Forum for Debate

SCT’s Forum for Debate provides protagonists on either side of an issue or public debate  -  including think tanks, commentators, academics and campaigners – with an opportunity to set out their well-considered, rational arguments and then allow a limited number of exchanges between them. Rather than then hosting an open forum or blog, the debates are designed to encourage visitors, guided by links provided by the British Library, to seek out further information about the issues and engage in face-to-face debate themselves. The  debates could also provide material around which Speakers’ Corner Committees can organise their own local events.

The latest in the series appears below. Previous debates can be found in the archive.


The Financial Transaction Tax – Social Justice or Economic Folly?

The campaign for a Financial Transaction Tax has gained considerable momentum since the financial crash of 2008. The Nobel Laureate economist James Tobin originally conceived it in 1972 as a levy on currency exchanges which would both regulate destabilising movements of funds and secure aid for developing countries. More recently its scope has been broadened to include a tax on all share, bond and currency transactions.

Its supporters, among them the European Commission and eleven EU members, claim that it could raise substantial funds for both participating governments and developing nations and that it is right that the financial institutions should be making a proper contribution to the reduction of the debt levels they created.

But its opponents, which include the UK and US governments, argue that the tax would reduce the volume of financial transactions and lead directly to the loss of jobs in financial centres, including the City of London. They warn too that pension funds and ordinary savers will receive lower returns as the banks simply pass on costs to customers.

So is the Financial Transaction Tax – also known as the Tobin Tax or the Robin Hood Tax – a simple and just means of redistributing wealth, combating poverty and reining in financial institutions, or is it a naïve and unworkable levy which would destabilise financial institutions, undermine the City and the UK economy and penalise pensioners and savers?

Owen Tudor

Trades Union Congress

Owen Tudor became Head of the TUC's European Union and International Relations Department in 2003.

He sits on the Robin Hood Tax campaign steering group, is the Secretary of TUC Aid and a Director of the Ethical Trading Initiative.

Owen has represented the TUC on the Health and Safety Commission, the Industrial Injuries Advisory Council and the Social Security Advisory Committee. He was a founder member of the Civil Justice Council.

The Robin Hood Tax campaign is committed to reducing poverty and tackling climate change by taxing financial transactions.

It is a coalition of 115 organisations including charities such as Oxfam, Barnardo’s and Friends of the Earth, green groups, trade unions, celebrities, financiers, religious leaders and politicians.

Supporters include President Hollande of France, Chancellor Merkel of Germany, businesspeople such as Lord Adair Turner, George Soros and Warren Buffet and economists such as Nobel Prize winners Joseph Stiglitz and Paul Krugman.

The campaign has millions of supporters, including 270,000 Facebook friends, in more than 25 countries around the world.

Malcolm Small

Institute of Directors

Malcolm Small is a Senior Adviser on Financial Services Policy at the Institute of Directors.

Malcolm has specialised in all aspects of management in financial services at senior level for the last 20 years, including 14 years with Norwich Union, latterly at operating Board level in Life and Pensions.

More recently, as Managing Director of Lyncombe Consultancy, he has specialised in the regulatory, technical and operational aspects of pensions and a wide range of other retail financial services.

He is a past Chair of the Investment and Life Assurance Group and a member of the Advisory Council at The Pensions Regulator.

The Institute of Directors has been supporting businesses and the people who run them since 1903, encouraging entrepreneurial activity and promoting responsible business practice for the benefit of the business community and society as a whole.

Its philosophy is to support, represent and set standards for directors and to represent their views to government. It supports and represents 34,500 members through 48 regional branches across the UK. Its members are some of the most skilled and prominent leaders in the UK, from start-up entrepreneurs to directors in the public sector and CEOs of multinational organisations.

Proposition

A Robin Hood Tax - We Can’t Wait

The campaign for a Robin Hood Tax is nearly five years old, although the idea on which it is based goes back to John Maynard Keynes. The case for it is based on two key wrongs that need righting and the trade union movement worldwide, as well as economists, development charities, environmental campaigners, faith groups and others believe it to be one of the best answers going.

