The Robin Hood tax

Should a tax or levy be imposed on currency transactions (tobin tax), or a more comprehensive financial transactions tax created to contribute towards the cost of the financial bailouts? Such taxes discourage socially useless activities like currency and share speculation. A levy of 0.005% on currency, shares, bonds, securities and derivatives trading for both domestic and cross-border activities, would affect the size of the over large financial sector, and raise revenue from the people most responsible for the global financial crisis. Foreign trade or long term investments would not be affected due to the levy being only a trivial expense for these activities.

http://evatt.org.au/publications/papers/233.html
http://robinhoodtax.org.au/
http://www.youtube.com/watch?v=8iFvhDK-5OE&feature=related

A Tobin Tax (or “Robin Hood” tax) would be a horrible idea, for numerous reasons. For the simplicity of debate, I will narrow it down to two main objections, along the lines of what a tax does: 1) move resources from the private sector to the public sector, and 2) discourages activity/economic behavior/types of transactions by increasing the costs.

First, a Tobin Tax would disincentivize speculation by increasing the cost; even at 0.005%, it stills increases the cost of the transaction and changes the perceived profitability of a trade. If a bank is trading a billion dollars a day, that’s $1,000,000 in taxes - and a million dollars certainly isn’t pocket change.

In your post, you call currency and share speculation “socially useless”, and the website you cited states that “too much trading is done to make a quick profit, and not to serve the real economy.” I would like to counter with the offer that speculation is not only socially useful, but it is indeed absolutly vital and critical to the health of an economy, and that any time an honest profit is made (IE, the profit does not occur through the use of fraud) it does indeed serve to benefit the economy.

Currency and shares are like any other tangible commodity bought or sold on a market when it comes to speculation; it doesn’t matter if the speculator is buying grain, fruit, oil, or gold, pounds, euros, yen, or dollars, or shares in IBM, Microsoft, Apple, or Wal-Mart. They are buying the commodity because they believe that, in the future, it will be worth more than it is worth now. Unlike the tangible goods, without speculation intangibles like shares and currency would have no worth. What use do I, as someone living outside of the EU, have for a Euro? None of the local stores will take it, I can’t buy gas with it, I certainly can’t eat it or make something useful out of it. Unless I plan on moving, the only reason I (or a bank) would have for buying euros is because I think I could make more money that way than by using my dollars for something else.

The entire reason people provide capital for a corporation’s initial public offering is because they expect that the shares they buy will be worth more in the future - speculation. People are willing to buy shares from stockholders who want out of a company because, again, they feel they can buy the share now for less than it will be worth at a later date - speculation. Governments are able to fund their operations through bonds and treasury bills because of speculation - other entities (individuals/banks/foreign countries) buy the cash instruments and provide money to the government because they feel that buying a sum of dollars (or pounds, euros, or marks) will provide a return on their investment. Speculation provides cash liquidity and helps to normalize the supply.

Speculation can also provide signals on the expected future results of present day actions. If a company is doing something bone-headed and stupid, their stock price will plummet as people recognize the error. The falling stock price gets the investors riled up, who demand a change in the company and avert the future disaster. Government bonds and currency prices work the same way - when the United States government passed legislation that would dramatically increase business expenses in a few years, stock prices fell in response to the expectation of a decrease in future value, and voters were riled up and demanding to know what the government was doing to the security of their future pensions.

Second (and this applies to most taxes in general), the Tobin Tax assumes that the government will be a better steward of the nation’s resources than the individual consumers who are participating in the economy. Yes, the Tobin Tax is levied specifically on one small subset of economic transactions and targetted against a specific section of the economy (the financial/banking sector), but a nation’s economy is a flexible, elastic thing and not a zero-sum game.

For example, corporations do not really “exist”; they are there simply because we pretend they are. When someone talks about Goldman Sachs, there isn’t an entity there they can go talk to - the company is meerly a collection of stockholders and employees. Hence, any tax levied against a corporation is really being paid for by individual citizens - either the stockholders (in the reduced worth of their stock), the employees (the company may have to lay off workers or postpone raises to pay for the taxes instead), or the individuals who do business with the company - increased costs passed on to the consumers, or less money being sent back into the economy through the company’s vendors. Thus, a ‘small’ tax on a ‘small, tightly defined’ section of the economy still has the ability to impact everyone.

Returning to the main point, again, it assumes that the government can do a better job distributing the money than you can. If the bank decides to increase its fees to offset the cost of the tax and you end up paying an extra $10 a year, and the government dedicates that money to “fighting poverty”, that has the same effect as the government ordering you to give $10 to your local food bank because the government knows that is the best use of your money, regardless of what your plans for it were. And, of course, the government is an inefficient bureaucracy - between the costs of enforcing the taxes, paying the tax collector, paying however many administrators and clerks it takes to run their program, and finally giving what’s left to the program, that $10 you hand out might turn into $6 for the food bank and $4 for the government employees. For this reason, I consider any taxes beyond the bare minimums to run a country to be an inefficient waste, and taxes on specific things/people are morally unjust, fraudulent representations by the government.

