Robin Hood Tax revisited

A Robin Hood is superficially attractive because it seems to offer:

  1. higher taxes on the wealthy
  2. a curb on speculation and market volatility
  3. more money for aid and global public goods.

But as I explained in February the Robin Hood tax isn’t a very good way to achieve any of these perfectly reasonable objectives. They would be much better pursued separately.

This analysis was confirmed by this new research published today by Neil McCulloch at the Institute for Development Studies.  He finds that:

  1. a significant proportion of a foreign exchange tax would be passed on to consumers (so it would not be not a tax on the wealthy);
  2. most empirical evidence shows that higher transactions costs are associated with more, rather than less, volatility.

He also finds that a financial transaction tax is feasible and that a tax on foreign exchange transactions could raise £7.7 billion in the UK, or $26 billion if implemented worldwide.

Unexpectedly, he then concludes that the UK Government should implement a currency transaction tax.

If the Robin Hood tax is not a tax predominantly borne by the wealthy, nor will it reduce market volatility, what’s the case for it?

If we want to increase our spending on aid and global public goods – which I support – we should do so by way of making the case in the public spending process.  Development activists should not try to bypass the systems of democratic control of spending priorities, nor should they advocate taxes which do not make good tax policy on either distributional or microeconomic grounds.

12 thoughts on “Robin Hood Tax revisited”

  1. Could it be that simple political expediency has moved Dr. McCulloch to support the Robin Hood tax? Assuming that UK attitudes toward wealthy speculators in the financial markets parallel attitudes here in California, such a tax might go far toward helping Parliament recoup its popularity—not exactly at high tide these days, I gather?

    Last February you drew an unfavorable contrast of the sneakiness of the Robin Hood tax with making a full-frontal case for a “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.” Yet making that case would mean taking the high road, and the high road is strenuous. Could Dr. McCulloch have made the political calculation that Parliament, already under severe pressure, will resist another steep climb?

    But I merely propose a motivation for Dr. McCulloch (since you asked), not approval of the Robin Hood tax. Precisely the tax’s sneakiness—married to the continued absence of what, in February, you called “sufficient mechanisms to drive bad aid out of the system, to spend more money well, and to be able to demonstrate conclusively its results”—will simply darken aid’s reputation. As if aid needs more of that!

  2. Owen,

    I haven’t had chance to read Neil’s paper yet, but I was given to understand that the ‘Robin Hood Tax’ campaign is calling for a tax on ALL financial transactions, as opposed to solely currency transactions as he recommends.

  3. Owen

    I have to say this blog post is not up to your usual standards. It misrepresents both the robin hood tax and neils research.

    Neil does not say that the tax will be passed on to ordinary people as you suggest. In fact he says the opposite, as does the IMF in its recent comprehensive treatment of transaction taxes. What they say is that the incidence of this tax will be on the owners of capital, so in effect a form of capital gains tax, and as the ownership of capital is so clearly skewed towards the upper quintiles the IMF concludes that the FTT would be ‘highly progressive’

    Equally the IMF and neil conclude that while the jury is out on the impact of higher transaction costs on short term volatility the impact on long term volatility is entirely unproven either way. This is the key issue that Lord Turner identified last year when he first raised the issue. There is a downside risk to having too much liquidity in the system as the financial crisis demonstrated, and a tax that reduces the size of markets such as the CDS market that has exploded in recent years to 70 times global GDP would be a good thing. When I asked neil about this last night he agreed as did the speaker from the european bankers association.

    Finally neil also supports the argument, again with IMF backing, that this tax does not have to be global to work and is therefore a political non-starter. The IMF is clear that transaction taxes exist in all the major financial centres in one way or other and that unilateral implementation is completely possible.

    I commend neil from moving from his cursory dismissal of this campaign many months ago to a thorough review of the evidence which has led him to change his mind. Since we launched this campaign in February a series of heavyweight papers by the IMF, the EC and the Leading Group have all laid to rest the arguments you and others have made against this idea.

    As such an influential blogger and a great supporter of financing for development I would urge you to do the same as neil, read the slew of new reports on this issue and see whether you still maintain your opposition. You are needed in sherwood forest!


    1. Hi Max


      On your first point, Neil says in the report: “In the long run, a significant proportion of the tax could end up being passed on to consumers.” I don’t think that is distinguishable from the view I attributed to him that: “a significant proportion of a foreign exchange tax would be passed on to consumers”. (This is kind of a “doh” point. Why would the shareholders of banks bear the cost of a foreign exchange transaction tax any more than the shareholders of a supermarket bear the costs of VAT?)

      On your second point, my blog post quoted Neil directly. The report says: “most empirical evidence shows that higher transaction costs are actually associated with more, rather than less, volatility.” I think there is perfectly reasonable case for trying to to dampen volatility and excess liquidity in financial services, but let’s design that mechanism as well as we can (for example, by tackling incentives in the financial services industry, improving transparency, regulations to trading systems etc). Why pick a transaction tax when, as Neil says, the evidence suggests that that higher transactions costs are associated with more, rather than less volatility.

      On your third point: I’ve never argued against a financial transaction tax on the grounds that it is not practical or that it is politically unatractive. We should decide the issue on its merits, one way or another.

