It worries me that people who are interested in reducing world poverty leap so readily on the Tobin Tax bandwagon.
There are three questions to answer:
- should we spend more on reducing global poverty?
(my answer: yes, if we have to)
- should we tax transactions in financial markets?
(my answer: maybe, though I am not persuaded)
- should we link aid budgets to revenues from such a tax?
(my answer: definitely not)
My answers are explained below the fold.
I can see why some people are attracted by a combination of extra money for the world’s poor and a poke in the eye for the unacceptable face of capitalism. But to support the Tobin Tax on these grounds is at best opportunism, and at worst reveals a hostility to the functioning of markets which will, in the end, not serve the poor.
a. Should we spend more on reducing global poverty?
Regular readers of this blog will know that I believe that aid works, though not as well as it should. I believe we have obligations to our fellow human beings around the world, and that we have it within our power to alleviate suffering and promote shared prosperity. Aid is not the measure of our common humanity, but it may be the cost of it. I would much rather promote the well-being of the world’s poor through more open trade policies, open immigration policies, changes to intellectual property rules, reductions in environmental damage and changes to our policies on peace and security. But (a) we aren’t in fact doing any of those things; and (b) we should be giving aid at the same time, especially as it is a natural complement – e.g. to more open markets. We should spend what it takes to eliminate global poverty – it is easily affordable – and if we can do it with less aid, all well and good. So yes, let’s spend more on aid, but let’s remember this is a means to an end, not an end in itself.
b. Should we tax financial transactions?
Adair Turner apparently believes that there are financial activities which are “a socially useless activity” and which should therefore be discouraged by taxation. However, the test for imposing a tax on an economic activity should not be whether it is socially useful, but whether it imposes costs on the rest of us. Presumably somebody wants the financial transactions in question, which is why they are willing to pay for them. If we want to impose a tax on them to discourage them, we have to explain what harm that does the rest of us. (Readers may be able to think of other activities undertaken by consenting adults that have no wider social benefit, but also do no social harm: should we tax all these too?)
Tobin believed that a tax on transactions might increase financial stability. That is the makings of a case for taxation, because financial stability is a public good. (Tobin explicitly distanced himself from the anti-globalisation supporters of his tax.) But it is not obvious that a Tobin Tax would increase stability. Are markets with fewer, larger transactions likely to be more stable than markets with more market players, and more frequent, smaller transactions?
In the end, this is an empirical question. If it really is true that markets with higher transaction costs are more stable than markets with lower transaction costs, then a Tobin Tax looks attractive. If not, not.
c. should we link aid to revenues from a tax on financial markets?
This is where I part company most sharply from those who think that it would be a good idea to use a Tobin Tax to finance international development.
My reservations are part theoretical, part practical.
The theoretical objection is this. Good public policy demands that governments spend the taxpayers’ money in the most effective ways to increase the sum of human happiness; and that they raise the money in ways which are either beneficial (e.g. by taxing bad things such as pollution) or at worst, in ways that do least harm. These should be separate decisions: linking a particular form of revenue to a particular form of spending unnecessarily constrains those choices. We should evaluate the case for aid spending on its merits; and we should evaluate the case for a tax on financial transactions on its merits. If we link one to the other, we may find ourselves pushed into less effective forms of spending, or less effective forms of tax.
And here is the practical objection. It has been clear from the current financial crisis that we need aid to be counter-cyclical – that is, we need more of it in a downturn; whereas in fact it is proving to be cyclical – that is, industrialised countries find it convenient to cut back on aid when things are tough. Turnover in financial markets is pro-cyclical. That means that if a tax on turnover is a primary source of aid finance, aid will become more cyclical, which is the opposite of what we need.
We concede too much ground when we advocate a Tobin Tax to pay for international development. We have profound obligations to help our fellow human beings, and we can do so at little cost to ourselves. Our obligation is to see to it that people have the food, water and shelter they need, access to security, health care and education and to a decent quality of life. If this costs more money than we are spending, so be it. The sums are small. If we can achieve these things with less aid, or no aid at all, all well and good. This is solid ground which we should defend. When we argue that the money should come from a Tobin Tax, or an airline duty, we implicitly move the debate to measuring our solidarity by the amount of aid we give, rather than what we seek to achieve, and implicitly concede that aid at the levels required to achieve these simple things cannot be afforded without additional taxation.