A further consideration that is frequently ignored by governments is the opportunity cost of moving resources out of the private sector: that is, what would you have done with your $10 if the government hadn’t demanded it be spent a certain way? At the website, it says that one one minute, the Tobin Tax could raise enough money to build a six-room schoolhouse for 250 students. What if the bank had wanted to loan that money to someone starting a small business? What if it had been earmarked for a number of first-time homebuyers who can’t get a loan for the homes they want now? What if it means an inventor can’t find funding for a revolutionary new invention?

In the last thirty years the financial system not the real economy has grown by leaps and bounds to the point where individuals and companies are more dependent on debt than ever before. These circumstances have increased the number of takeovers and buyouts and this culminated into the global financial crisis that led to the most severe economic downturn since the Great Depression. In these circumstances of massive market failure, a Tobin tax or financial transactions tax can actually solve more problems than it creates.

Takeovers and buyouts are normal business practices, and by themselves have had little to no impact on the recession. Take overs and buy outs happen during a recession, since companies might need the cash to fund operations (and/or they get into a position where they can not operate on their own any more) or their value deflates to the point where they look like a good investment. They are a sympton, not a cause.

You are correct about the economy using (and getting used to) massive amounts of debt and that ultimatley that caused the recession, but the policies that led to the debt bubble were created by the US Federal Reserve, the central bank, and not by the other banks in the private sector. The Federal Reserve lowered their prime intererest rate to an astonishingly low number for an extended period, making it incredibly cheap and easy for everyone to borrow money, thereby bloating the money supply. There are only two outcomes in that situation: rampant inflation (a higher supply of money being spent on the same relative amount of goods = higher prices, and the central bank provides more and more money to keep up with the rising costs) or a recession (the money supply gets cut backto prevent inflation, less money available for the same amount of goods = lower prices = a recession).

I’m perfectly willing to go into as much detail as you want (I’ve retyped this post a few times to try and make my point as concise as I can) but basically, the recession’s severity and length can be attributed to the hamhanded shenanigans of the Federal Government, the Federal Reserve, and their agents.

At its core, a recession is when inflated costs adjust back downwards towards a more acceptable level. Adding on additional costs (government taxes) will not make that reduction go any faster or finish sooner - it will drag it out, since the government is artificially keeping the costs elevated. In fact, I would argue that part of the reason the recession didn’t end in 2007/2008 was because most private individuals saw the government’s response (spend a ton of money that didn’t need to be spent, declare additional taxes and other costs for businesses, etc), realized they would have to pay for it eventually, and locked up their pocket books so they can have cash when the government comes to take it from them.

Also, you can’t get anywhere by beating a dead horse. If the market “fails”, how will increasing the costs and adding additional burdens to said market going to make it better? It seems like trying to fix a cut by using a cleaver.

And this is a side note, but what, exactly, is a massive market failure? I would assume that a “market failure” would be something like a power failure, equipment failure, or the infamous wardrobe failure - IE, that said item stopped performing the task it is intended for. The market is not intended to drive up prices on a constant basis; recessions are a vital part of the market to keep inflation in check. If a recession is a ‘market failure’, that would make Zimbabwe one of the most successfull markets ever - in November 2008, their currency inflated by 79,600,000,000% (for one month; it’s about 98% per day, or prices doubling every 25 hours).

In other words the economy has widened, but not deepened. Not all economic activity has the same value, their is a place for a financial sector within an economy. The financial sector provides capital for new ventures and is a check on management performance as you have already mentioned. As the financial sector becomes larger and larger in relation to the real economy its value will decrease. The actions of the federal reserve in the months leading up to the sub prime crisis does not enhance or detract from this fact. It was just the end game and it was played badly.

First, I don’t see how you can just dismiss the Federal Reserve - they are the sole entity in charge of the monetary supply, and their policies play a significant, major role in the availability of credit. There are significantly more people willing to take a home loan at 5% interest as opposed to a 17% interest rate. If the Federal Reserve prints up $8 trillion and dumps it into the economy, it will have a significant impact - and the Federal Reserve is the only entity that can inflate the money supply like that. Everyone else in the private sector needs to earn their money from someone else.

I’m not entirely sure what your terminology means. I’m a professional accountant, a business major, and I study economics, but I’ve never heard the economy described in terms of wide or deep. Intuitively, it seems like a ‘wide’ economy would be diversified, and a ‘deep’ economy would be heavily focused in one or two areas, but contextually that doesn’t seem to be what you are saying.