First, the world is not going well. Despite the achievements of the Millennium Development Goals, we have not yet abolished poverty. Climate change continues to wreak havoc around the world both through extreme weather events and in changes in crop growing patterns, sea levels and biodiversity. The global economy, still to recover from the financial crisis of 2008, may – left and right agree – be on the brink of another shock. Meanwhile, public services have been cut, UK wages have fallen in real terms for longer than ever before and unemployment continues to outstrip job creation worldwide.

Second, the global financial system has not been adequately corrected after the crisis. Investment decisions are still too short-term, even where they occur. Too often, the savings built up by the super-rich as a result of relatively untrammelled globalisation are devoted to financial speculation or ever more risky loans in exactly the way the sub-prime mortgage bubble was inflated. And bankers’ bloated bonuses remain the most visible sign of a global reward system that spins the wealth the world creates ever faster towards the top of the employment hierarchy.

Could a tiny tax like the Robin Hood Tax (perhaps 0.5% of the value of traded stocks and shares, maybe even a hundredth of that, 0.005% on derivatives and currency transactions) really make much difference? I think so.

The simplest attraction of any tax is of course the revenue it might generate to do good things. Estimates are always uncertain but the most conservative suggest that a Robin Hood Tax would raise an extra £20bn in the UK alone – more in the rest of the EU, and perhaps ten times that if applied globally, with the USA the major source of potential revenue. It’s worth noting that the UK’s existing financial transactions tax, Stamp Duty on stocks and shares traded by individuals (financial institutions being largely exempt), raises about £3bn a year on just a fraction of the market.

That money could be devoted to paying for the costs of global climate change, massively increasing overseas aid budgets and restoring some health to public finances. It could pay for more nurses, more childcare, more teachers.

And it would come from one of the least taxed activities in the economy. The International Monetary Fund accepts that financial transactions, exempt from levies like VAT for a number of reasons, are generally under-taxed. Yet since governments have made the pledge (with taxpayers’ money) to keep the banks afloat regardless, those financial institutions receive an implicit subsidy worth around £100bn a year due to reduced interest costs on their own borrowing.

But beyond the revenue raised, the most important argument for a Robin Hood Tax is the impact it would have on financial sector behaviour. It would reduce significantly the incentive to speculate on the money markets. Some classes of activity, such as high frequency trading (described by Lord Turner, former CBI Director General and now Chair of the Financial Services Authority, as ‘economically useless’) , might get wiped out altogether, with little or no downside.

Overall, it would make investment in the real economy correspondingly more attractive while providing greater security for such investments because the more often the money is moved around, the higher the cost – the grit in the wheels that James Tobin wanted to apply to the then much smaller financial markets.

This is the fundamental case for a Robin Hood Tax: it would be a tiny tax that could do great things.

Proposition

The Financial Transaction Tax - Punitive and Pointless

What is the point of a Financial Transaction Tax? It’s not as base a question as it first seems and the difficulty with formulating an answer strikes at one of its most fundamental flaws.

Taxes on banks – either general levies or on specific activities – were first proposed decades ago as a means of curbing two of the more unsettling phenomena which afflicted modern-day money markets: volatility and speculation.

However, the European Commission, in its recent proposals for a FTT, has a slightly different motivation. In its own words, it is seeking to “make the financial sector pay its fair share”. Basically it wants to punish the banks and other financial institutions for their role in the financial crisis.

This is an understandable response to a particularly damaging economic downturn, but I can’t be alone in thinking we should hold our governments to higher standards than vindictive and populist outrage. The crisis shocked the continent – and its impact is still being felt across Europe – but we need to learn its lessons, not use it as an opportunity to teach the pantomime villains one.

That is why I ask what the EU is trying to achieve by introducing a tax on financial transactions. It seems to me that it dreamed up the idea and retrospectively tried to make it attractive to the public – as any kind of tax of banks undoubtedly would be. But this is misguided.

Even if the underlying aim of the tax was justifiable - as are wider attempts to reform standards to encourage more responsible behaviour – it would still be the wrong policy. Unlike other, more targeted interventions such as, whatever their merits, capital buffer requirements, ring-fencing retail banking operations and a regulator in the form of the FCA which isn’t afraid to show its teeth, the FTT is a broad and clumsy mechanism. It is indiscriminate, hurting the ‘good’ guys as much as the ‘bad’ – to adopt the pantomime rhetoric – and directly punishes savers and investors. It does absolutely nothing to militate against risk and could actually encourage banks to take on more in pursuit of higher returns in order to cover the additional cost of doing business.

