Nigel Stanley
Giles, the free-thinking economist, describes me as amiable in his latest critique of the Robin Hood Tax.
I’m not sure my colleagues would agree with that, but I think I rather like that, so let me try an amiable response – though I fear that positions are now so well dug in that we are probably well beyond the point where any outcome other than amiably agreeing to disagree is possible.
And while Giles is keen to hang this all on the TUC, we were rather late to the party. He is taking on a very broad coalition of charities, faith groups and campaigns.
Giles quotes me:
“many of its critics have build vast superstructures out of arguments necessarily simplified to ensure the campaign goes wider than the wonk community.”
and responds
“So by taking it seriously, and thinking hard about what the Robin Hood tax would actually do, we are missing the point.”
That’s not what I meant at all. What I had in mind were the many critiques of the RHT that failed to understand the rates that we are proposing and the intent of the tax.
Like Duncan, I’m happy to concede that this is to some extent the result of the campaign going for a high initial media impact with simple messages. While I would like to live in a world where issues are settled by dispassionate debate, we don’t – and this is how campaigning works.
A good example of what I meant is Giles’s post here, which discusses the impact of a currency transaction level of 0.05% – ten times the level that the RHT campaign is calling for (0.005%). Others including the TPA have discussed the RHT as if it were set at the rates that Tobin originally suggested and for the same purpose.
We are not. We are looking to transaction taxes as a way of raising money for good causes. Of course they are likely to have some effect on the volume of transactions, and it is likely to be the most speculative transactions that are hit. Tobin wanted to “throw sand in the wheels of international finance”. We may well be dropping a few grains in, but that is not our purpose.
As this is not meant to be the route to reforming the banks it is hardly surprising if Joe Stiglitz does not mention it in his book on banking – the main complaint of Tim Harford that Giles cites. (Though they both also seem allergic to Bill Nighy in the same way that I am to Michael Moore). And while Tim Harford finds it irritating, I suspect that quoting the big cheeses on our side is a reaction to attempts to patronise us as naive.
I would be worried if people thought that a Robin Hood Tax was a substitute for dealing with the sources of instability in the world’s finance system. While in some quarters I think this may be a deliberate misunderstanding, there is nothing to stop people being in favour of transaction taxes and dealing with what Giles calls the right thing:
complexity, overhigh leverage, off-balance-sheet jiggerypokery, tax evasion, whatever.
Given our work on tax avoidance and evasion at the TUC, I don’t think anyone would accuse us of going soft on tax dodging. Our work – and that of groups like Christian Aid and Tax Justice - has helped put this on the policy map.
The other main criticism is the incidence argument. The critics say that the RHT is seeking to raise unfeasibly large amounts from banks and that they will pass on the charges, which will hit ordinary people.
McKinsey estimate global bank profits at $800 billion (before the crash) – that’s 26 times more profit per employee than average, but they are not the only transacters (if that’s a word). We can add in hedge funds whose profits are estimated at between $300-$600 billion. (And don’t forget these profits are paid after bonuses.) There are no doubt other institutions not captured by these stats.
Of course they will try and pass on these charges. That is one reason why we need more regulation as their super-profits suggest that they are not operating in a competitive market.
But cracking down on tax avoidance by banks, financial institutions and other companies will also make them try and pass on these charges - as would making them pay any other tax. This is why the libertarian right always oppose all taxes on corporations.
While the campaign starts with a determination to ensure that the income from the RHT tax is paid from what would otherwise be profits and bonuses, undoubtedly some will be passed on. The key question with incidence though is not just who will it get passed on to but also what would be the incidence effects of alternative policies.
A tax on transactions will inevitably hit those who make the most transactions, and that is going to be the wealthy – not the poor. See here for a new paper that investigates this.
And this is the key to the TUC’s support for the RHT – and I suspect that goes for many of the other organisations backing the RHT.
I long ago learnt that no policy is perfect or is without at least some downsides, but the alternative is to raise other taxes (with VAT the most touted despite its clear regressive incidence) or to make big cuts in spending – at a time when we need to invest in repairing the damage from the recession, tackling global warning and relieving poverty here and abroad.
The RHT is therefore an indirect tax that firstly targets the institutions that did most to cause the crash and who have made super-profits, and secondly, is a progressive indirect tax that is hard to evade. It can make a significant, though only partial, contribution to finding the funds we need to avoid cuts, meet the Millennium Development Goals and tackle climate change.
That is how it should be judged, and while I have rarely been involved in a campaign where I didn’t squirm a little at some of the arguments of allies, that is what I happily endorse.
Giles has argued very well that now is not the time to make spending cuts as that will risk recovery, but I suspect that when it comes to dealing with the structural deficit – he is mainly a cutter, while we are mainly progressive taxers.
Comment made by Giles on Mar 2nd 2010 at 10:39 pm:
Your very decent post deserves a considered reply – some day. But the next day or so is hectic, it may have to wait. Best, Giles
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Comment made by Tim Worstall on Mar 3rd 2010 at 11:12 am:
“Of course they will try and pass on these charges.”
