Why Owen Barder is (mostly) wrong to oppose the Robin Hood Tax

RHTlogo-1023x66 Owen Barder has a thought-provoking post setting out his objections to a financial transactions tax (FTT) in response to the launch of the Robin Hood Tax campaign. I’ll run through the areas where we disagree, then where we agree, and finally the areas where I am still sitting painfully on the fence. Where we disagree: First the framing: Owen claims the FTT tries to kill three birds with one stone – redistribution, curbing speculation and finding money for climate change adaptation and aid. I would argue that one of the reasons why the FTT has got so much more momentum than it’s forerunner the Tobin Tax, is precisely because it has abandoned the effort to throw ‘sand in the wheels’ and curb things like currency speculation. Owen is right that a 0.005% tax on exchange trades would hardly have deterred George Soros from breaking the pound in 1992. [caption id="attachment_1924" align="alignleft" width="155" caption="The Sun explains currency speculation"]The Sun explains currency speculation[/caption] So the FTT is actually a progressive tax, used for filling fiscal holes in the rich countries, paying for climate change adaptation and mitigation in developing countries, and funding aid pledges to the poorest countries. Next the issue of ‘incidence’: All taxes get paid by someone  – obviously money doesn’t come out of thin air, (although in the weightless world of finance, it sometimes seems to come pretty close). The money raised will of course have an impact on the banks. But NGOs’ own analysis and research by long time (and heavily scrutinized) FTT wonk Rodney Schmidt suggests that the banks could contain a large part of the initial burden of taxation without passing it on to consumers. Rodney has looked into previous fluctuations and found ‘it is not at all clear that there is a strong correlation between trading volume and bank profits.’ He adds: ‘In the wholesale foreign exchange market banks themselves will pay the tax, because there are a lot of them trading constantly with each other in a competitive market. However, in the equities market, there is no wholesale market at all, so it will be much easier for big banks to pass on the cost of trading, including the FTT, on behalf of clients to the clients themselves.’ So the tax on currency trades and some other bank activities would not have a big impact on the rest of us, but as Rodney says, a wider version of the tax that includes trading in shares is likely to have at least some knock-on effects. This definitely deserves more study both on the likely distributive impact, and possible measures to prevent costs being passed on in regressive ways, but research alone will struggle to find all the answers – why not introduce the tax on currency trades first, then extend it slowly and monitor impact? In the end, even in share trading, the knock-on effects are likely to be a small proportion of the overall amount raised, so the tax is likely to still be very progressive, unlike many other forms of taxation, such as VAT. Does Owen oppose the UK’s existing 0.5% stamp tax on share trades for the same reasons? Saying ‘there’s no point in taxing banks, they’ll just pass it on’ could equally apply to any form of corporate taxation, yet Owen apparently supports many of those. And let’s not forget that banks are seriously under-taxed compared to other sectors. In similar vein, Matthew Lockwood suggests that a global wealth tax would be more progressive and transparent, to which Owen adds a long list of other progressive alternatives (extending national insurance and the like). This is classic economic debate – identify your ‘first best solution’, and then contrast it in lofty tones with all the ‘second best’ ones. But there’s usually a reason why the first best ones are not already in place – it’s called politics. There is currently a political opportunity presented by the global financial crisis to introduce a (very) small tax that will raise a bundle of cash for good causes. I do not think that window exists for the alternatives that Matthew and Owen are proposing. So guys, if you can’t compete with the combination of volume, progressivity and political viability of the FTT, why not get behind something that might actually happen? This is not an academic exercise, but a serious effort to raise desperately needed cash. Finally, Owen’s argument that the FTT will be cyclical and so will add to the volatility of aid, doesn’t hold water. Sticking the revenue in a fund and smoothing out the bumps is relatively straightforward, as numerous examples of national commodity stabilization funds have shown in recent years. Where I agree with Owen is on his view that an FTT won’t have much of an impact in regulating financial markets – absolutely, that needs a separate approach (in fact, the absence of a major impact on the workings of the market is precisely part of the FTT’s viability!) The ‘socially useless’ activities of the sector need to be curbed (thanks Lord Turner), along with volatility, which causes huge damage to the real economy and the ‘privatise gains, socialize losses’ logic of periodic bank crises that ratchet up public debt and inequality. Regulate away, people. And finally, where I’m agnostic is over Owen’s argument that the FTT is in a way too easy. He wants to join battle with those who oppose aid, win the argument for ‘good aid’, and then get people to willingly cough up the money needed. On the one hand, that’s a strong ‘social contract’ kind of argument, stressing the importance of the political and financial links between citizens and state, (albeit in this case limited to the donor countries), and it forces the aid industry to take issues of quality and accountability seriously. But on the other, it seems a little extreme/purist. Do we just tell the millions around the world they will have to wait for schools, hospitals and relief from climate change until we convince every last tabloid reader (and even more difficult, their editors and owners) of the effectiveness of aid? Of course we need to continue to work on public opinion and the quality of aid – and we do. But presenting this as a choice between supporting the FTT and everything else we do on aid is entirely false – we are, believe it or not, capable of working on more than one thing at the same time!  One last whinge. A lot of the commentaries on the launch of the tax have been very sniffy about the role of celebs like Bill Nighy and Richard Curtis. I don’t think that’s fair – they have been concerned with development issues for a long while (since well before Make Poverty History) and actually know a good deal. But I would say that, wouldn’t I. Why not judge for yourself on the basis of this clip of them appearing on the dreaded Breakfast TV sofa to launch the campaign. ]]>

