Why 'Human Capital' is an abomination

March 1, 2010

Gonzalo's blogging; Labour rights in China; insider stupidity; we're all doomed; precision v knowledge; hamster economics; hope in Haiti and putting the UN to music: links I liked

March 1, 2010

The Robin Hood Tax takes off: update, arguments and counterarguments

March 1, 2010
empty image
empty image

RHTlogo-1023x66

The Robin Hood Tax campaign has certainly struck a nerve. On the one hand, huge public support (within three weeks of the launch, 300,000 views of the Bill Nighy youtube, 120,000 fans on Facebook, 30,000 signed up on email) and serious political interest (UK parliamentary launch with 80 MPs, lobby meetings with all the major parties). But also a significant amount of ‘pushback’ in the blogosphere and op-ed columns. Criticisms fall into two broad camps: although it’s an interesting phenomenon, I don’t intend to discuss the first – the ‘who does Bill Nighy think he is?’ tendency of policy wonks who clearly resent upstart celebs speaking out (except to say that Bill’s been campaigning for Oxfam for years, and that the policy wonks are presumably jealous at how much coverage he gets). Let’s get onto the substantial stuff. In the initial exchange of fire, two main issues emerged:

1. Who pays in the end, assuming $400bn doesn’t just come out of thin air? Critics like the FT’s Tim Harford claim that calling it a ‘tax on bankers’ hides the fact that ordinary punters will pay in the end.

My response: Because it is levied once per transaction, the FTT acts as a kind of frequency filter. If a financial institution turns over its whole portfolio once a day, it will pay 365 times as much tax as one that turns over its portfolio once a year. So in the first instance, the tax will fall on high frequency traders like hedge funds and the proprietary trading houses of investment banks, not on low frequency traders like retail investors, people changing money to go on holiday, or high street banks. 

But who has their money in the hedge funds? Well up until recently, it was almost entirely ‘henwees’ – High Net Worth Individuals (HNWIs) – so an FTT would have been hugely progressive, affecting only rich individuals ability to ‘use money to make money’. Admittedly, in the last few years pension funds and other institutional investors have started buying into the more speculative investment vehicles, so the boundary has got a bit more blurred. According to a recent report in the FT ‘most UK schemes were now looking to allocate up to 15 per cent of their portfolio to hedge funds’, although the current percentage is well below that. So an FTT could deter pension funds from moving into higher risk investments – arguably no bad thing. But yes, even though overall, an FTT would be extremely progressive, there would be some pass through to pension plans. In practice, however, an FTT would in reality be a family of taxes at different levels on different kinds of transaction,  and could be fine tuned to maximise that progressivity.

2.  If we don’t introduce it in all countries at the same time, it will put those that do at a commercial disadvantage, and lead to a mass flight of financial institutions.

rbsMy response: Ideally an FTT would be applied globally by all countries.  But while this is being negotiated at the G20 and elsewhere, there is nothing to stop governments taking steps, either as a group of like-minded countries, or unilaterally.

And here’s what for me is the killer counter-argument to this objection. A range of domestic FTTs imposed by different countries already exist! They show that unilateral action is completely possible, and that fears that introducing a tax makes firms go elsewhere are overblown:

– UK: a 0.5% Stamp Duty on share transactions raises more than £3.2 billion each year
– US: a small transaction tax finances the Securities and Exchange Commission
– Belgium: An FTT on the transfer of shares, bonds and other securities. At a rate of 0.5-1.7 % it raised Euro 147 million in 2005.

So if the UK investment houses are willing to stomach a 0.5% tax on share transactions, are they really going to flee these shores over a tax 10 or even 100 (in the case of currency transactions) smaller? Unlikely.

There are a number of other points that get picked up with less regularity: there are other taxes like a wealth tax that are even better (see my previous response); an FTT wouldn’t necessarily curb volatility (I have some sympathy with that one); we should go with an expansion of President Obama’s levy on banks instead (as well, maybe, but not instead – you won’t see much cash for climate change or development out of a bank levy).