And what about the tax’s wider impact on the economy? In an age of impact assessments when government policies are justified on the basis of creating so many thousand jobs or boosting GDP by so many millions, the impact of the FTT on the economy looks remarkably unremarkable. The EU claims that its own analysis shows “a modest negative impact of the tax on economic efficiency” equating to a 0.3% fall in GDP. That is, unless the entire €38b the FTT is estimated to raise were spent on “growth-enhancing public investment” – in which case the tax might boost GDP by 0.1% over a 40 year period.

More than the numbers, however, one of the tax’s most fundamental flaws is the principle behind indiscriminately taxing an activity. Standard taxes on income or profits – in the form of income or corporation taxes, for example – mean deductions are directly linked to the growth and wealth that has been created. Taxes on activity, on the other hand, create false economies that make no economic or social sense.

This has long been the argument against stamp duty on property and land transactions in the UK. The same amount of tax is paid no matter the method of payment or circumstances of the buyer. A first-time purchaser with a 95% interest-only mortgage will be lumped with the same stamp duty bill as a wealthy investor dealing exclusively in cash.

This clearly doesn’t add up and the same logic applies to the financial transaction tax. It leads to inefficient decision making and punishes activity. The FTT’s proponents are yet to put forward a comprehensive case for its implementation beyond punishing one of the economy’s most important sectors and we should resist such arbitrary and ill-conceived attempts to raise revenue.

Response

Malcolm suggests that the Robin Hood Tax is indiscriminate populist revenge against the financial sector, punishing both 'good' and 'bad' behaviour. He cites computer models implying that it would damage the economy and argues that taxing activities like trading is inefficient.

It's certainly true that the Tax would be popular. It consistently scores well in opinion polls and has the support of over 60 local authorities across the UK, backed by Labour, Liberal Democrat, Green, SNP and Plaid Cymru Councillors.

But it's all thought through too. The tax is backed by Nobel prize-winning economists Paul Krugman and Joe Stiglitz and over a thousand other senior economists. Business leaders Bill Gates, Warren Buffett and George Soros also support it.

More importantly, this is not a theoretical discussion. The IMF found that 16 of the G20 leading economies have or have had effective financial transactions taxes. The UK's own Stamp Duty on share transactions is over three hundred years old. Its current form was shaped by Margaret Thatcher, hardly a persecutor of the finance sector.

As for the computer model Malcolm cites, it assumes that all taxes are bad and ignores the beneficial impact of spending the revenue they raise. A FTT would encourage better economic performance by investors, creating jobs, preventing cuts and tackling poverty and climate change.

The tax would indeed discriminate between good and bad behaviour. It would discourage disruptive and risky high frequency trading and speculation and promote the sort of long-term investment which pension funds engage in.

A Robin Hood Tax would fall mostly on high net worth individuals and hedge funds which is fairer as well as more efficient than the VAT increases and benefit cuts that have been the current government's response to the global financial crisis.

Response

Owen’s is a persuasive argument  with which I am sure many people will sympathise. I recognise some of the legitimate problems he raises. Where we differ is in our proposed solutions.

It is true that falling real-terms wages, a difficult international climate and a short-term investment culture are all damaging to our economy and our living standards. But a Robin Hood Tax is not the answer.

At the heart of arguments for the FTT lies the belief that a nation’s wealth and prospects for growth are best kept in the hands of governments rather than citizens. Owen admits that the aim of the tax is to raise revenue “to do good things” such as increasing aid budgets, paying off the deficit and hiring more teachers. These are all worthy aims which I of course support. But presenting the FTT as a panacea which will achieve all these goals is optimistic to say the least.

As we in the UK know more than most, decisions on how governments spend their money require a series of delicate compromises. Trade-offs have to be negotiated between competing priorities such as the ones Owen outlined.  Balances must be struck within a tax regime which enable it to raise enough funds without stifling investment and entrepreneurship. It must also be sufficiently simple to deter mass avoidance while leaving people with enough of their own money that they don’t wince too hard when they open their pay packets.

Its proponents ideallistically float the FTT as a tax on banks all of which are awash with cash and deserve to contribute more to the public good. In their view, the impact would be felt by no-one other than the rogue traders and speculators who inhabit the wealthiest enclaves of our major cities.

