No less a scholar than Bill Nighy urges us to support a “Robin Hood Tax” to take money from the bankers and speculators and give to the poor.
The Robin Hood tax appears at first sight to be a way to kill three fairly succulent birds with one stone. It offers an attractive combination of:
- Higher taxes on the wealthy, so reducing inequality
- A curb on speculation and financial market excesses
- More money for global public goods and aid.
All these are worthy objectives, but Robin Hood tax is not a good way to achieve any of them.
Branding a financial transaction tax as a “Robin Hood tax” which takes from the rich and gives to the poor is a brilliant piece of communications. (Imagine if it had been called a “Class War tax” – this says more or less the same thing but somehow seems less appealing.) A Robin Hood tax lures many people who care about social justice, and want to spend more on international development, into opportunistically supporting the introduction of a tax on financial market transactions. But before we are seduced we should take a hard look at whether it will achieve what we want.
Stand and Deliver!
The campaign would like us to believe that this tax will be paid by speculators. That isn’t true, of course. It is like thinking that beer duty is paid personally by the barman in the pub, or that Richard Branson personally forks out for your airline passenger duty. The people on whom a tax is levied generally pass it on to someone else: their customers, employees, suppliers or shareholders. We don’t know who will end up bearing a financial transactions tax, but it is likely to be all of us who meet the costs, as customers of firms that use financial markets, or savers whose money is invested in financial assets. You should not assume that it will mean less champagne for people who work in the City: they may be in-bred aristocrats but they are probably smart enough to figure out quite quickly that they should pass on the cost to someone else.
If we want to tax the rich more, there are much more effective ways to do it than to tax financial transactions – ways which might actually fall on the rich, and catch a much bigger spread of rich people than a transactions tax. For example, you could raise much more money from the rich by extending National Insurance charges to all capital income (eg interest, capital gains, dividends and rent) rather than imposing it only on labour income. You could also abolish the upper earnings limit on National Insurance. You could close loopholes for non-domiciles and people who use trusts to avoid inheritance tax; or simply raise the top rate of income tax. You could treat all inheritance as income in the hands of the beneficiary, and tax it accordingly. Any of these would be a more targeted and fairer way of increasing taxes on the rich than a financial transaction tax.
Financial markets play an important role in the real world by channelling our savings to investments with higher returns and enabling us to share risks. In well-functioning markets, allocating money to businesses that meet the needs of their customers and so make a good return tends to benefit all of us – whether we are investors, customers or employees of these firms. For this allocation of resources to happen well, the prices of financial assets had better reflect their true underlying value, at least most of the time, and we are all worse off if financial asset values deviate for long periods from what the underlying businesses are really worth. But there are plenty of structural problems in the financial services industry that make it likely that financial assets may in fact be mispriced some of the time. These include the incentives created by bonuses (for example, linking bonuses to the value of a deal as predicted by firms’ financial models rather than the value that is eventually realised) and the rise of institutions that are “too big to fail” and therefore enjoy the implicit subsidy of a public guarantee.
However, it is hard to see how the existence of speculators, arbitrage and – most of all – liquid and highly traded markets make financial markets less effective. In most cases, we would expect markets with lots of buyers and sellers to do a better job of identifying the underlying value of assets than markets with relatively few transactions. Speculators generally make money when they correctly assess that a market price does not reflect the real value of the asset. George Soros made money from Black Wednesday when he judged that the value of the pound in the Exchange Rate Mechanism did not reflect what it was really worth (because the government was trying to sustain a higher value for the pound). By betting on that judgement, Soros helped to bring about the change in price that he was predicting, and so accelerated the alignment of the asset price with its true underlying worth.
A small turnover tax is likely to deter the small-scale arbitrage that helps to reduce the short-term discrepancies between prices, making markets marginally less transparent and slightly less efficient. It probably won’t make any difference to the big misalignments, such as asset price bubbles. The short term gains to traders from buying in a rising market will far exceed the cost of any turnover tax, so they’ll continue to get behind bull markets. Their behaviour is only likely to be moderated if they can be made to bear some of the costs of the future correction, instead of just getting the rewards when the bubble inflates. It is theoretically possible that a reduction in turnover will make a market more stable and less volatile (this was James Tobin’s point about “throwing sand in the wheels”), but it is the less likely outcome; more likely the opposite is true.
If we want our financial markets to work better, we should be looking at the causes of the volatility and misalignments. It is not the number of speculators, or the number of transactions in which they engage, but rather the incentives they face. Asymmetric bonuses which reward gains but do not punish losses encourage risk taking and short-termism. Institutions that are too big to fail will take bigger risks than they would without the implicit guarantee of a bail out. Insufficient competition between financial firms allows rent-seeking by monopolists. The privatisation of gains but socialisation of losses creates perverse incentives. If we want to tackle financial instability and misallocation of resources we need to address the root causes, not reach for a tax on transactions which is likely to hinder, rather than help, the ability of markets to correct themselves.