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Comments

8 Responses to “Why Owen Barder is (mostly) wrong to oppose the Robin Hood Tax”
  1. Hi Dunks – good to see you slapping us “first best” policy wonks back down into our holes where we belong…
    Let’s start with my original post (http://politicalclimate.net/2010/02/10/tobin-or-not-tobin/). I didn’t actually say that an increase in taxes on wealth would be “more progressive and transparent” than an FTT. I said that it keyed more directly into a deeper logic. You can dismiss this as an “academic exercise” if you want to; I see the notion that there is a link between historical carbon emissions, the contemporary distribution of wealth and the need to finance adaptation in poor countries not as a “first best solution” to be pronounced in “lofty tones”, but rather as an important broad principle, from which could be developed some powerful political narratives. Historical responsibility is almost always framed in terms of nations, provoking a defensive response, and surely a new perspective that recognises and uses that fact that not everyone in the North has done equally well out of the history of energy intensive capitalist growth could be useful.
    Paying for adaptation is going to be a long term issue, and having a campaign that (rightfully) grabs an opportunity (although more on that below) should not be a reason for banning an exploration of wider ideas. OK, so I used the Robin Hood Tax launch as a peg to hang my post on – but, hey, that’s blogging. If a campaign supported by everyone from Bill Nighy to Angela Merkel can be so threatened by some thinking around the issues from an ultimately sympathetic viewpoint, it’s not very robust is it?
    Now let’s talk about the politics. You say you see a window for the FTT which isn’t there for a more direct tax on the wealthy. You could be right, but I think there are good counter-arguments. First, in the wake of the financial crisis, people hate bankers, not financial transactions. They want the bankers’ wealth taken away from them. They want financial markets regulated.
    Second, and within that mood, increases in taxes on wealth are a real proposition. Despite his embattled political position, Obama is putting forward his proposal to reverse the Bush tax cuts for the wealthy in his 2011 Budget.
    On the other side of the equation, the incidence issue of a FTT is not just a nerdy debating point for pointy-fingered people, but a potential political weakness. Its opponents could try to make much of the likelihood that the tax will be passed through to ordinary people. Don’t forget that, in addition to the speculators and the banks, a huge range of companies rely on futures and options to hedge currency risk in international business and trade transactions – the hedgies will pass the tax on to them, and they’ll pass it on to us. Think what the Daily Mail could do with that if it wanted to.
    Lastly, however the money is raised, I also think you shouldn’t underestimate the importance of the politics of spending it – the last bone picked with Owen Barder in your post. Last September, we polled over 3,000 people in marginal constituencies to test views on various climate-related policies. Sadly, financial transfers to fund adaptation and mitigation in developing countries had little strong support, which also appeared vulnerable to arguments that corruption will prevent money from reaching the people it should. As you say, Oxfam and others continue to work on the “quality of aid” (as you put it), but I wouldn’t see that as something you should do separately from making the case for a FTT.
    So – can we “compete with the combination of volume, progressivity and political viability of the FTT” or should we shut up and “get behind something that might actually happen”? God, what a bleak macho choice – what happened to being able to test, debate, develop from within a broad shared position? I’d like to think that being in favour of an FTT and wanting to develop a wider narrative and additional policy ideas weren’t mutually exclusive. For the record I am happy to get on board the FTT campaign bus. I just don’t want to leave my brain behind.