And the question that’s been nagging at me for weeks finally surfaced at the parliamentary launch last week. Suppose an FTT were to be be introduced – what guarantee would there be that the revenue would not all go straight to filling fiscal holes in the North, rather than half of it going to climate change and development, as proposed? Two responses: firstly, moral suasion – governments would need pretty thick skins to raid the money destined for development. But thick skins go with the job description, so we also need to think through the mechanics of how the tax would be levied, and see if there is a stage before it reaches the hands of finance ministries, where it could be channeled into arms-length escrow-type accounts that would then distribute it in pre-agreed proportions.

Finally, some stick is being handed out to the Robin Hood Tax campaign for the (over) Robin_Hood_Mask-180x127simplicity of its messages (see Tim Harford’s follow up post). To which I would respond, duh, there’s a clue in the title – it’s a campaign, not a seminar. Campaigns need to have clear messages that inevitably do violence to some of the detail, but the groups that constitute the RHT are busily having detailed grown-up policy discussions with decision makers, reading the research, commissioning new work etc etc.

So where do I think the criticisms are justified? I think there are two places. Firstly, we should have made it clear that we were always talking about banks and other financial institutions, not just the banks, and that we recognized that money does not come out of thin air (but that this is a very progressive way to raise it). Mind you, ‘a tiny tax on wholesale transactions in financial markets’ isn’t quite as catchy – back to campaigning again.

Secondly, we should probably have devoted more attention to putting forward our thinking in policy wonkland, perhaps with a separate geeks website for debate, exchanges of information and research etc. That’s something we need to sort out as the campaign develops. But there should be no let up on the public campaigning – Bill Nighy. Richard Curtis et al have brought this discussion to a level of prominence that ‘undercover economists’ could only dream of. All power to them.

EinsteinLast word to Einstein: ‘We should be on our guard not to overestimate science and scientific methods when it is a question of human problems; and we should not assume that experts are the only ones who have a right to express themselves on questions affecting the organization of society.’ I’m with Albert.

 

Update 2 March: for more on ‘who pays the tax’, read this excellent paper by Sony Kapoor (who also gives Tim Worstall a good going over in the comments to this post).

15 comments

  1. Reasonable argument, it would have been nice if you made the links between Robin Hood and James Tobin. However, the assumption that the Robin Hood tax is relevant to development assumes that more financial resources (of the conventional type) are helpful. Evidence on this is not clear.

  2. Excellent/thoughtful argument. Gives useful/in more depth information to those already convinvced and should help those who have genuine concerns/arguments.I do think you do have to keep repeating replies to concerns, as though some who keep objectiong are3 clearly spoilers, some are just genuine cynical people who know that “they” always pay in the end and those at the top of the tree always always manage to claw back any gains somehow. Something needs to happen to change this reality and the RHT could actually do that. Those who stand to loose unless they found some morals on the way to the cash point will never agree, I guess we have to accept we are only human and some will never see beyond themselves.
    Ive “shared” this article on Facebook and suggested its really worth spending the time to read it.
    THANKS!

  3. Dear Duncan

    I wish you were right when you write that money doesn’t come out of thin air. For it does. In Germany it happens to be 31 banks who have the privilege to “print money” and lend it at interest. I never checked in the UK even though that’s where I discovered this extraordinary myth of “fractional reserve banking”.

    Googling for “money out of thin air” gives you LOTS of hints.

    The Guardian published an article on http://bit.ly/bnB2Q4

    Your article is EXCELLENT and the RHT is the next best thing to the real financial reform that we need. More about that on http://publicdebts.wordpress.com

    With best wishes for more and more power to your writing elbows,

    Sabine
    Organiser, Forum for Stable Currencies
    http://forumforstablecurrencies.info

  4. Sigh.

    You are absolutely missing the point.

