Not wanting to be left behind by various actors, pop stars and other members of the glitterati, the European Commission president Jose Barroso played his popular card in his EU address on Wednesday and lent his support to the zeitgeist of banker hatred by suggesting that a financial transaction tax, the Tobin tax, or what’s come to be known as the “Robin Hood” tax should be implemented. Apologies for over using the Rome burns whilst he fiddles analogy, but if Greece takes a bath and goes into an uncontrolled default spiral and it spreads to Italy, which is a $3 trillion bond market, then Barroso’s plan to raise €54 billion a year would be rendered impotent and irrelevant. Under Barroso’s proposal, which he claims has the support of 65% of European citizens, a minimum tax rate on trading of bonds and shares would be set at 0.1% and 0.01% for derivative products and be levied on trades where at least one of the institutions is based in the EU.
Opponents argue it could stifle growth and damage the City. Sam Bowman, head of research at the Adam Smith Institute, said: “The Tobin tax or financial transaction tax proposed by José Manuel Barroso would achieve exactly the opposite of what the EU wants. It would increase volatility by forcing traders to make fewer but bigger trades, which would create bigger lurches up and down on financial markets.”
This myth with regards to the transaction tax needs de-bunking, the reputation of the mythical Robin Hood and his merry band of vagabonds in tights may have gone uncontested for far too long, but that’s a story for another day, quite simply the FTT concept won’t ‘work’.
Amongst the many words you could immediately throw at the proponents of the tax would be “algorithm”, or how about these three words, ” high frequency trading”? The irony that the investment funds and other special investment schemes actors and pop stars prefer to buy into, in order to avoid tax, are probably under-pinned by HFT algo trading should not be overlooked. By value, HFT was estimated in 2010 by consultancy Tabb Group to make up 56% of equity trades in the US and 38% in Europe. According to data from the NYSE High Frequency Trading grew by approx. 164% between 2005 and 2009. As of the first quarter in 2009 total assets under management for hedge funds with high frequency trading strategies were $141 billion. Placing a number on the value of trading, or the volume of trades made, to leave this figure under management is incalculable. How would you tax billions of single trades that can be done in seconds or mili seconds?
Before debunking the idea completely it’s worth engaging in a short history lesson of the original idea behind the Tobin Tax, particularly as the original concept has no relationship with the ‘revenge and justice tax’ so many appear to want implemented. Specifically he saw it as a solution to smooth out international imbalances, not to raise tax internally from the banking sector in isolation. Whilst he proposed that the IMF or world bank should be the custodian of the tax receipts it (the tax) was to be used as a mechanism to counter the imbalance caused by excessive trading of spot currency transactions only. Both he and Keynes before him saw a transaction tax as a reforming tool. It must also be noted that the financial world is unrecognisable now from that which Tobin and Keynes knew, the monitoring and regulatory framework they visualised to oversee such a complex initiative would have been considerably ‘lighter’.
James Tobin – “currency exchanges transmit disturbances originating in international financial markets. National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exchanges, without real hardship and without significant sacrifice of the objectives of national economic policy with respect to employment, output, and inflation.”
Tobin saw two solutions to this issue. The first was to move towards a common currency, common monetary and fiscal policy, and economic integration. The second was to move toward greater financial segmentation between nations or currency areas, permitting their central banks and governments greater autonomy in policies tailored to their specific economic institutions and objectives. Tobin’s preferred solution was the former one but he did not see this as politically viable so he advocated for the latter approach:
“I therefore regretfully recommend the second, and my proposal is to throw some sand in the wheels of our excessively efficient international money markets.” Tobin suggested a tax on all spot conversions of one currency into another, proportional to the size of the transaction.
“It would be an internationally agreed uniform tax, administered by each government over its own jurisdiction. Britain, for example, would be responsible for taxing all inter-currency transactions in Eurocurrency banks and brokers located in London, even when sterling was not involved. The tax proceeds could appropriately be paid into the IMF or World Bank. The tax would apply to all purchases of financial instruments denominated in another currency from currency and coin to equity securities. It would have to apply, I think, to all payments in one currency for goods, services, and real assets sold by a resident of another currency area. I don’t intend to add even a small barrier to trade. But I see offhand no other way to prevent financial transactions disguised as trade.”
In the development of his idea, Tobin was influenced by the earlier work of John Maynard Keynes on general financial transaction taxes. Keynes’ concept stems from 1936 when he proposed that a transaction tax should be levied on dealings on Wall Street, where he argued that excessive speculation by uninformed financial traders increased volatility. For Keynes (who was himself a speculator) the key issue was the proportion of ‘speculators’ in the market, and his concern was that, if left unchecked, these types of players would become too dominant. Keynes wrote;
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation. The introduction of a substantial government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States”.
Whilst a terrific political soundbite and theory politicians, actors and other celebrities would be best avoiding championing the idea before consulting with the banking fraternity. In every other way the banking and political elite are wedded at the hip, it therefore wouldn’t require much imagination for Mr Barroso’s office to call, for example, Nat Rothschild of the Rothschild banking dynasty and have a quick chat, or another of the many contacts he’ll have on speed dial..”hey, Nat, sorry to interrupt your general ruling of the universe gig, how’s things? This Robin Hood tax idea, what d’ya think, can I make it fly?..Nat…Nat?”
Failing that Barroso could call Tim Geithner’s office who would simply say “no”. The USA admin’s opposition to such an unworkable tax has been unbroken since it was first muted. How can a financial transaction tax be applied in Europe and not in the USA, or China, or the other BRICS nations? Once again the original concept put forward by Tobin required total cooperation from all central, investment and retail banks. Would the PIIGS get special dispensation? There’s also another issue, looking at forex transactions in isolation the tax would have to be applied to all retail exchanges, therefore the cost of basic ‘holiday money’ would go up, you can bet Barosso’s 65% public support would vanish then. Also would the cost spread to writing cheques, credit card payments? It’d have to and if not you can bet the banks would introduce it to recover the implementation cost of the Robin Hood tax. You’d think that half of one percent wouldn’t really create a dent, however, the cost to implement such a scheme would have to be underwritten somewhere by some shadow NGO, what that figure would be and ultimately who’d pick up the tab is anyone’s guess. As a can of worms it’s best left unopened, you’d have more chance of herding cats than to put the theory into practice.
Robin Hood was a highly skilled archer and swordsman known for “robbing from the rich and giving to the poor”assisted by a group of fellow outlaws known as his “Merry Men”. Robin Hood became a popular folk figure starting in the medieval period continuing through modern literature, films, and television. In the earliest sources Robin Hood is a yeoman, but he was often later portrayed as an aristocrat wrongfully dispossessed of his lands and made into an outlaw by an unscrupulous sheriff.
If it’s more tax we’re collectively after then there’s a simple mechanism already in place which has been operated since the days Robin Hood decided he didn’t want to be ‘in the club’ of tax payers anymore he just wanted revenge and his own form of justice. Raising personal taxes and clawing back the taxes avoided by employing the best accountants will equal more far revenue than the FTT can raise annually, I’m sure the wealthy members of the celebrity industrial complex won’t mind chipping in.