  2. Duncan

    Wow, now that’s what I call a comment Matthew. I stand corrected. Opportunism leavened by critical debate sounds about right. And yes, the incidence question needs more research, (we’re on the case) and the issue of whether the money would ever escape the clutches of northern treasuries to be spent in poor countries is the one that nags away at me.

  3. Dear Duncan,
    I think the main issue is linking a specific tax with a totally and utterly unrelated service to be financed. It might look like a short time financial win for the environment, but what the global environment needs most now is good global governance. The FTT might be good in its own, but as it is conceived now, it would be bad governance.
    Earmarking taxes randomly across sectors, e.g. creating the FTT for financing environment and development is bad governance, because funds are not allocated according to the priority of the government, but according to the accidental income from a specific tax. Moreover, the level of the tax on the financial sector will not only be determined on basis of the perceived optimal tax to limit transactions, or the equitable burden sharing for all government actions. It will mostly be determined by the power of the environmental/developmental lobby to extol taxes.

  4. Lumping together “public opinion and the quality of aid” makes it sound like you think the growing concerns about aid effectiveness are simply PR problems.
    But then if that is how you feel, letting people know that probably doesn’t help your credibility very much does it?

  5. Duncan

    Hi Justin, I’m certainly not ‘lumping them together’. We need to work on the quality of aid because we want aid to have maximum beneficial impact. And on public opinion because we want to strengthen both the understanding of development, and the support for good quality aid.

  6. Tom Martin

    Just on a technical point Duncan, I presume you are aware that “recognised intermediaries” (banks to you and me) are explicitly exempt from the 0.5% tax on shares that you mention in your blog. There’s not much point considering to what extent banks pass that tax on because banks aren’t eligible to pay it.
    The people who designed that tax knew that if it applied to every transaction it would knacker the functioning of the market and increase the overall cost for end customers, which is why they exempted market-making activities.
    The trouble I have with the proposal is that 0.05% looks like a small number to people who haven’t the faintest idea whether that’s actually big or small, whether it would be a good idea or damaging. It’s about appearance rather than practicality.
    A is a bank with a £10m surplus of money to lend overnight. B is a bank with lots of available securities that A would take as collateral and a £10m funding shortfall. Today that situation has a simple resolution: an overnight repo. The interest on that transaction would be about £1,000.
    The Robin Hood tax at 0.05% would charge the banks £5,000 for doing that transaction. I despair for anyone who thinks that transaction will still go ahead – Bank A is better off sitting on the cash and earning no interest at all. There won’t be any tax collected on all these transactions that will no longer happen.
    Claiming that the tax is very small and will have little effect, while simultaneously being very big and raising loads of money, is just plain devious. They can’t both be true. Pick one and have a little courage.

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