From the TUC

Would a Robin Hood Tax be bad for business? No.

09 May 2013, by in Economics

That’s the short answer, but, given the recent leaking of a letter by Business Europe (the ETUC’s employer equivalent, to which the CBI belongs) and the protests from German blue-chip businesses reported in the Financial Times (£), it may be worth explaining why.

In fact, a Robin Hood Tax on financial transactions would be good for the real economy, encouraging long term investments rather than short term gambling. Because the tax would fall mostly on the high ferquency trading that sees trillions of pounds simply whizzing around the exchanges never actually making anything (except more money, which is then leeched off in fat finance sector bonuses), longer term investment in real businesses would become relatively more profitable. So the money would go into productive economic activity, rather than betting on the markets.

And it would provide governments with the revenue that they would then use buying more goods and services from the private sector. It’s often forgotten by employer mouthpieces that large chunks of public sector spending go straight into the private sector, where schools and social housing are predominantly built, on top of the longer-term effects of infrastructure and skills training. That’s why the Government’s austerity policies have led the economy to judder to a halt.

It would even be good for the City, in the long-term: a bit like a diet for someone fat (disclosure: I know what I’m talking about!) The financial sector would emerge fitter and healthier, although – and trust me I’m being genuinely sympathetic – it would not be fun for a while! We’re doing some work to see how many more people might end up with jobs in the finance sector if a Robin Hood Tax was introduced, albeit on more reasonable salaries, not bloated, bonus-fuelled “remuneration packages.”

The criticisms that come from business are neither new (despite what journalists are saying to sell their papers!) nor significant. And they have all been taken into account by campaigners and the officials of the European Commission and the 11 European governments supporting the tax. The Business Europe letter was, unfortunately, dated May 2012, and it certainly reflects a view that hasn’t changed since then!

German employers (in a country where all three major political parties back the tax) are reported to be concerned about the impact on hedging exchange rate risks when they export; the impact on pension funds which build up their resources by trading; and the impact on the repo market which helps provide companies with investment capital. Of course, some of these concerns are technical ones which need to be taken into account in drafting the precise text of the tax rules (I’ll concede they may have a point on repo’s) – so employers are talking up a negotiating position, rather than actually opposing the tax.

Their concern about hedging (which is a perfectly reasonable activity if you trade in different currencies, which can go up or down) is understandable too, although they are exaggerating the impact, and ignoring the exclusion of currency transactions from the EU proposal (maybe they’re attacking an earlier draft….) On pension funds, I’m slightly cynical about their motives (employers are not, historically, the main defenders of workers’ pensions or they wouldn’t raid the pension pots so often!) But our main point is that pension funds would be hit if they engaged more and more in risky but remunerative derivative, option and futures markets or high frequency algorithmic trading. But if pension funds went back to the way they worked when they were actually making money, by investing long term and turning over their share portfolios every few years rather than every few seconds, the effect of the tax would be so small as to make no difference (indeed, such a switch in investments might actually result in richer pension pots because they would be less likely to be bled dry by the fees of overactive fund managers, and the economy might actually grow again!)

Turning to the Business Europe concerns (some of them shared, surprisingly, with German employers), there are a lot of apocalyptic warnings in the letter, but most of the concerns can be addressed in negotiations (eg over how public debt is managed – surprisingly, there’s little point in Governments taxing themselves!) Substantively, the only additional concern is the old chestnut that financial sector activity will move abroad – despite the inclusion of rules that would clearly prevent that happening or being worthwhile.

It would be nice if businesses demonstrated that they had explored the positives as well as the negatives of the tax, from their perspective. They might still come out against, but it would be less of a knee-jerk response, and might even lead to changes in the proposal that we could all live with.