Driven by data; ridden with liberty.
José Manuel Barroso, President of the European Commission, has put his endorsement behind introducing an EU-wide Financial Transactions Tax (FTT). This follows the agreement for such a plan by German Chancellor Angela Merkel and French President François Hollande, as well as his predecessor Nicholas Sarkozy, an affirmative vote by the European Parliament and support for a global version of the tax by the Robin Hood Tax Campaign. The premise is politically powerful: tax the bankers to help the poor. This tax was originally put forward by the American economist James Tobin, initially to support the schooling of children in poorer nations. Given the coalescing voice agree this idea, it is worth scrutinizing in more detail.
The plan is to tax all financial transactions between EU member states, or with any state residing in the EU, to the one or mixing the following rates: 0.01%, 0.05% or 0.1%, which proponents of the FTT point out is a miniscule rate. Despite the seemingly tiny rate, the estimates of the revenues from the FTT vary wildly. The European Commission claims a FTT of 0.01% will raise revenues between €16.4bn and €43.4bn a year, whilst suggesting an FTT of 0.1% would generate annual revenues between €73.3bn and €433.9bn. However, European Parliament thinks it will raise €200bn of taxes a year. The Robin Hood Tax Campaign’s advertisement claims it could be “hundreds of billions a year”.
The lure of these bountiful revenues has only emboldened its proponents. However, they are, as famous French economist Frédéric Bastiat would say, entranced by what it is seen, and ignorant of what it is unseen. A tax may raise a certain amount, but its presence may cause the lowering of other tax takes. This is an artifact of the interconnectedness in an economy. The European Commission accepts that this proposal would cut the size of the EU’s economy: “at 0.1%, a transaction tax on securities could, without the application of mitigating effects, reduce future GDP growth in the long run by 1.76% of GDP and of 0.17% at a rate of 0.01%.” If their predictions for the revenues are overly optimistic, there could be no new tax revenue at all.
Stamp duty draws much focus in the debate, which is a specific type of FTT. In a letter to The Telegraph and The Guardian, 1000 economists stated that “the UK already levies a tax on share transactions of 0.5%, or ten times this rate, without unduly impacting on the competitiveness of the City of London.” However, transaction taxes have negative consequences, including that the volume of transactions is often reduced dramatically following the implementation of the tax. According to the Institute for Fiscal Studies (page 2 of this PDF), “stamp duty is thus shown to depress share prices, particularly for firms whose shares are frequently traded. This may increase the cost of capital faced by firms, which in turn could have negative repercussions on investment.” Thus, the effect of this specific FTT, which taxes only the sale of shares, has had rather significant effect on the wider economy; the effect of a unilateral transactions tax would be rather more severe.
Sweden remains the only nation that has ever levied a general or ‘pure’ FTT, which it did during the 1980s. It was a disaster on every metric. The Swedish government predicted the tax would raise 1.5bn krona annually on the transactions of bonds alone, but the most it raised in a single year was 80m krona, with a mean average close to 50m krona. Despite the tax rate for five-year bonds was 0.03%, even smaller than the rate proposed for Barroso’s FTT, the volume of bond trading fell by 85% in one week. The trading of futures was also severely affected, with a 98% reduction in such transactions, whilst the options trading market evaporated completely. Due to this huge loss of activity, the loss of revenues from capital gains taxes was greater than the revenue from their FTT. This tax is also a key reason for London dominating the European markets, which now hosts over 80% of all financial transactions within the EU. Marion G. Wrobel claimed in a report for the Canadian Government that “by 1990, more than 50% of all Swedish trading had moved to London.” Sweden is now one of the staunchest opponents of an EU-wide FTT.
The final problem with the FTT is one that concerns tax incidence. This is a term that economists use to describe not which entity is writing out the cheque for a tax, but who is actually bearing the burden of that taxation. There are only three possible shoulders that this burden can fall upon: the shareholders of the banks, the workers in the banks and the customers of the banks. In the working paper for the IMF, entitled ‘Taxing Financial Transactions: Issues and Evidence’, it states that initially, the burden will be very progressive, as “high income individuals possess a disproportionate share of financial assets, and so would suffer from the initial fall in taxed securities prices.” In the long run, an open economy like Britain will suffer from imposing this taxation: the burden “would fall on workers, who as a result of the smaller capital stock would be less productive and receive lower wages”.
The aims of this campaign are laudable, often with proposals to spend the ‘new revenues’ on helping the poor or other pursuits. However, there would be either very little or no new revenues; this tax would reduce the overall tax take, as even the EU’s own report believes. It will not even be the bankers or the rich paying for it, everyone who uses the banking system will bear the burden. If we implement the Robin Hood Tax, we would only be robbing ourselves.