    Imposing an FTT will reduce turnover (you agree with this, see remarks about volatility). Reduced turnover is the same as reduced liquidity (this is an identity, no proof needed). Reduced liquidity leads to expanded margins. That is, the difference between buy and sell, bid and ask (while proof of this is required that’s not hard to find. It’s even noted in Dean Baker’s paper on arguments agains an FTT. Transactions costs is small companies, with low liquidity, are higher than transactions costs in large companies with high liquidity. Lower liquidity leads to higher transactions costs is both obvious and trivial.)

    Right, so the result of this tax will be higher margins in the financial markets. Yes?

    So, who pays these higher margins? Everyone who uses financial markets. So, your and my pension finds pay these higher margins. “Real” transactions, FX transactions to facilitate trade pay these higher margins. Changing money for booze on holiday….pays these higher margins.

    So, who are all these people who pay these higher margins? That would be you, me and every other citizen of the world rich enough to ever purchase or use a financial product. Some several billion of us.

    Thus, the Robin Hood Tax, when it says that “This tax on banks – not you or I” or “The Robin Hood Tax will not impact on personal banking or on retail banking. That’s because it targets a distinct area of bank operations – high-frequency large-volume trading, undertaken by financial institutions in the ‘casino economy’. 

If you change money to go on holiday, send remittances abroad, invest in a pension fund or take out a mortgage, you will not be affected by this tiny tax.” is either ignorant or lying.

    Up to you which you think it is but whichever it’s hardly the basis for changing the global taxation system, is it? Ignorance or lies?

  5. And this paper on tax incidence is, well, trying to be polite about it, crap.

    “Clearly, the financial sector has ample capacity to absorb a significant proportion of
    the transaction tax through a combination of lower profits and lower compensation
    for employees. While some of the costs will be passed through to the real sector of
    the economy, the bulk of the tax burden will fall within the financial sector itself,
    primarily on hedge funds and investment banks.”

    That it is possible for banks to pay some of the tax without passing it on means nothing. The real question is who will carry the costs of changes in behaviour caused by the tax? That will have to be consumers….through those wider margins.

    Note please that, even in this paper defending the tax, he says that the “real economy” (that’s you and me folks!) will pay some of the tax. Which brings us back to the RHT people lying really, doesn’t it? Their own papers tell us that consumers of financial products will pay at least some of the tax. Something they tell us we won’t.

  6. Dear Tim,

    I am not sure who you are but it is pretty obvious you have never worked in financial markets. I have!

    You say “Reduced turnover is the same as reduced liquidity (this is an identity, no proof needed).” – You must be Kidding!!

    Anyone who has worked in the financial markets will tell you that Turnover is not the same as Liquidity. Liquidity in a market comes from a diversity of opinion. You can have a highly liquid market with very low turnover – where participants can trade easily when required. Conversely, you can have a market with very high turnover with low liquidity. This is what we saw with the crisis. Markets which had a high turnover turned out to be very illiquid.

    “Right, so the result of this tax will be higher margins in the financial markets. Yes?” – Seriously Tim, have you have ever been close to a trading floor?

    First, there are many financial markets not just a single one. Take the Credit Default Swaps being used to speculate against Greece now as an example. Now, it is a market dominated by Hedge Funds. You sound like someone who has a lot of money, perhaps invested in hedge funds – so if we tax CDSs as I think we should – Hedge funds will pay and if you do have your money in a Cayman Island Hedge Fund, so would you. This is the way it should be. Most of the rest of us, who keep a respectable distance from these hedge funds, will NOT pay.

    Second, Transaction costs for a security are the sum total of a number of factors 1) the brokerage fees 2) the price impact of when you trade 3) short term volatility (how much does the price move by between when you decide to trade and when your trade goes through. In the time that it will take you to go to the toilet, the market would have moved, usually by an order of magnitude greater than the tax rate you will need to pay. In fact, the volatility reducing effect of an FTT (by reducing the proportion of noise or momentum trades) is likely to exceed the rate payable by the tax.

    Third, and perhaps most important, brokers trade far more often than optimal because they earn a fee on each transaction – this well known phenomenon is called churning. This means that end users end up paying a transaction cost of say 10p per transaction 100 times – GBP 10. To the extent the FTT would reduce excess turnover and churning, it would also reduce the total transaction costs payable.

