Last week a development charity press office sought my support for a “Robin Hood tax”. The idea of the tax – “turning a crisis for the banks into an opportunity for the world” – is that “a tiny tax on bankers has the power to raise hundreds of billions every year” to “tackle poverty and climate change”. Well, I am a big fan of Robin Hood, no great fan of bankers and would like to tackle poverty and climate change. But the idea leaves me cold.
The tax is being backed by a large coalition of charities and fronted by Bill Nighy in a smooth marketing campaign. It’s all in a good cause. But I have been appalled by the campaign’s profound lack of curiosity as to whether this tax would be a good idea.
Start with the claim on the Robin Hood tax website that this is a “tiny tax on bankers … the people who caused this mess”. First, it’s not a tax on bankers. It’s a tax on financial transactions. And it’s not necessarily tiny, because some worthwhile financial transactions have a very large face value, and a much smaller true value. For instance, I might buy car insurance which could – if I knocked somebody down and permanently disabled them – trigger a payment of £1m. My insurance company might want to reinsure that million-pound risk, a perfectly sensible, socially useful and non-speculative transaction. But at a “tiny” tax rate of 0.05 per cent, that’s a £500 tax on a face value of £1m. It’s hard to imagine such a tax wouldn’t somehow affect my premium.
The Robin Hood tax proposes to raise several hundred billion pounds, and it will ultimately be paid not by “bankers” but by all of us, with the burden shared unpredictably. Robin Hood himself seems incurious where his arrows will strike, or at least unwilling to be specific.
The tax would certainly be attractive if, like a tax on carbon dioxide or congestion, it reduced destructive activities. But would it? James Tobin and John Maynard Keynes both proposed taxes on financial transactions and each believed that the tax would reduce financial volatility. This is possible but far from obvious, when you realise that the tax might encourage bigger, more irregular financial transactions. An analogy: if I have to pay a charge whenever I use a cash machine, I make fewer, larger withdrawals and the amount of money in my wallet fluctuates more widely. Bear in mind, too, that the most bubble-prone asset market is for housing, which is bought in very lumpy, long-term chunks.
There isn’t much evidence as to whether transaction charges reduce volatility. What there is is mixed – but perhaps leaning against the Robin Hood tax. On the French stock market, coarser “tick sizes” raise spreads and act like a tax: they increase volatility. Transaction taxes on Swedish stocks in the 1980s reduced prices and turnover but left volatility unchanged.
Banks have let us down, but the answer is to reform the banks, not tax financial transactions. (Sometimes the local bus company lets me down; I have never regarded this as an argument for a bus tax.) I’d modestly suggest a combination of stricter capital requirements, closer supervision, better bankruptcy procedures for banks and charges for the taxpayer’s underwriting of banks’ balance sheets. A tax on financial transactions doesn’t make my top 10 policy reforms. In fact, it doesn’t figure on the list at all. It’s a sideshow.
I haven’t forgotten the ultimate aim of raising money for the very poor. It’s a cause I continue to support politically and personally. But the Robin Hood campaigners have dented my confidence that they should be trusted with my cash. Money isn’t enough: we must also care about what works. Do they?
Also published at ft.com.