Many of you have probably heard of the “Robin Hood tax“—now under study at the European Commission—a well-chosen term for what economists refer to in their jargon as a Currency Transactions Tax or ‘Tobin tax.” But political leaders in both Europe and U.S.A seem to avoid the issue, caught in a squeeze between the public opinion and pressure from the big financial corporations.
“A Robin Hood tax is Obama’s lifeline.”
A taxation of financial transactions is the agenda again, as it always is in troubled economic times. In Europe most people favor a so called “Tobin tax” at the moment, but the strong forces of the financial industry is as always fighting back. So, who will win this time? Well, that depends on how many men the “Robin Hoods of politics” are hiding in the Sherwood Forrest. Here’s professor George Irvin to explain:
The basic idea is that the word financial market is now so large that taxing it at some minuscule rate (0.05%, or 50 euro cents in every €1,000 traded) would rake in billions, Irvin writes in his latest blog post at EUobserver.com.
Just to give you some idea, the Bank of International Settlements (BIS) estimates that in 2007 the world’s yearly currency transactions totaled US$800tr (that’s fifteen time world GDP, or nearly a quadrillion dollars) of which 80% is purely speculative.
A 0.05% tax on this annual turnover would yield 400 billion dollars (about €250bn) each year, enough to fight poverty, deal with global warming and have shed-loads of money left over for repairing our government budgets.
Because almost all such trades are computerized, software already exists for collecting such a tax wherever it takes place.
And even if financial markets were able to avoid tax on half that sum, we’d still be getting US$200bn per annual. It’s a no-brainer, really.
The pros and cons
Or is it?
A lot of bankers and financial journalists oppose it. In essence, the “devil’s advocate” argument against such a tax consists of four questions:
(1) will the proceeds reach the right people?
(2) is 0.05% high enough to stop speculative activity?
(3) will the bankers find a way of “passing it on”? and
(4) can it work unless the US supports it?
“Will it reach the right people?” is always a concern, but to reject a Robin Hood tax on those grounds is a bit like rejecting aid to the victims of the Haitian earthquake on the grounds that some small percentage of them are thieves.
Is 0.05 high enough? That’s a good question: James Tobin originally proposed 1% in the 1970s, then decided two decades later than 0.1 would be enough to “place grit in the wheels of the speculators.”
If not, there are at least two remedies.
First, the tax could be varied according to the type of trade involved, with higher rates on, say, short-term derivatives than long term futures contracts.
Secondly, to avoid foul play, such a tax could be complemented by a new bankruptcy regime requiring unsecured creditors and other counter-parties to be forcibly and swiftly converted into shareholders, until the failed institutions are adequately recapitalized.
Will bankers “pass it on”? The answer is that where the tax is low and the market highly competitive, it probably won’t be worth their while? After all, Britain levies a stamp duty of 0.5% on everyday share trades, and nobody argues that that banks and brokers ‘pass it on’ to the average citizen.
Banks and brokers “take a fee” on such trades, just as they do on currency trades, but the fee is paid by the counter-party.
What if the U.S. doesn’t play ball?
Finally, can it work if the US is opposed?
But who in the U.S. is opposed? Tim Geithner, Obama’s Treasury Secretary, seems opposed, but he’s an ex-banker who has worked closely with Bush’s Treasury Secretary, Hank Paulson.
Larry Summers, Obama’s chief economic adviser, was an early advocate of a Tobin tax.
Obama himself is keeping quiet for the moment because he’s anxious not to make any more Congressional enemies.
If Germany, France and Britain—all of whom support some form of Robin Hood tax—were to proceed unilaterally, it is hard to see how the U.S. could oppose it.
Moreover, with the US budget deficit approaching 10% of GDP and much of the U.S. press calling for budget balance.
A Robin Hood tax is Obama’s lifeline.
Who’s betting billions against the euro at the moment? The big financial speculators, that’s who!
A Robin Hood tax is both quite feasible, and it imaginatively reflects the public’s desire to make the speculators pay for the havoc they have caused.
By George Irvin
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