To me the crucial point is the incidence of this tax. The Robin Hood bods insist that no actual consumer will be hurt i hte collection of this tax. They also refer directly to an FTT that already exists: stamp duty on share purchases in London (the Baker paper).

Yet there are several papers around looking at the incidence of said stamp duty. Two major carriers of the burden are pensions in the form of lower pensions for those who have been saving and companies in higher costs of capital (which, if we take that incidence further, almost certainly feeds through into lower wages for the workers. It was Joe Stiglitz who showed that, in theory at least, the incidence of taxes which make corporate capital more expensive can cost workers more than 100% of the tax raised in the form of lower wages).

So, if this FTT is like stamp duty, if the incidence is like that of stamp duty, then the people who will pay this tax is us. The peons.

Somewhow I expect the reaction to “let’s tax the bankers $400 billion” and “let’s tax ourselves $400 billion” to be different. Everybody loves taxing someone else, few like being taxed themselves.

On a slight sidenote, I would like to speak up for the Robin Hood tax, but in its original form – the famous ‘tobin tax’.

What James Tobin originally proposed was an altogether different beast to this robin hood tax, with a fundamentally different aim and intention.

The original point of the Tobin tax was to limit speculation in foreign exchange trading. The idea was that by imposing a tax on trading in domestic currency, the government would make it prohibitively expensive to trade in that currency for purely speculative intentions. Thus, it would only be worth your while if you were a large company or institutional investor who was purchasing a sufficiently large amount of foreign currency to make the transaction cost-effective.

Thus, Tobin visualised, the determination of the domestic currency would revert to fundamentals of world trade – demand and supply for goods or services. This in turn would reduce uncertainty, further promoting trade and all the benefits that ensues.

The point was not to raise money, indeed the tobin tax as visualised would make very little money at all. Neither was the point to improve social equality or redistribute wealth. The idea was to revert floating exchange rates to a more rigid arrangement, improving macroeconomic stability by removing the volatility of speculators.

While I’m not 100% sure of the merits of the original tobin tax, it was a fundamentally more interesting idea that this new reincarnation.

Is this really asking you to be part of the World’s Greatest Bank Job (ha ha ha ha) or a conniving way to encourage you to be a part of the Worlds Biggest Con Job?
I just have to wonder how many folk actually have heard about the ‘Robin Hood Tax’ ? – (RHT) and more importantly have taken the time to find out what it is? where it comes from? what is actually involved? Let me tell you right now it involves BILLIONS OF DOLLARS, and of course, should it come to pass, just who will administer it?

http://just-me-in-t.blogspot.com/2010/04/men-in-tights.html

This is always true when there are derivatives markets (OK, sorry, when there are effective derivatives markets. The futures and options turnover has to be larger than the underlying cash market otherwise those derivatives aren’t liquid enough to actually be effective.)

“In fact the way I’d imagined it was that it would have a dampening effect,”

Whether speculation destablises (increases volatility) or stabilises (reduces volatility) is still argued. A reasonable summary (but then of course I would say this) is that those arguing split into three camps. Marketeers say it stabilises, those who don’t like markets all that much say it destabilises and the balance of evidence seems to favour the marketeers.

“where the amounts are enough to hit short-term speculation but not enough to dramatically remove liquidity.”

It’s those last three words that matter. Which is an empirical question. Without actually putting it into effect and seeing what happens (a very expensive thing to do if it does remove significant liquidity….and the papers *supporting* the tax indicate, dependent upon the market, reductions of between 25% and 75% of current turnover) we have to go by analogy. What were spreads in the FX markets when volumes were 25% less than today? What were spreads in derivatives when liquidity was 75% lower than today?

Quite a lot higher is the answer.

“I notice you don’t say that’s a sure thing, and I don’t know what the factors are that influence the outcome”

How much do margins rise is the significant factor. If they rise by more than the tax then the burden is over 100%. People a great deal more knowledgeable than I (Giles Wilkes, Freethinking economist blog) think that margins would rise by more than the tax in the FX market for example.

Think of it this way. A reasonable margin in FX these days is 1 basis point. We add a 0.5 bps tax. This scares liquidity away to the extent of 25%.

If margins stay at 1 bps (plus the tax, so 1.5 bps) then we’ve got a great little tax. If margins move out to 2 bps (plus the tax, so 2.5 bps) then the costs of the tax on consumers is 1 bps for each 0.5 bps raised in tax. We’ve a tax burden of 200% of revenue raised.

