Why Owen Barder is (mostly) wrong to oppose the Robin Hood Tax

February 12, 2010

     By Duncan Green     


Owen Barder has a thought-provoking post setting out his objections to a financial transactions tax (FTT) in response to the launch of the Robin Hood Tax campaign. I’ll run through the areas where we disagree, then where we agree, and finally the areas where I am still sitting painfully on the fence.

Where we disagree:
First the framing: Owen claims the FTT tries to kill three birds with one stone – redistribution, curbing speculation and finding money for climate change adaptation and aid. I would argue that one of the reasons why the FTT has got so much more momentum than it’s forerunner the Tobin Tax, is precisely because it has abandoned the effort to throw ‘sand in the wheels’ and curb things like currency speculation. Owen is right that a 0.005% tax on exchange trades would hardly have deterred George Soros from breaking the pound in 1992.

The Sun explains currency speculation

The Sun explains currency speculation

So the FTT is actually a progressive tax, used for filling fiscal holes in the rich countries, paying for climate change adaptation and mitigation in developing countries, and funding aid pledges to the poorest countries.

Next the issue of ‘incidence’: All taxes get paid by someone  – obviously money doesn’t come out of thin air, (although in the weightless world of finance, it sometimes seems to come pretty close). The money raised will of course have an impact on the banks. But NGOs’ own analysis and research by long time (and heavily scrutinized) FTT wonk Rodney Schmidt suggests that the banks could contain a large part of the initial burden of taxation without passing it on to consumers. Rodney has looked into previous fluctuations and found ‘it is not at all clear that there is a strong correlation between trading volume and bank profits.’ He adds:

‘In the wholesale foreign exchange market banks themselves will pay the tax, because there are a lot of them trading constantly with each other in a competitive market. However, in the equities market, there is no wholesale market at all, so it will be much easier for big banks to pass on the cost of trading, including the FTT, on behalf of clients to the clients themselves.’

So the tax on currency trades and some other bank activities would not have a big impact on the rest of us, but as Rodney says, a wider version of the tax that includes trading in shares is likely to have at least some knock-on effects. This definitely deserves more study both on the likely distributive impact, and possible measures to prevent costs being passed on in regressive ways, but research alone will struggle to find all the answers – why not introduce the tax on currency trades first, then extend it slowly and monitor impact?

In the end, even in share trading, the knock-on effects are likely to be a small proportion of the overall amount raised, so the tax is likely to still be very progressive, unlike many other forms of taxation, such as VAT. Does Owen oppose the UK’s existing 0.5% stamp tax on share trades for the same reasons? Saying ‘there’s no point in taxing banks, they’ll just pass it on’ could equally apply to any form of corporate taxation, yet Owen apparently supports many of those. And let’s not forget that banks are seriously under-taxed compared to other sectors.

In similar vein, Matthew Lockwood suggests that a global wealth tax would be more progressive and transparent, to which Owen adds a long list of other progressive alternatives (extending national insurance and the like). This is classic economic debate – identify your ‘first best solution’, and then contrast it in lofty tones with all the ‘second best’ ones. But there’s usually a reason why the first best ones are not already in place – it’s called politics. There is currently a political opportunity presented by the global financial crisis to introduce a (very) small tax that will raise a bundle of cash for good causes. I do not think that window exists for the alternatives that Matthew and Owen are proposing. So guys, if you can’t compete with the combination of volume, progressivity and political viability of the FTT, why not get behind something that might actually happen? This is not an academic exercise, but a serious effort to raise desperately needed cash.

Finally, Owen’s argument that the FTT will be cyclical and so will add to the volatility of aid, doesn’t hold water. Sticking the revenue in a fund and smoothing out the bumps is relatively straightforward, as numerous examples of national commodity stabilization funds have shown in recent years.

Where I agree with Owen is on his view that an FTT won’t have much of an impact in regulating financial markets – absolutely, that needs a separate approach (in fact, the absence of a major impact on the workings of the market is precisely part of the FTT’s viability!) The ‘socially useless’ activities of the sector need to be curbed (thanks Lord Turner), along with volatility, which causes huge damage to the real economy and the ‘privatise gains, socialize losses’ logic of periodic bank crises that ratchet up public debt and inequality. Regulate away, people.

And finally, where I’m agnostic is over Owen’s argument that the FTT is in a way too easy. He wants to join battle with those who oppose aid, win the argument for ‘good aid’, and then get people to willingly cough up the money needed. On the one hand, that’s a strong ‘social contract’ kind of argument, stressing the importance of the political and financial links between citizens and state, (albeit in this case limited to the donor countries), and it forces the aid industry to take issues of quality and accountability seriously. But on the other, it seems a little extreme/purist. Do we just tell the millions around the world they will have to wait for schools, hospitals and relief from climate change until we convince every last tabloid reader (and even more difficult, their editors and owners) of the effectiveness of aid? Of course we need to continue to work on public opinion and the quality of aid – and we do. But presenting this as a choice between supporting the FTT and everything else we do on aid is entirely false – we are, believe it or not, capable of working on more than one thing at the same time! 

One last whinge. A lot of the commentaries on the launch of the tax have been very sniffy about the role of celebs like Bill Nighy and Richard Curtis. I don’t think that’s fair – they have been concerned with development issues for a long while (since well before Make Poverty History) and actually know a good deal. But I would say that, wouldn’t I. Why not judge for yourself on the basis of this clip of them appearing on the dreaded Breakfast TV sofa to launch the campaign.