Also, what is the “real” economy, if it excludes the financial services sector? Any economic activity is part of the economy.

The financial sector exists to make money. In some cases, it does that by providing capital; in others, it provides other services that are just as crucial - it’s hard to run an economy without banks that can accept deposits or cash checks, to have international trade if nobody is willing to accept a foreign currency, or to make stable plans without insurance against risks. All of these are services that provide value to other economic agents; if they didn’t provide value, then they wouldn’t make money and would not be part of the economy. If the financial sector is a larger percentage of the overall economy, then that just means there is a high demand for those services - arguably, making them worth more, not less.

Australia’s economy is widening at a very fast rate due to a mining boom that is related to China’s growing manufacturing sector. This boom has created huge skills shortages in a number of different industries. Labour shortages are being caused by the mining industry requiring more skilled labour, but the mining industry is not a huge employer of labour. The majority of these labour shortages are occurring in industries that service the mining sector like legal, accounting and financial services, and industries benefiting from the related increase in population and consumption, like construction and retail. While the mining sector widens the economy through its demand for more labour and services, all other sectors of the economy not related to the mining industry are suffering. As the Australian currency appreciates due to the mining sector, other sectors of the economy, for example manufacturing, foreign student education and tourism are shrinking. The Dutch disease leads to a larger economy through widening of the parameters but the growth is very shallow, it lacks resilience.

http://newmatilda.com/2010/06/03/do-we-really-want-be-financial-services-hub
http://www.theaustralian.com.au/business/opinion/population-policy-a-national-pyramid-scheme/story-e6frg9if-1225896291035
http://www.nytimes.com/2010/07/13/opinion/13iht-edbowring.html

Interesting!

The first article you linked (RE: Financialism) seems to be mostly sensationalism with little actual base.

First, the report they cited from the Levy institute was itself an interesting read, but the author makes a couple of fallacious assumptions. It treats income inequality as a problem, when there’s nothing wrong with it - some jobs are worth more than others. It also overemphasises “stakeholders” as opposed to “shareholders”. Yes, the shareholders need to keep their customers and employees in mind when making decisions, otherwise they’ll drive them off to a competitor. The “stakeholders” should not be taking the place of the shareholders, though - they aren’t owners. I’m not sure if you’re familiar with the data, but in the US our major auto manufacturers (General Motors, Ford, and Chrysler) seriously underperform when compared to foreign companies that have established themselves in the US (Honda, Toyota) and one of the main reasons is because of the influence of the United Auto Worker’s Union. The Levy report praises unions as a means to force company managers to align themselves with the interests of the “stakeholders” (instead of the shareholders), but it doesn’t mention the fact that the primary driving goal of a union is to decrease efficiency - to get the members paid more for less work.
Finally, (and it isn’t a main point, just a tidbit) the report mentions how “wastefull” and “pointless” it can be for someone to “play” the stock market when they don’t know what’s going on. I would argue that it isn’t wastefull/pointless at all - if someone makes a stupid, random investment and looses money, then they have transferred some of their wealth to someone who isn’t as stupid and will be more productive with their money.

The New Matilda article also attacks the Johnson report (“Australia As A Financial Centre”). Bluntly, I think it makes perfect sense to capitalize on your strong points. The resource boom will end at some point, and the mining sector will need to be replaced with something else in order to sustain growth. If you already have a strong financial sector with established support industries, why not use it? What would you like to see replace mining instead, and how do you think it should be implemented? The article also mischaracterizes the report, for example, stating that it calls for increased sub-prime securitization. The report itself makes a point of stating that there is almost no sub-prime mortage market in Austrailia, which helped the country avoid the worst of the global recession, and that further securitization would be in the prime market.

Finally (for the New Matilda article) it also brings up income inequality again as a false argument (and other class-warfare ploys) to get people riled up against the “big evil banks”.

That line is nothing but playing the crowd. If Society needs more people working in finance, the economy provides more money for people who go into it as a career. If Society needed more researchers, the economy would provide more money for research. It’s basic supply and demand, applied to the labor market.

The second article (about the population policy) was also interesting, and provided some additional insight on the Australian economy but it has more to do with the problems of socialism (expansive government benefits) than with the financial sector. Most (if not all) industrialized countries are facing a similar problem - with an aging population, how do we continue to afford expensive government programs? The New York Times article is similar, illuminating the economy and possible future problems.

A bank can’t force you (or anyone) to take out a loan, though - all of that debt is voluntary. It’s a problem with the consumerist “I want it NOW!” attitude that has become more prevalent lately. If people demand debt financing, they’ll find a way to get it.