    Fourth, it is easily possible to levy much higher rates of tax on those financial markets where retail customers are not exposed – the burden will then fall mostly on hedge funds and investment banks. An then there are exemptions and refunds that can be instituted in markets where retail customers have a high exposure.

    “And this paper on tax incidence is, well, trying to be polite about it, crap.” – What a sophisticated, well-thought out and well argued response? I am so impressed that I have nothing to say – how does one argue with crystal clear logic like that?

    “Note please that, even in this paper defending the tax, he says that the “real economy” (that’s you and me folks!) will pay some of the tax.. people lying really, doesn’t it?” – How you derived one from the other, only heaven can say.

    One needs to raise $10bn new tax revenue. How can one do it? Increase VAT – bad idea. It’s a regressive tax where the poor bear a much higher rate than the rich. An especially bad idea at a time one needs to stimulate consumption. Increase income tax – We just did. Increase corporate tax – Maybe.

    Or tax the parts of the financial sector where the poor sections of the economy are not exposed – Of Course. This is what the FTT is about. Plus it improves market functioning in many other ways by penalizing Churning, excessive Short-termism, Complexity and Opacity.

    The crux of the argument is that while someone always pays any tax, the percentage of a FTT that falls on say the lower 50% of income groups is negligible compared to any other equivalent form of taxation with the possible exception of an even higher top rate of income tax or a Norwegian style wealth tax. Most of the tax will come from within the financial sector and their employees – the exact same people who brought us into this crisis and are walking away with millions in bonuses again.

    Now Tim, go read the paper.

  7. I’ve read your paper. I’ve read the Shulmeister paper. I’ve read Dean Baker and even the TUC paper.

    I’ve also read the papers from Oxera and the like on the incidence of Stamp Duty on share trading. I’ve read Joe Stiglitz on how the incidence of a tax can be greater than 100% of the tax raised.

    No, sorry, but you cannot wibble out of this one. The incidence of this tax will be at least partly upon all users of financial markets. That is, pension funds, remittances, individuals changing money to go on holiday and so on.

    And it’s entirely possible that the burden carried by those will be higher than the amount raised in the tax.

    Which means that when the RHT says that we consumers won’t pay the tax they are either ignorant or lying.

    Neither of whicdh are good reasons for adopting their idea.

  8. Sonny, you are a lucky man never to have heard of Tim Worstall.

    Tim is, amongst other things, an official blogger and press officer for the United Kingdom Independence Party (UKIP) – joining the ranks of Rustie Lee and Robert Kilroy Silk in putting himself firmly in the mature and considered mainstream of serious thinkers about the problems facing the global economy… or perhaps not.

    He also enjoys visiting websites to accuse people of lying and ranting on minor points of detail. I’m sure he’ll be back soon to have another rant. He also deals in some minor metal commodity markets – no doubt that will form the basis for his next post with claims to be the modern day Tallyrand of global finance.

    Tim raises the broader philosophical question of how individuals react to change. I always admire Martin Wolf – a man with deeply held liberal views, but with enough of a searching intellect to ask themselves difficult questions. And the past two years have certainly thrown up difficult questions about the role of global financial markets. Tim is a good example of the other method of reacting to change – stick your head in the sand and keep blogging.

  9. Suppose this FTT was introduced. The revenue raised in the UK and accruing to HMRC would dwarf the revenue raised in Paris and Frankfurt. Although the UK is not part of the eurozone, London is the de facto euro capital. All trades settled in London should be revenue for the UK no matter where the trade originated.

    How do you think European governments would react when the see the revenue generated for the British exchequer compared to the paltry sums generated for their own? To transfer tax collected in Britain because the trade was settled in London to others would be an obscenity.

