Imagine a minute tax on banks which could raise billions of pounds a year, allowing us to turn round the NHS, improve education, and tackle global poverty and climate change. It sounds too good to be true. Yet this is exactly what advocates of the ‘Robin Hood Tax’ claim would be possible, if only our governments could get together and agree to do something about the significantly under-taxed financial sector…
The basic idea is quite simple: take a tiny cut, say around 0.05%, of every financial transaction made by investment banks and hedge funds on stocks, bonds and derivatives. This would not only raise an estimated £250 billion a year globally, it would also help prevent the sort of risky and speculative high-frequency trading which helped cause the financial crisis in the first place. It seems like a political no-brainer. Tax the greedy bankers who ruined our economies, recover taxpayers money spent on the bailouts, and in the process save the world. Who on earth could oppose such a policy?
George Osborne, apparently, who recently suggested at an EU finance summit that we should “just put this idea to bed.” Osborne has described the proposed EU-wide tax as a “bullet aimed at the heart of London,” portraying it as a plot hatched in Brussels to undermine the UK economy. Admittedly, London’s position as Europe’s largest financial centre means the British financial sector would stand to pay the most tax, accounting for around 70% of the total revenue collected in Europe. Yet Germany and France, who both back the tax, have made it clear that the tax would be collected at a national level. This means that we would also gain the most by far in terms of government income- around £20 billion. Incidentally, that’s the same figure Osborne recently pledged to guarantee in loans to small companies in order to help kick-start the economy.
The other main criticism of the proposal is that many banks would simply relocate to other global financial centres in order to avoid the tax. All three main parties in the UK have therefore claimed that the tax is unworkable unless it is applied on a global scale, with Osborne claiming that anything less would amount to ‘economic suicide’ for the UK.
However, it is important to note the British government already imposes a form of financial transaction tax in the form of a stamp duty of 0.5% on all share purchases. Despite this, the London Stock Market remains one of the most successful in the world. The city’s strategic position in the heart of Europe, large pool of skilled labour, well-developed infrastructure, lack of corruption and trustworthy legal system, and its status as a world-class centre of education and culture all combine to make it a highly desirable place to do business. This is complemented by a very low corporation tax, and perhaps most importantly the security provided by the implicit guarantee that banks will be bailed out by the taxpayer if they fail.
All these factors combine to suggest that the claim that banks will simply leave if the Robin Hood tax goes ahead are greatly exaggerated. Significantly, this is not the first time the finance sector has made use of scare tactics in an effort to intimidate the government. HSBC and Standard Chartered threatened to relocate in 2010 when the government imposed a bank levy tax. Yet the threat never materialised, and both banks still have their headquarters in London.
The banks and their supporters in the media have also repeatedly used the example of Sweden as proof of why a financial transaction tax is doomed to failure. Sweden imposed a similar tax during the 1990s and trading volumes fell dramatically. Yet this was in essence a problem of design, the tax was linked to Swedish brokerages meaning it was easy to circumvent by relocation. The Swedish example has thus been consistently wheeled out as a straw-man to discredit the current proposal, conveniently ignoring the fact that better-designed transaction taxes have been successfully used in a variety of countries such as Brazil, Argentina, India and Colombia. These past experiences have not only shown us that such a tax is possible, but importantly that they can be designed in such a way that they are cheap to implement and difficult to avoid through relocation. Perhaps this then explains why the financial sector is so mobilised against it.
The final argument made against the tax is that it will hit the everyday consumer, either through its impact on pension funds or on liquidity and economic growth. The truth is the proposed tax would force us to rethink the highly flawed nature of our current economic model. We have to ask ourselves: do we really want pension funds to be constantly being traded on highly volatile and speculative markets? The Robin Hood Tax would encourage a more long-term and responsible investment model for pensions as this would only necessitate a one-off payment. Similarly, do we really want economic growth to be based on financial speculation, bringing few benefits to the real economy whilst serving to enrich a small minority? The tax would reduce the sort of irresponsible practices which have brought nothing but economic ruin to our society.
Right now the campaign for the Robin Hood Tax is gaining momentum. 65% of the British public would support the introduction of a financial transaction tax, along with nearly two-thirds of Europeans. And this is not just a populist measure. Bill Clinton, George Soros, and Nobel Prize-winning economists Josef Stiglitz and Paul Krugman all support the tax.
In light of this the government’s position that the tax will only work if it is applied on a global level seems like a convenient cop-out, as it is highly unlikely there will ever be a unanimous agreement on this issue. This is why the EU’s proposal is significant, as it could help to lead the way by example, particularly if it succeeds in raising the predicted revenue. Of course, this is not to say that implementing the tax would be easy; there would undeniably be problems particularly in the early stages. Yet the British government’s categorical refusal to take part shows how fearful it remains of the influential financial lobby. If it was serious about transforming the British economy, reducing our over-reliance on finance and restoring the place of manufacturing and entrepreneurship, this tax would provide the perfect means to do so.