It’s not all that long ago that typical margins in FX were 10 bps……

However, I do wonder if we need quite so much liquidity, that speculative trade exceeds real trade many times over (so I have read, by a critic of speculators) and financial flows influenced by sentiment can have sudden and crippling effects on national economies.

If there’s a serious proposal for this tax, I can’t imagine that it’s enough to remove speculators from the market altogether – note that my original question was based on very frequent transfers. A small tax looks like it would be an incentive for longer-term trading.

In fact the way I’d imagined it was that it would have a dampening effect, but not so much that financial trades representing real trade would actually outweigh speculative and hedging trade.

I know that many knowledgeable economist-type people don’t like the Tobin Tax, and it’s one reason I’m not on the campaign for it. However I’ve yet to hear a convincing argument against it – at least in the form I’ve described, where the amounts are enough to hit short-term speculation but not enough to dramatically remove liquidity. Whether that’s even possible is beyond the scope of this discussion, I suspect. (My intuition says it should be possible, but my intuition is not highly knowledgeable about economics.)

The idea of tax burden being higher than tax collected looks significant. I notice you don’t say that’s a sure thing, and I don’t know what the factors are that influence the outcome (I’d guess that the level of the tax would be a central factor.) And I’m not in a position to assess the “decent calculations” you refer to. So you may well be right, but I can’t see the reasoning.

This is indeed what they say. However, changes in one part of an economy can have effects in another part.

So, those evil speculators do indeed have to start handing over cheques….and because they’re speculating they have to hand over a lot of them. Right, so they’ll do less speculating. This isn’t arguable: it’s actually one of the purposes of the tax.

Now it might actually be true that speculators are eeevil people only making money out of money (some think so, I don’t, but so what) but by their speculation they bring something to the market, liquidity. Remove them from the market and liquidity falls.

What happens in less liquid markets? Margins rise. That is, the difference between the buy and sell price of whatever it is will increase. Again, this isn’t controversial nor really even arguable.

So, first round effects. We’ve less speculation and still a considerable number of cheques being sent in.

Second round effects. What is the impact of increased margins on all who use those financial markets? Well, obviously, they face the increased costs of those increased dealing margins. Those effects might be small on any one transaction but cumulatively, on all those doing “regular trade”, it adds up to a pretty large sum.

Now note that some of the speculators, the people the tax is aimed at, have left the market and so aren’t taxed at all. But the people who we’re not so keen on taxing are still there….and they’ve got to pay not just the tax but the cost of those speculators having left. A double whammy on “regular trade” then.

It actually gets worse. there’s absolutely nothing in either theory or practice that says there has to be a diret relationship between those higher costs and the amount of tax raised. Indeed, Joe Stiglitz (serious economist, Nobel Laureate….) proved back in 1980 that the tax burden (that extra cost) can be more than 100% of the amount raised in tax.

So, while the campaign says that it’ll be just those eeevil speculators who cough up (or at least, most of it) we can actually see that the burden will fall on “regular trade” and that the burden can be (and in markets like foreign exchange, decent calculations show it probably will be) higher than the amount raised in tax.

There’s a difference between “let’s tax them over there, won’t cost you a penny” and “you’ll all have to pay $800 billion so we get $400 billion to spend on our pet projects”. The campaign uses the first as its rallying cry when the second is closer to reality.

At least, that’s what I think they say, so I have at least two degrees of separation between my understanding and what’s actually going on. Could you enlighten me?

Owen replies: Hi Eddy – yes, my post links to Duncan’s reply and briefly reacts. I don’t think it is sustainable to say that we know that the arguments for this tax are not very good, but we are going to sieze the political opportunity anyway.

When I lived in Saudi Arabia I had a bank account. The bank couldn’t pay interest on it. However, they paid me a fee in respect of my allowing them to use my money. This fee was calculated as a percentage of the amount in question over the time for which I chose to make it available to them. But they didn’t pay interest because that was unIslamic.

No, Capitalism describes a system of the ownership of productive assets and resources. It doesn’t need or imply either usury or the charging of interest. There are plenty of Islamic economies that are recognisably capitalist that do not have usury or interest.

You, unfortunately, are using both “capitalism” and “usury” to mean “things I don’t like”.

@Tim Making money out of money is “realising the time value of money”???

I understand the difference between the “financial economy” and the “real economy” to turning money into “financial products” and making things or providing services that are useful to others.

Financial products may appear to be useful. But they are not as far as the real economy is concerned.

Making money out of money is like charging interest. Hence I use the term ‘usury’ for that process. And while usury is forbidden in most religions and philosophies, it is legalized as capitalism.

With very little respect I find it difficult to equate those who enable us to realise the time value of money with “legalised usury”.