Ah, no, you’re missing the point about tax incidence. It isn’t that people “will try to pass on” taxes. We’re not invoking agency here.
We’re saying that in response to a change in taxation behaviour will change. As a result of those changes in behaviour then other people will be affected by the tax.
Here, a reduction in liquidity will lead to a widening of margins. Thus everyone using those financial markets where margins have widened faces higher costs. The incidence of the tax therefore falls (at least in part) upon all users of financial markets.
Yes, people changing money to pay for beer on holiday, yes, pension finds, yes, remittances and so on.
There’s also the point that such incidence is not capped at the amount of the tax collected. It was Joe Stiglitz back in 1980 who showed that incidence can be higher than 100%. The effects of the changed behaviour can be more expensive than the sum raised.
That’s the problem with this tax: it’s being sold on a false prospectus. The RHT campaign keeps averring that the consumer in general won’t be affected. And yet they will be.
“While I would like to live in a world where issues are settled by dispassionate debate, we don’t – and this is how campaigning works.”
That’s a pretty weasel worded way of saying “we’ll get people to support this by lying to them”.
Comment made by Nigel Stanley on Mar 3rd 2010 at 1:11 pm:
But my point is not that there will be incidence effects, which include behavioural changes. (And if you want a technical discussion see the paper by Sony Kapoor linked to above.)
It is rather that any taxation or cuts package affects people in different ways. Financial transaction taxes will have a progressive incidence. Spending cuts or VAT increases will have a regressive impact.
That’s a political choice – and I expect that you too are a cutter, and possibly a more rapid one than Giles.
Comment made by Tim Worstall on Mar 3rd 2010 at 1:20 pm:
“and I expect that you too are a cutter”
I’m a Fellow at the Adam Smith Inst, so yes, that goes with the territory.
“Financial transaction taxes will have a progressive incidence. ”
No, that’s the thing that needs to be proved, not the thing that can be assumed.
If the incidence is upon all users of financial markets then it’s not in fact all that progressive.
Indeed, we can go further. If margins widen as a result of reduced liquidity, what happens next? OK, we’ve seen that the bruden falls on users. But where do the margins go? To the banks and bankers!
An FTT can therefore be highly regressive. No, not will be, but could be. And we’d rather like to nkow before enacting it, would we not?
I’ve read Kapoor’s paper and am deeply unimpressed.
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Comment made by Giles on Mar 3rd 2010 at 1:35 pm:
Whereas Fearsome Cutter Giles would like to point out that
http://www.centreforum.org/publications/a-balancing-act.html
I am not an ideological cutter. In fact, while I’m posting myself here, read this piece of utter contrarian excellence
http://freethinkingeconomist.com/2010/01/06/the-government-is-smaller-than-you-think/
We do have to cut, eventually: you can’t have your revenue machine generating 10% less without the spending coming down …. eventually. But I’m no Adam Smith Institute ideologue, sir …
Comment made by Nigel Stanley on Mar 3rd 2010 at 2:15 pm:
I hope I didn’t imply that Giles was cut of the same ideological cloth as Tim – as I certainly didn’t mean to.
(And it’s probably libellous).
Both his links are well worth a read.
I’m even tempted to say that Giles may be closer to us than he is to Tim, (if still more of a cutter) – but I suspect that would only lead to trouble.
And rather than reply to Tim I think this response on Duncan’s Oxfam blog by Sony does it pretty well:
http://www.oxfamblogs.org/fp2p/?p=2009#comment-11900
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Comment made by Richard W on Mar 4th 2010 at 2:08 am:
The arguments about the impact on markets with the introduction of a transaction tax at 0.005% are probably exaggerated. At that rate the cost will most likely be internalised. However, that does not mean I support the RHT. I noticed Sony in his response to Tim gave examples of hedge funds trading CDS and churn in securities trading. That is a bit disingenuous when their real target is the $3 trillion per day FX market. Maybe even with currency at 0.005% the financial institutions will internalise the cost of the tax. Although I suspect that it will widen currency spreads and that in some measure affects everyone in the economy.
The reason I would not support this transaction tax even at this small rate is because of what is likely to happen in the future. Once introduced politicians will increase it. Politicians have constituencies and constituents demand spending. Generally raising taxes does not make politicians very popular with their constituents. What better way than just to tweak the transaction tax ever upwards. No crowds of angry protesters as it is just those nasty bankers and hedge funds getting taxed. Eventually the tax is not internalised and it does start to widen spreads. I don’t go a bundle on the efficient market hypothesis. However, I also don’t believe a price can be as efficient with a tax applied and a wider spread as one without a tax.
If we in the UK want to raise a lot of money from a tax (27 billion) with a positive effect on the environment then remove the VAT zero-rating on food. There is a tremendous amount of food wasted in the UK, with much of it ending up in landfill. With VAT applied food would be used more efficiently and less wasted. This would obviously affect regressively those on low-incomes. So counteract the effects through the tax and benefits system for those on low-incomes.