Raising money for good causes
So by now you think I’m being prissy. So what if a new tax does not redistribute money from the rich or make financial markets work better? It will raise a shed-load of money by taxing transactions in a way that nobody will notice, and we can use that to do good things on poverty and climate change. If taxation is the art of plucking the goose with the minimum of hissing, surely this is a sure fire way to get some money out of the system to spend on development which is woefully underfunded?
Well, not really. Good taxes are not just taxes that nobody notices, but taxes that tend to discourage people from doing bad things and encourage people to do good things; which add to rather than subtract from economic efficiency. There are lots of taxes that citizens don’t pay directly – such as corporation tax and employer national insurance contributions – which nonetheless add to the burden on ordinary taxpayers and the size of which is a matter of political debate. Adding a new tax is not going to make citizens more willing to see an increase in the overall tax burden.
Aid spending is pitifully small relative to need. As a nation we are spending much less than we should if we want to live up to our commitment to spare no effort to ensure that poverty is reduced, that mothers do not die while pregnant, that children go to school and that everyone has access to the water and health care that they need.
The amounts in question are tiny relative to total government revenues. Aid is a small fraction of overall spending and could easily be increased without any new taxes. The limit to aid is not lack of available money, but the lack of agreement that this is a priority for spending more of the nation’s money. Too many people believe – wrongly, in my view – that aid is not effective; that it transfers money from poor people in rich countries to rich people in poor countries; that much of it is lost in corruption or waste; and that it does as much to hinder as to help countries to grow and lift themselves out of poverty. Those attitudes are not going to change because we have introduced a new tax.
The development industry is right to say we should spend more on aid, but we are losing the argument. Instead of addressing the criticisms by demonstrating how aid is effective (and taking steps to make it more effective where it isn’t) we are turning to a Robin Hood tax apparently in the hope of bypassing public opinion. Because the chattering classes (which clearly includes me) have failed to persuade enough men and women that it is a good idea to spend more money on aid as well as on the National Health Service and schools, we are apparently hoping to go over their heads, by setting up a source of funding over which ordinary people will have no control
But that is not how the system works, nor should it be. The nation’s willingness to give money for development will be decided by whether we demonstrate the results, and whether we can really convince people that their money is being properly used. Introducing a new tax dedicated to what we think are good causes may give aid a temporary boost, but if people are not convinced that they want their money to go on aid they will quickly demand that budgets elsewhere are reduced accordingly. In the long run, this will have the opposite effect: a tax part of which is dedicated automatically to development will engender even more complacency in the development industry about the need to demonstrate to taxpayers how their money is being used.
Building support for development is not merely a communications challenge, as is often implied by the hand-wringing of the big aid agencies: it is a reality challenge. Not only do we have to show people how their aid is used, we actually have to make aid more effective, more transparent and more accountable, so that we drive up performance.
Dambisa Moyo is right that bad aid does not work; but she is wrong to claim that all aid is bad aid. She is wrong to claim that aid does more harm than good. There is a lot of hugely effective aid which transforms people’s lives every day. But the aid industry lacks sufficient mechanisms to drive bad aid out of the system, to spend more money well, and to be able to demonstrate conclusively its results. This, rather than a Robin Hood tax, should be the agenda for genuine progressives who want to see more money being spent on international development.
I have explained here before another reason why a Tobin Tax is a bad way of raising money for aid. Financial markets tend to be highly cyclical – there is a lot of turnover in rising markets in economic booms, and the markets tend to go quiet in recessions. So the revenues of such a tax would be highly cyclical – more money for development in global economic booms, less in global downturns. Yet aid should be the opposite. It is needed most of all to protect the weak and vulnerable from economic downturns. Aid is already too cyclical, exacerbating the impact of global economic fluctuations on developing countries, reinforcing the effects of changes in revenues from commodities, investment and remittances. The last thing developing countries need is for aid to become even more cyclical than it is today.
The backers of the Robin Hood tax are on the side of good and there is no denying their commitment to social justice, nor their genius for communications and popular engagement. We certainly need what the tax seems to offer: more redistributive taxation, a curb on financial market excesses, and more money for aid.
My reservation is not that the Robin Hood tax is too ambitious or that it cannot be negotiated. It is that it is the wrong way to address these problems. Each of the three objectives is better addressed directly than through the blunt instrument of a tax on financial transactions. We need to build a consensus that there are minimum standards of living below which no person anywhere in the world should be allowed to fall, and that those of us who are fortunate to live comfortably should all make a modest contribution to that. This should be part of the social contract in a democratic society, and it should be part of the mainstream system of taxing and spending. Robin Hood stole from the rich and gave to the poor at a time when we lacked institutions to tackle poverty and redistribute income. A Robin Hood tax is no more a lasting solution to financing poverty reduction than was the approach of Robin Hood himself.
Update: Duncan Green from Oxfam has responded here. We agree that this is not a good way to curb the excesses of the financial services industry. Duncan reckons “the banks” will pay a good part of the tax: presumably he means the shareholders. If so, why not just levy an additional profit tax on banks? I think his strongest argument is that in a world of second best, this is the best available option for raising more money. I think that is a mistake. We can and should make the case for aid to be financed properly; and I do not believe that raising money this way will add additional funding to development in anything but the very short tem unless we address rather than try to sidestep people’s concerns.