In my view it’s also only second best. http://bit.ly/9fNURo

However, I still support the idea. For before it raises funds, it raises consciousness, i.e. it acts as a reminder of the conscience in bankers and politicians.

It shows them how many people do care.

It shows up the patheticness of the likes of Goldman Sachs.

Also it’s not just about “the rich”. It addresses all those who “make money out of money”, i.e. legalised usury.

It’s the tip of an iceberg that hopefull will melt sooner rather than later. No need to feel guilty about ‘living comfortably’. We won’t implement it anyway. But any publicity is good. Just speel the name right. And that is also easy. Brilliant re-branding of the Tobin Tax, and in tune with the Zeitgeist of banking climates.

Sabine
Organiser, Forum for Stable Currencies
http://forumforstablecurrencies.info

Owen replies: Thanks Sabine. With respect, I find it hard to reconcile the view that nobody will notice (which is one of the arguments given for why it is politically attractive) with the view that it will “raise consciousness”.

I find the faith in markets slightly perturbing, given recent events. Your assertion that it is “structural problems in the financial services industry” that distorts the transmission of fundamental value via equity market price signals seems far-fetched, given recent events, if nothing else. Markets are instable, procyclical, and tend to amplify psychological traits like fear, confidence, jubilation, anxiety and denial in participants. They are also the best way we have of exchanging information and arriving at price signals — but at a price. Are these traits not central to the current crisis?

Also, on the one hand you say that the costs will surreptitiously be borne by us all, and on the other bemoan the fact that the development industry has lost the aid argument and cannot persuade the public to fund aid increases. In what world is development (and thus, surely, the funding thereof) not the art of the least bad? Are we to make the better the enemy of the good because we disagree with the principles of the action in question? I’d be interested to hear your thoughts, on the other points too.

To me the crucial point is the incidence of this tax. The Robin Hood bods insist that no actual consumer will be hurt i hte collection of this tax. They also refer directly to an FTT that already exists: stamp duty on share purchases in London (the Baker paper).

Yet there are several papers around looking at the incidence of said stamp duty. Two major carriers of the burden are pensions in the form of lower pensions for those who have been saving and companies in higher costs of capital (which, if we take that incidence further, almost certainly feeds through into lower wages for the workers. It was Joe Stiglitz who showed that, in theory at least, the incidence of taxes which make corporate capital more expensive can cost workers more than 100% of the tax raised in the form of lower wages).

So, if this FTT is like stamp duty, if the incidence is like that of stamp duty, then the people who will pay this tax is us. The peons.

Somewhow I expect the reaction to “let’s tax the bankers $400 billion” and “let’s tax ourselves $400 billion” to be different. Everybody loves taxing someone else, few like being taxed themselves.

I would like to add a few arguments:
firstly the principle of the unity of the budget. Indeed, a country budget reflects the order of priorities of the government. This is why income, that is not a direct payment for a semi-independently delivered service, should go into the one budget. Creating all kinds of compartments where income from one side goes specifically to a totally different but as specific issue, makes priority setting impossible. Indeed, the income stream will decide the budget for the good cause, not the priority allocated by the government. If the tax and income would be under the power of the minister of development, he would just raise the tax as high as possible.
Another aspect is the issue of punitive taxes. If the tax is successful in banning the bad practice (a good thing) then the income from it will go down, and development will be less funded.

My questions is, and bear in mind I’m writing from the United States, from the point of view of political economy is the Robin Hood tax a worthwhile investment? I agree that it is a blunt instrument. However, in one of the stingiest and wealthiest countries in the world many of your alternative suggestions would be met with considerably more political resistance than would a Robin Hood tax. This does not mean that it is a good idea but perhaps lacking the ability to enact the ideal taxation policies would make one take a second look.

Owen replies: Thanks Michael. Your praise means a lot to me.

Owen replies: Thanks Peter. I was deliberately setting to one side the question of whether it is negotiable. Many things have seemed inconceivable and yet we have found a way to get them agreed (e.g. debt relief) so I don’t think the difficulty of getting it agreed should be a reason not to support it. The fact that it won’t achieve any of its objectives well, on the other hand, does seem to be quite a big disadvantage.

What am I missing here?

Owen replies: You are not missing much. It is true in general that to understand the eventual incidence of a tax, you cannot simply look at who is making the payment to the tax authorities.

This point is general: when you levy a tax, you have to think about the structure of that particular market to understand who will end up paying it. Different taxes will have different final incidence. A broad tax levied by increasing national insurance might be quite hard to pass on, and might fall on the the employees who pay national insurance.