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April 19, 2011

Has the microfinance bubble really burst? Guest blog by Milford Bateman

April 19, 2011

Robin Hood: the long view from Ha-Joon Chang (and me)

April 19, 2011
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This appeared in today’s Guardian and on its Comment is Free site yesterday. CiF is notable for the number and vehemence of Ha-Jooncomments, many of them slightly unhinged. 100 comments in the first two hours is about par for the course, evoking images of lots of angry people in bedsits and offices bashing away at their keyboards. Keeps them off the streets, I suppose.

Robin Hood: a tax whose time has come

Ha-Joon Chang and Duncan Green

The benefits of a tax on financial transactions are now so widely accepted that future generations will ask what took us so long

“In 1816, the British parliament repealed the temporary income tax that William Pitt the Younger had introduced in 1789 to finance the Napoleonic war. The MPs hated the tax so much that they even agreed that all documents connected with it should be collected, cut into pieces and pulped.

When the income tax was reintroduced in Britain in 1842 by Robert Peel, everyone considered it a temporary measure to replenish the depleted exchequer. But despite generations of politicians after Peel promising to abolish it, the tax never went away.

It proved impossible to abandon a tax whose time had come.

By the time Benjamin Disraeli and William Gladstone kept breaking their promises to abolish the income tax (one of the few things they agreed on), the homespun capitalism of the 18th century had already given way to a more organised form of capitalism.

With economic development, the social division of labour was becoming more and more sophisticated, increasing the importance of collective inputs such as infrastructure and education. A more effective provision of collective goods required a well-financed state, for which an income tax was seen as a new vital ingredient.

Robin HoodAs they too developed, countries such as the US and Sweden followed suit. Today, the income tax is the biggest source of government revenue in most rich countries.

The same destiny may now await the Financial Transactions Tax (FTT) – or Robin Hood tax, as it is widely known. Although the French government, which chaired meetings of the G20 finance ministers and the IMF/World Bank member states last weekend, supports a global FTT, American opposition means that initial progress is more likely within a smaller “coalition of the willing”, including France, Germany, and South Africa. French and German support may ensure that the eurozone is the first international forum that agrees an FTT.

Even a decade ago, when it was doing the rounds under the alias of “Tobin tax” (named after James Tobin, the Nobel laureate economist who first raised the idea), the levy was an absolute taboo in polite society. But after the great financial crash of 2008, the case for it is looking “obvious” to many, as indeed the income tax did in the late 19th century. Its time, too, has come.

This levy on financial transactions, even at the very low level that is currently proposed (0.05%), is expected to slow down the most speculative elements of international capital flows and raise the significant sums needed to provide the newly required global collective goods – especially green technologies and development aid.

Of course, the FTT alone will not achieve much in terms of stabilising our financial system. It needs to be implemented as a part of a comprehensive package.

First, countries that cannot issue “hard currencies” should be allowed to use capital controls. The significant change of position by the IMF in this regard following the 2008 crisis is encouraging, but capital controls should be seen as normal policy tools – rather than a measure of last resort, as the IMF still suggests.

Second, we have to reform the rating agencies. Despite their incompetence and even cynicism, revealed both in the 1997 Asian crisis and in the 2008 crisis, these agencies are still deciding what is a good financial asset and dictating how governments should conduct their policies – not just fiscal policies but also monetary and social welfare policies. They need to be regulated more heavily, and a non-profit public agency should be set up to provide a credible alternative to their ratings.

Third, if we are serious about the revenue implications of our financial policy, tax havens need to be reined in, if not Robin-Hood-tax-campaigner-005totally abolished. That single act would generate sums on a par with a global FTT.

Last but not least, overly complex financial instruments should simply be banned, unless they can be shown by their inventors to bring significant net benefits in the long run, in a manner similar to the drugs approval procedure. Otherwise our ability to manage the system will be outstripped and we will repeat the crisis of 2008.

What finally emerges from this new round of post-crisis tax invention may differ somewhat from the FTT, but the general principle – taxing international financial flows for the public good – looks here to stay.

Thirty, 50 years on, our children and grandchildren may be wondering how we ever thought to run the world without such tax – just as few of us can imagine how our grandparents and great-grandparents used to manage without the income tax.”

Here’s my review of Ha-Joon’s latest book, 23 Things They Don’t Tell You About Capitalism. Plus Robin Hood supporter Bill Nighy looks at how to spend the money on UK poverty in this video, and more support for Robin Hood in this Observer editorial on Sunday.

5 comments

  1. Hi Duncan – the comments on the CIF site are indeed enough to make grown men weep.

    I’m not against the FTT, though I think there’s need for the pro-camp to do two things: 1) Prove or at least robustly model where the incidence of the tax will fall, consumers or producers; and 2) Prove or at least credibly estimate what the impact will be on speculative flows. This needs to be a nuanced analysis, because as has been pointed out before, some kinds of speculation are valuable as price-smoothing mechanisms.

    Further, I’m not sure why this has to be linked to development aid. I certainly have never seen a credible analysis that suggests that the key to sustainable development is more money. At best, you can draw on the aid/growth literature which is epically inconclusive.

    Duncan: Thanks Ranil, check out this paper on the incidence of the tax http://robinhoodtax.org.uk/files/ReDefine-FTTs-as-tools-for-progressive-taxation-and-improving-market-behaviour.pdf. I think the strength of the tax is mainly as a fund-raiser, rather than a volatility-dampener. As for whether aid works, I’m not going there this morning!

  2. Duncan – thanks for the link – I’ll have a look.

    re: the aid debate – I’m definitely pro-aid, just not sure how much we need. But agreed, let’s stay clear of that debate for just now!

  3. Oh heavens, don’t people realize that this tax will only hit Main Street? “Wall Street” won’t pay a dime — it’ll just pass the cost on to ordinary folks — people with 401ks who’ll see their expenses go up and returns go down … and market volatility will, in fact, increase — probably dramatical­ly — because there will be fewer participan­ts. And for those who are concerned about the plight of the middle-age­d unemployed (and, therefore, unemployab­le) an f.t.t will put out of business thousands of small-time daytraders who’ve been laid off from their jobs and have found that the only way to support their families is to eek out a living (and eeking it is) daytrading the stockmarke­t. On balance, this tax is likely to reduce government revenues, as trading volume will drop (dramatica­lly) while tax revenues from ancillary businesses fall. Really, it’s hard to imagine a more counterpro­ductive, and self-destr­uctive taxing scheme.

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