part in the recent financial crisis.