Why the 'Robin Hood' Tax Would Tick All the Right Boxes; the European Parliament Yesterday Voted Overwhelmingly for a Financial Transactions Tax. after a Global Week of Action for the Campaign for the So-Called Robin Hood Tax, Dr Calvin Jones of Cardiff University Asks Whether It Is the First Step to Economic Sanity
Byline: Dr Calvin Jones
THE discussion around the potential implementation of a "Robin Hood Tax" on financial transactions has generated significant media debate. The Continental enthusiasm for the tax has enabled detractors to paint the introduction of a European Financial Transactions Tax (FTT) as the first step to EU self-funding, and thus its increased dominance.
The UK Government and London Mayor are implacably opposed, convinced that a Euro FTT will simply move relevant transactions outside the EU - and principally of course from London - with a resultant loss in financial activity (and potentially financial institutions and global importance).
Conversely, an FTT has some significant benefits. Economists love the idea of "the right tool for the right job".
In the application of a very low (0.1% or lower) tax rate to financial transactions as they happen, the Robin Hood Tax ticks this box.
For example, large pension funds would only pay this small tax whenever they bought or sold their assets; typically every year or two - and with this then a small proportion of management costs. But these funds are not the target of the FTT.
Even after the financial crisis, about 70% of US share transactions are "high frequency" trades, whereby traders, aided by highly complex mathematical algorithms and bang-whizz computers, constantly buy and sell vast volumes of shares, bonds, derivatives and other assets, owning them in many cases for mere seconds.
Such traders, earning tiny margins on each trade, would pay this tax hundreds of times each day and thus would simply no longer undertake asset swaps merely to take advantage of fleeting, tiny changes in price.
The volume of financial trades would reduce, but where there was genuine, lasting value to be made from buying or selling assets - for example, where a company had good growth prospects due to product innovation - the potential returns to investors would be far, far greater than the tax, and so capital would still flow to support the "right" sort of activities. But based on fundamentals, not on short-lived movements in share prices or currency exchange rates.
The Coalition is probably right that an unevenly applied Robin Hood Tax will drive some financial activity out of the EU and UK. This is what happened when Sweden introduced such a tax in 1984 (albeit a pretty poorly designed one). Critics have pointed to the subsequent growth of the Oslo stock market as a failure of this policy. But this just raises the question: why on earth would you want a large stock market? There is an argument that competitiveness in financial services is an export driver, adding to the tax-base and hence welfare of countries such as the UK. However, I am writing this in 2012. Since 2007, the UK government has committed anything between pounds 500bn and pounds 1 trillion to save the banking sector.
The Bank of England has, in an impressive sleight of hand, created an additional pounds 325bn via "quantitative easing" to avoid the worst potential outcomes of the credit crunch. …