Have you heard of the “Robin Hood tax”?
03/06/2013 | FxM – Evan Brock Gray
Maybe the financial transaction tax (FTT) sounds more familiar, or maybe not. So what is it?
This is a small tax on large financial transactions whose proceeds will be put towards the needs of the common people on the basis of civil justice. Just like the English folk hero, this tax takes from the “rich” (meaning those in financial markets making vast amounts of money whose activities don´t actually serve the real economy) and gives to the “poor” (meaning those adversely affected by the economic recessions caused by the current financial crises), i.e. 99% of us.
There are 11 Eurozone countries looking to implement this type of tax at the beginning of 2014, including Germany, France, Italy and Spain. However, the British government is opposed to the Robin Hood Tax saying it will have damaging repercussions on London´s financial center and, therefore, on the British economy. The U.S. government has imposed similar duties with the Dodd-Frank Act, but only for the trading of derivatives (financial instruments or contracts created between two parties whose price is derived from the price of one or more underlying assets) and, for the moment, has not been willing to expand the tax to other areas. 40 countries in all have or have had in this type of tax on financial trading transactions (including the U.S. not so long ago with the Tobin tax on speculative currency trading).
The movement for the Robin Hood style FTT began in 2010 and is currently being proposed in the U.S. as HR 1579: Inclusive Property Act of 2013. There is also a parallel campaign gaining strength in the U.K. This idea is to turn the global banking and financial crises into an opportunity by charging a tax on certain transactions of only 0.005%, 0.1% or 0.5% (depending on the type of trading or financial product) which could result in the collection of around $350 billion annually (£250bn).
The funds collected from the tax would be used in the following ways (with available data):
– Job creation (9m jobs in the U.S.),
– Mortgage and housing improvements (1.75m U.S. homes not foreclosed and £2bn for U.K. housing benefits and £5bn for home insulation),
– Provide better health care (expand AIDS treatment, help 41m U.S. families find insurance and provide free health care for 200,000 people in the U.K.),
– Improve child education ($6bn for every child in the world to attend primary school) and end child hunger (food plans for 25m American families),
– Investment in infrastructure (mass transit projects, environmentally responsible manufacturing and an infrastructure bank to promote projects)
– Environmental improvements ($2bn for wind turbines and green energy and $11bn to adapt all of Haiti for flooding).
Taking these benefits into consideration, there are two main ideological arguments that support the FTT. The first is that banks and financial institutions should take more responsibility for their role in the financial crisis by making a greater contribution to public finances, especially because public funds were used in bailouts and government participations. The second reason why a FTT would be beneficial is because it would encourage traders to be more responsible since increasing the costs of speculative trading would better reflect an asset´s prices and boost the volume of long-term trades (because high-speed, short-term trading would become more expensive).
But there are critics of the FTT, just as not everyone was happy with “public justice” of Robin Hood himself. Ex-governor of the Bank of England (Mervyn King) has said he doesn´t know anyone in the central banking community that thinks this would be in the market´s best interest. This type of national regulation does fly in the face of modern macroeconomics which says markets are self-correcting in the long run and government intervention only causes inefficiencies. Financial companies themselves would be hit hard by this tax because of the intense competition for high-speed, high-volume trading leads them to make many trades that would be taxable. It is said that derivative trading will be decreased by around ¾ of its current volume, making it difficult for some companies to efficiently leverage their risk. National governments are concerned about overlapping regulation and that by taxing bond trades, this would cause shortages in market liquidity and essentially end the asset repurchase market (“repo-market” – governments sell their assets, or bonds, for fast cash). Even businesses say the financial institutions will simply pass on the cost of the tax, making it harder for them to finance their activities.
However, in the words of Brussels based public interest lobbyist Benoit Lallemand of Finance Watch in the face of critics: “The only thing I haven´t heard so far is that FTT is going to speed up global warning and kill baby seals,” he said in jest in a Financial Times article. He also thought that this tax should be given a shot not only because of the benefits mentioned above but “because you want the financial sector to serve the economy” and not the moneyed interests that have long ago formed political lobbies and are staunchly against financial transaction taxes, and public-empowerment figures like Robin Hood in general.