      I’m happy to continue to read the evidence – as I did this paper. But unlike Neil, I can’t see how the evidence he presents in his paper leads him to the conclusion that the tax should be supported.

      Finally, I’m tickled that you quote the IMF so approvingly in your comment. I didn’t think you generally found their arguments persuasive?

      Kind regards

  4. The Broker recently featured a Special Report authored by Prof Paul Bernd Spahn and Prof Stephany Griffith Jones on FTT’s and CTT’s. They also conclude that a CTT might be more feasable, for example first introduced by the EU. Also they elaborate on the governmental platforms for these taxes and how to spend it.

  5. A few quick questions for clarification, from a non-economist:
    1) Aren’t the ‘consumers’ of banks products still going to be disproportionately wealthy? In other words, if the tax is in fact borne by consumers, won’t this mainly be other businesses and wealthy individuals. (We all use banks, but we don’t all use them the same).
    2) If banks have differential exposure to the tax, won’t it be harder to pass the taxes on to consumers. In other words, if one institution has high exposure to the tax, and another doesn’t, but they both compete for me, the first won’t be able to pass the tax on to me, because I will bank at the second.
    3) Why is the converse not true–when oil companies get tax breaks, they don’t automatically pass that on to the consumers. Why isn’t part of the way to pay these taxes out of bank profits?
    4) Wouldn’t an advantage of a tax system for development/climate change be that it avoids the very fickle political process of delivering foreign aid?

    1. Scott

      Thanks. Pretty good questions for a non-economist.

      You are probing the question of the relationship between revenue collection and tax incidence. In other words, the people from whom revenues are collected may not be the people who bear the eventual economic effects of the tax. The incidence of a tax is determined primarily by price elasticity of demand and price elasticity of supply. If a group of customers is relatively price insensitive, it makes sense to pass the tax on to them rather than to a group of customers who are likely to take their business elsewhere.

      That’s why financial services companies are unlikely to pass the cost on to their shareholders (who can easily switch to other stocks) or to their business customers (who can trade elsewhere). But somebody has to pay. Most banks would pass this tax on to their retail customers, as they are relatively price insensitive: it is a lot of hassle to move your bank account, compared to moving to a different company for your foreign exchange transactions.

      Only 5% of low income households (defined as the bottom fifth of the income distribution) do not have a bank account, according to If banks would regard these accounts as unlikely to be very price responsive, and least costly to lose, these would be the customers most likely to bear the tax.

      With oil companies, consumers are quite price sensitive: it easy to drive on to the next petrol station. That’s why the incidence of oil taxes is different from a bank tax.

      Finally I think it is a big mistake for development campaigners to try to bypass the political process of domestic expenditure allocation. We have an extraordinarily strong story to tell, on economic, political and moral grounds. We should continue to make the case for aid on its merits, and be answerable for how the aid is used, rather than try to bypass this important discipline.


  6. Owen

    Indeed my agreeing with the IMF is very amusing, but in fact they have been really great on this topic, giving it a good hearing. I would like to think that we judge the IMF on their treatment of the facts and the evidence, and on this one they have done a pretty good job. Their preferred option is not the transaction tax by the way- they are in favour of a Financial Activities Tax.

    On the incidence argument, the tax will be passed on to the owners of capital, just like capital gains tax. These are not your typical ‘consumers’. for example, the standard up front investment to become a ‘consumer’ of hedge fund products is 1 million dollars.

    You could probably try and argue that even capital gains tax eventually ends up being passed on in one way or another, but your argument then rapidly becomes one that is largely against tax per se.

    The question is not whether the lower quintiles will not end up paying some of this but surely it is hard to argue that this tax would not be highly progressive in its incidence. As such it is the opposite of VAT, which consumes twice as much of the income of the poorest quintile than the richest.

    There is also now widespread agreement that the financial sector is undertaxed and this has contributed to its growing too large.

    The Robin Hood Tax does not campaign for a separate pot for these revenues- we are saying it should go into the general revenues of government, but should enable them to meet their promises.

    Having just gone through the bruising CSR here in the UK, sadly it is simply not good enough anymore simply to make the case for aid on its own merits. We should of course continue to do this and we do, but in the current economic climate, with up to a million people in the UK facing unemployment, we have to fight back with more than this. The beauty of the robin hood tax is that we can say legitimately to the public in rich nations that we should not be forced into a false choice between the poor at home and the poor abroad, when the financial sector has largely got off scott free and remains undertaxed. The financial sector should be made to pay more tax, whether through a tax on transactions or some other method, to ensure we can prevent cuts at home and honour our aid and climate finance commitments.


  7. The term Robin Hood tax is itself a misnomer of course. It is most unlikely that any UK government would provide more in aid than it is already committed to doing through the 0.7% GDP pledge (something all the main parties have signed up for). Whether this is a good way to raise tax revenues is one thing. How that money should be spent is another. Using that revenue for aid, or the NHS or to save an aircraft carrier for that matter, will required the debate you call for. It is perfectly fine for development activists to plead their cause, just as arts activists have been doing.

    1. @devbod I have no problem with development activists making a case for development spending. Indeed, I wish they would. Instead they are making a case to introduce a tax that will not do what they imply, and which will distort tax and (if they have their way) spending choices.

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