Robin Hood Tax - 14th November 2011

For over a year now I have had a steady stream of emails asking me to support a so called Robin Hood tax, in recent weeks this stream has developed into a flood following the protest at St Paul’s Cathedral, and the support for the demonstrators’ demand for the tax lent by the Archbishop of Canterbury.

The campaign states that “the big idea is to generate billions of pounds – hopefully even hundreds of billions of pounds. That money will fight poverty in the UK and overseas. It will tackle climate change. And it will come from fairer taxation of the financial sector. A tiny tax on the financial sector can generate £20 billion annually in the UK alone. That's enough to protect schools and hospitals. Enough to stop massive cuts across the public sector. Enough to build new lives around the world – and to deal with the new climate challenges our world is facing.”

Now, who could disagree with that? The demand for this tax however, is not new: it is often called the Tobin tax after James Tobin, an American economist who, In 1972 proposed a tax on currency market transactions. Exchange rate speculation, he argued, "can frequently have serious and painful real internal economic consequences". To limit the problem he said, "we need to throw some sand in the well-greased wheels" of the foreign exchange markets. In other words, raising the cost of currency transactions would reduce their volume and what he considered to be their destabilising effects.

I do not share Tobin’s dim view of foreign exchange markets. I see them as essential for maintaining world trade and restoring economic competitiveness. Movement in currency exchange rates can have very beneficial consequences for an economy too (effects that the Greeks and Italians can now only dream of, because -if they had kept their currencies- their exchange rates would now depreciate saving them having to be bailed out). Tobin’s objective was to reduce the efficiency of the market and the volume of the trade –which is not entirely compatible with the Robin Hood movement’s dream of raising hundreds of billions from taxing it. They want to goose to continue to lay golden eggs, but Tobin knew that it would kill the goose.

This is a trade out of which the United Kingdom does very well, the damage that a tax might do could well reduce our tax revenue rather than increase it, because financial services has always been among our chief exports. I could only be induced to support such a tax if there was international agreement to secure its universal application (which is very unlikely indeed) otherwise It would damage the City of London by driving business to New York and the Far East where the tax would not apply.  I am not opposed to a financial transaction tax in principle, indeed, we already have such a tax: stamp duty, and anyone who has paid it recently on a house purchase will know how expensive it can be.

Let us be clear, there are other members of the EU who see the Robin Hood tax as a milch cow because we in the UK would pay 80% of it. Even if it failed to kill off the trade, as Tobin intended, and continued to raise large revenues, its supporters have already spent the money many times over: climate change; international development; universal primary education and etc. Some readers may find it hard to believe, but there are European states that have yet to honour the commitments on foreign aid that they have already made, and who hide behind the aspiration of imposing the tax as an excuse. The EU commission however, has made clear that the proceeds would go directly into their own coffers.

The UK, of course, has stepped up to the plate in terms of meeting our foreign aid obligations without such a tax to fund it. Others should be honest, and do so too.