Saturday, February 13, 2010

The Robin Hood Tax debate: the financiers rack their brains to object

Over on the FT there is an attempt at arguing against the Robin Hood Tax (aka Transaction Tax, Tobin Tax or TT), which is a proposal to levy a 0.005% levy on each financial transaction on the money markets, and send it to alleviating climate change and poverty in the poorest countries.

Here are the best arguments that the great and the good of the financial world can muster:

Mike Devereux, director of the Centre for Business Taxation at Oxford University says:
Banks would pass on a global tax to their customers. It would be a stealth tax because no one would know who was actually worse off as a result of it.
Not all banks have identical amounts of financial transactions. Sudden increases of banks charges by some banks would be a signal that they are carrying out a great number of deals, which would be an index of speculative activity, which might in turn cause prudent customers to transfer their money to banks that operate in a safer way. In other worlds, traditional bankers.  So the TT has the same effect as a Glass-Steagal Act, separating casino banking from deposit/loan banking.

Other concerns include the risk of damaging the liquidity and depth of financial markets.
Oh come off it. A tax of 0.005% on financial transactions, on an industry that can afford bonuses measured in billions?

It could offer avoidance opportunities.

Bolleaux. The beauty of the TT is that the computer programme can deduct the tax as the transaction goes through. Also, although trades are made all over the world, the majority are settled at a single London based institution. 

Ian Young, of the Institute of Chartered Accountants in England and Wales says:
The worry is it would send the market makers off established markets down alleys and into back streets where the tax won’t apply.
He means the cowboy arena of CDS and CDOs, which need to be regulated and taxed in their own right.

So that's it, so far.
A more real argument comes from the Long&Wrong blog, a trader who calculates that it would triple his transaction costs, which are 10-15% of his profits.
This assumes that trading will continue at the previous pace. Part of the rationale for the TT is to damp down the uninhibited frenzy of the trading, forcing them to spend more than half a nano-second in thought before they press the button. If the tax would have a really damaging effect on the traders (who do have a valid role in setting prices), then it could be further reduced.

Long&Wrong also complains that the tax would be levied on his loss-making as well as his profitable transactions.
First reaction is, well, tough. That's the market for you.  Which is a rather unfeeling reaction, but it is a tax on gambling activity, and losses are an intrinsic part of gambling. (Which reminds me - is common gambling still tax free??). It might on the other hand be possible to set the tax on profitable transactions.

All taxes are touted as the end of civilisation as we know it by those affected by the tax. This is normal. What I find surprising is the weakness of the case offered by the financiers. Given that they are paid six-figure salaries and bonuses, you would think they could do better than this.

Aha, more arguments from Guy of Gisbourne, named after a dastardly mercenary bounty hunter whose head, disfigured beyond recognition, ended up on the end of Robin Hood's bow. As well as the above, he adds:

It is completely ineffective in terms of solving the problems which caused the financial crash 
So? It is not aimed at solving all those problems at a stroke. Its aim is to damp down the rapidity of trades, and to redistribute wealth. Paul Krugman states that "repo" ultra short term transactions were a factor in the Credit Crunch.

It acts as a tax on business

Er...yes. Your point being?

If not applieduniversally, banks will move out of countries where it is applied.
So apply it universally then. The US is against it at the moment, but its power is waning, and a week is a long time in politics.

Let's do something else instead, like bailout insurance, or making banks small enough to fail.
This is an example of NeMiDPWAL,  "never mind the dog poo, what about the litter". Also known as the Red Herring.

PS Paul Krugman is on the side of the Merry Men. He concludes "the Obama administration needs to free its mind from Wall Street’s thrall. " Amen.

No comments: