September 30, 2011

Tobin Tax, Robin Hood Tax – whatever it is, will it work?

Posted: 15:10 PM CEST

by Bruce Byiers

in Governance, International economy and trade

The European Commission has presented a proposal for a EU-wide financial transaction tax (FTT) to come into effect in 2014. Ostensibly to increase the tax contribution of financial services, to limit market volatility, and to avoid distortions on the internal market, the tax also aims at substantially raising EU revenues. Indeed, the EC’s proposal estimates that it will raise € 57 billion per year, more than the €53.8 billion spent on aid by the EU and its member states in 2010.

So has the Tobin Tax’s time finally come? As one commentator puts it, “Tobin Tax or Not Tobin Tax? That is not Really the Question.” While James Tobin’s 1972 proposal was intended to tax currency transactions, thus dissuading short-term trades and minimising exchange rate volatility, the current proposal excludes spot currency transactions, covering instead securities, bonds, shares and derivatives. So indeed, it is not a Tobin Tax, and actually according to some evidence, it may also even raise volatility.

And what about Robin Hood? Is this our chance to take from the rich and give to the poor? Or at least to further contribute to poverty reduction and limiting the impacts of climate change? The UK Robin Hood Tax campaign suggests it is, and the proposed FTT appears to be one their preferred methods for taxing the financial sector.  However, whether or not this really meets their expectations depends on i) whether or not the tax can indeed be implemented as desired to raise the estimated amounts, and ii) what happens to the money after is has been raised.

Will it really work as intended?

The EC’s proposal is estimated to be able to raise € 57 billion per year, but that will not appear from thin air.  Someone will have to pay but it is by no means certain that the tax will fall on the financial sector. One reason is that the incidence, or final cost of the tax, can simply be passed on to consumers. However, even if this ends up being the case as some suggest would be likely, at least in the long-run (see a recent IDS paper, for example), the fact that financial instruments are more used by wealthy individuals may imply it is relatively progressive. So maybe Robin Hood would be happy.

What may be of more concern, however, is whether or not the companies carrying out the trades can be taxed.  The tax planners employed by financial institutions are no dummies and the residency principal proposed (i.e. that those carrying out the trade will be taxed if they are resident in an EU member state) may leave room for firms to arrange to have residency outside the EU. (Taxes on financial transactions such as in the UK have rather been based on where the trade took place, and are therefore harder to avoid.) Indeed, other taxes on firms based on the residency principal suffer enormously through the use of offshore tax secrecy jurisdictions, the subject of a different campaign by the Tax Justice Network. Some of the same problems afflicting other taxes may therefore also be important here.

And where would the money go?

Even if the revenues can be raised, how would the money be spent? The Robin Hood Tax campaign proposes ear-marking funds for poverty reduction and climate change in developed and developing countries. The FTT proposal also mentions these, but unfortunately they seem almost as an afterthought: the primary stated goal is to create “a new revenue stream with the objective to gradually displace national contributions to the EU budget, leaving a lesser burden on national treasuries”. Although this is perhaps not what campaigners had in mind, the current economic climate, particularly within the EU, has also put pressure on national and development budgets, so perhaps any new money for distribution is a good thing, particularly from such a high-earning sector…

So it may not be a Tobin Tax as such, and it doesn’t fit entirely with the Robin Hood Tax proposal, but it isn’t completely different either. Some suggest it is unworkable, perhaps even intentionally so. EU member states will now discuss the proposal, and while the UK opposes the tax and would accept it only if non-EU countries adopted it as well, Germany and France are in favour. What perhaps will matter more is what happens with a similar proposal being prepared for the G20 by Bill Gates, to be discussed by heads of states at the next G20 summit to be held in Cannes in early November. A coordinated approach across all G20 countries would certainly bring further credibility and put pressure to ensure compliance.

But in addition, if the goal is to raise additional revenues and “to ensure that financial institutions make a fair contribution to covering the costs of the recent crisis”, further attention might be paid to tax secrecy jurisdictions. And this would have the added benefit of really benefiting countries in raising their own revenues to reduce poverty and tackle climate change!


Bruce Byiers is Policy Officer Political Economy of Reforms and Development at ECDPM.



This blog post features the authors personal views and does not represent the view of ECDPM.

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