But this simply wouldn't be the case: this is a dangerous tax that can’t deliver but would restrict banks’ lending to households and businesses and hit pensioners, savers and investors.

Conclusion

The Robin Hood Tax is not the answer to every problem in the economy. But it would do a significant amount of heavy lifting: it really is a tiny tax that could make a big difference.

Malcolm is not wrong to question the assumption that the state will do better work with the money raised by the tax than the people who will lose out by paying it.

But in this case, the answer is fairly simple. Barring environmental degradation (and of course a financial transactions tax is one way to pay for the costs of tackling climate change), there couldn’t be a better example of market failure than the global financial crisis.

That crisis began because too many risky investments were made by the financial sector, some of them in loans to people who because of low wages could never pay them back and more in speculation on the money markets.

A Robin Hood Tax would rein in much of that risky activity (even the loans that were underpinned by complex and exotic financial instruments) by adjusting the price. It’s actually more of a market mechanism than its opponents admit, as well as raising much needed cash for the exchequer.

That cash is desperately needed. To tackle the deficit, governments can do three things: cut public expenditure, raise taxes and, most important of all, promote growth. Cuts to public expenditure have already gone too far: a Robin Hood Tax would allow us to roll them back. It would be a fairer way to raise revenue than VAT or income tax - and it would promote growth by encouraging long-term investment.

Malcolm also asks the other crucial question about any tax: who pays? But he is wrong to imply that ordinary pensioners, savers or investors would be hit. A Robin Hood Tax would fall mostly on the richest. Our pensions would only be hit if our pension funds changed their normal behaviour from investment in stocks and shares, with a turnover of portfolios every three to five years, to concentrating on gambling on derivatives and high frequency trading that turns over portfolios every few milli-seconds. I wouldn’t want my pension depending on a lucky bet anyway, so discouraging that would be good all round.

A Robin Hood Tax would fall mostly on those high net worth individuals (jargon for the super rich fat cats who do so much damage to the economy and have floated free of social and moral obligations) who invest in hedge funds and the shadow banking market.

It would be far more dangerous not to introduce a Robin Hood Tax – as the global financial crisis showed all too clearly. Let’s get on with it.

Conclusion

It’s accepted by its proponents that the Robin Hood Tax is nothing more than a revenue-raising ploy.

There will undoubtedly be people who are happy to see governments attempt this transfer of wealth from savers and investors to the state. I think it is important, however, that we acknowledge the costs associated with arbitrary taxes and question whether a Robin Hood Tax would even facilitate such a transfer, or just destroy savings, investments and pensions and in the process constrain much-needed economic growth.

Taxes are never ‘free’ money for governments and it is not as simple as the name ‘Robin Hood’ implies. It is misleading to claim an FTT would be the vehicle for a vast redistribution of wealth from rich to poor. There’s a complex web of knock-on effects which we need to understand.

Banks and the products they offer serve a vital purpose in our economy and society. Take derivatives: by letting banks take the risk of fluctuations in the price of goods, currencies or properties, derivatives allow businesses to get on with major projects and invest in growth safe in the knowledge of predictable revenues.

Explaining these points is relevant to understanding the damage an FTT would do. It would hurt banks, of course, and perhaps upset one of the government’s most important and stable funding streams. Contrary to what Owen says, banks are not ‘under-taxed’. Financial services account for just over one tenth of the UK economy and employ around 7.5% of the working population. In turn, they contribute £65bn in taxes to the UK government. That works out at £1 in every £8 of government income.

But more than impacting just the financial services industry, the millions of companies across the world which rely on financial instruments would be hit as well. Additional charges, taxes, levies or fines ultimately leave banks with two choices: they can pass the costs on to their customers or they can lend less. Given the amount banks lend for every pound they keep in capital, the damage this could do to overall investment very quickly adds up.

If introducing a global FTT makes little sense, then the UK, EU or any nation or group of nations acting unilaterally is even more misguided. Banking activity won’t stop; it won’t be reformed; it will just move. London will lose its place as the financial centre of the world and companies, jobs, investment, lending and tax revenues will dry up.

Unfortunately, Owen’s claim that the Robin Hood tax would only punish bad behaviour in the financial services industry can’t be sustained. I understand the motives and can sympathise with anger at the banking sector but this is the wrong policy for so many reasons.

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