A Maid Marian of sorts, I like the idea of taking from the rich to give to the poor, and I certainly believe in a low-carbon economy, so it’s pleasing to see momentum building for the causes behind a financial transaction tax in Europe and the UK. But I’m not convinced such a tax is a sustainable way to create a more equitable economy, nor that politicians can agree on its price and purpose.
It is a coalition of 115 UK organisations including ActionAid, Oxfam, Friends of the Earth, and Save the Children. It claims to have a quarter of a million supporters and is endorsed by more than 350 economists and politicians from all main political parties.
They are all worthy organisations, and poverty and climate change are life-changing causes.
Earlier this month representatives of the group landed on the doorstep of Prime Minister David Cameron at No 10 Downing St, to argue for the adoption of such a tax. (It was a well-timed visit, with a media scrum on location for a press release on Rupert Murdoch’s withdrawal of the BSkyB bid.)
On the Continent, momentum has been building in favour of a Robin Hood Tax for months.
Richard Gower, policy adviser at Oxfam, in the UK, says President Nicolas Sarkozy has made the issue a priority of France’s G20 Presidency and Germany is also supportive, with Angela Merkel having suggested FTTs would be a good way of raising the money needed to protect people in poor countries from climate change. Spain, Finland, Luxembourg, Belgium, Austria, Greece and Portugal also support FTTs. But Gower says the dividends must go towards fighting climate change and poverty, not topping up government budgets.
Meanwhile the European Commission has proposed for EU-wide FTTs of 0.1 per cent on stocks and bonds and 0.01 per cent on derivatives, in a bid to raise €30 billion for its general budget.
The EDHEC-Risk Institute, which is headquartered in France, has written an open letter addressed to the European Internal Market and Services Commissioner, Michel Barnier, warning of the inadvisability of imposing a “Tobin tax” on financial transactions in order to fund the future European budget. Its letter makes no mention of whether such a tax should be used to fight poverty and climate change.
A Tobin tax, named after Nobel Laureate economist James Tobin, was originally defined as tax on all spot conversions of one currency to another, intended to put a penalty on short-termism.
EDHEC’s recommendations are structured around the theoretical and empirical evidence on transaction taxes, as well as the implementation challenges.
It says the findings of theoretical models are mixed about the effectiveness of the Tobin tax to reduce volatility and improve welfare.
It will lead to a reduction in the trading of securities on which the tax is imposed, which also means reducing speculative activity in financial markets, and driving away investors who provide liquidity, stabilise prices, and help in the price-discovery process.
The net effect on volatility is likely to be small, the letter says.
EDHEC also outlines the substantial body of empirical work studying the effect of a transactions tax on volatility of the price of financial securities. Most of these find that a transaction cost either fails to reduce return volatility, or leads to an increase in volatility.
The imposition of a transaction tax also leads to a reduction in the demand for that financial security, and thus, a drop in its price.
The implementation of such a tax also creates problems. EDHEC argues it is difficult for regulators to distinguish between transactions related to fundamental business and those that are purely speculative. It is also difficult to determine the appropriate rate for the Tobin tax that would reduce the activities of investors who are not fully rational but not drive away trade by rational investors.
And, it concludes, from the point of view of speculators, unless every country in the world introduced the Tobin tax, it would be easy to circumvent the tax by routing transactions through countries that do not impose the tax.
The advent of globalisation, and the opportunities for cross-border trading, present many opportunities but also increase complexity.
Life was so much simpler in Robin Hood’s day: the bad guys wore black, the good ones wore green, and so stealing a bag of gold from a dishonest prince was a pretty straight-forward way to live. These days, the colours are the same, but the bags of gold are infinitely more complicated.