  10. In the Tim/Sony argument my reading is that Sony wins becuase he isn’t denying that there will be some, probably small, leakage of tax incidence onto the general public, but I think Tim seems to accept that most of the burden will be borne by the frequent traders.
    2 questions for Sony:
    1) If the volume of churning trade chasing tiny margins falls away dramatically, as Tobin wanted, what effect will that have on the projected yield of £250 bn?
    2) Given that the bulk of the taxable trade will be in the hands of hedge funds as the banks withdraw further from thses markets under new capital rules and possibly Volcker, what would stop one or more rogue tax havens cornering the market in the location of trading and/or settlement for these players, who can shift domicile and operate with less scrutiny than other institutions?

  11. I love the way that some here dismiss Tim. For those who don’t know, he is an entrepreneur and I suspect, knows more about economics and business than most of the folk on this board. His point seems to be unanswerable: taxes are a cost. Indeed, that is often their point.

    For instance, we tax alcohol and tobacco, for example, to drive down consumption for health reasons. Policymakers support imposing tax “costs” on certain items of consumption to reduce turnover. Sometimes, it is argued by people that property should be taxed more to discourage speculation in property, etc.

    So it seems fairly clear that taxing financial transactions will mean there will be fewer transactions overall, and that the volume will decline. This will, as Tim Worstall states, reduce liquidity, widen the bid-offer spreads in financial markets for things such as currencies, bonds, equities, commodities and so on. It will therefore be more expensive for people to obtain mortgages, buy currencies when on holiday, and so on. Of course, the tax will affect groups differently – that is another issue. But there will be considerable knock-on effects.

    Alan Doran:
    It is no doubt true that some funds will migrate to “rogue” tax havens where FTT does not hold sway. Well, a less negative way of putting it is that people do business where it is cheaper to do so, ie, where there are lower taxes. That is what is meant by economic freedom.

    An example of this is when, in the very late 60s, a change to the US tax treatment of bonds encouraged the development of an offshore eurodollar market in London.

    Capital migrates. If people want to stop or cut financial transactions and prevent trade, they should be more honest about it.

    Duncan: Thanks ‘Tom’ – any particular reason for opting to use a pseudonym? (http://www.samizdata.net/blog/archives/2011/10/a_comment_oppos.html)

  12. This is one of the most immoral proposals I have read though calling it a “Robin Hood” tax has a wonderful irony, I quote from Atlas Shrugged-

    Ragnar Danneskjold: “But I’ve chosen a special mission of my own. I’m after a man whom I want to destroy. He died many centuries ago, but until the last trace of him is wiped out of men’s minds, we will not have a decent world to live in.”

    Hank Rearden: “What man?”

    Ragnar: “Robin Hood.”

    Ragnar: “. . . [Robin Hood] is not remembered as a champion of property, but as a champion of need, not as a defender of the robbed, but as a provider of the poor. He is held to be the first man who assumed a halo of virtue by practicing charity with wealth which he did not own, by giving away goods which he had not produced, by making others pay for the luxury of his pity. He is the man who became a symbol of the idea that need, not achievement, is the source of rights, that we don’t have to produce, only to want, that the earned does not belong to us, but the unearned does. He became a justification for every mediocrity who, unable to make his own living, had demanded the power to dispose of the property of his betters, by proclaiming his willingness to devote his life to his inferiors at the price of robbing his superiors. It is this foulest of creatures – the double-parasite who lives on the sores of the poor and the blood of the rich – whom men have come to regard as the moral idea.” “. . . Do you wonder why the world is collapsing around us? That is what I am fighting, Mr. Rearden. Until men learn that of all human symbols, Robin Hood is the most immoral and the most contemptible, there will be no justice on earth and no way for mankind to survive.”

  13. Since Sony Kapoor is using an appeal to authority (his own) to buttress his arguments, it would be germane at this point for him to disclose quite precisely the nature of his work in financial markets.

  14. Man is born free but everywhere he is forced to suffer the oppression of coercive taxation.

    How long must we endure this wicked manifestation of statecraft, I wonder?

    ‘Whoever claims the “right” to “redistribute” the wealth produced by others is claiming the “right” to treat human beings as chattel.’ Ayn Rand, The Virtue of Selfishness.

Leave a comment