Wednesday, February 10, 2010

A Few Thoughts on the Robin Hood Tax

I rather like the idea myself, but I thought I'd say a few things about it and address a few criticisms that have headed it's way.

Firsly, my criticism, which is that I think hundreds of billions is too optimistic. I just don't think it will raise that much. My guess would be that it would lead to a serious reduction in the volume of foriegn transactions that took place. That said, I don't think that this is necessarily a compelling reason not to go ahead with it.

Now, on with some other criticisms:

Capital is mobile and this activity will just move elsewhere.
I think this one depends on how it was levied. If the tax was levied on actual foreign exchange transactions (changing one currency into another) then I think this would be the case. There's nothing to really stop someone setting up in a tax haven that ignores the tax and acting as a counterparty to foreign exchange transactions.

An alternative would be to force banks in their host nations to levy the tax on bank transfers to and from accounts outside the host nations's borders. This would prevent a nation that didn't want to play ball undermining the tax, money could be moved in and out of this nation untaxed but it would still face a tax if it was ever moved into a participating nation.

Following on from the above, there is an argument that imposing such a tax would give an advantage to those counties that choose not to participate, I don't see this as a huge problem. While a country without the tax might be a little more attractive to foreign investors, it's hardly likely to be the only factor an investor takes into account when making their decision.

It would create a huge new class of arbitrageurs seeking to exploit such price discrepancies
An argument put forth by Oliver Kamm. He's correct, but the same can be applied to plenty of other government interventions in the economy. The question is whether such aribitrage will be a massive problem or a minor irritation. My guess would be the latter.

If such an act did create a some kind of price discrepancy between participating and non participating countries we have to wonder how long the effect would last, once the tax became a fact of life would we still see distortions? Additionally, is it beyond the ability of regulators to deal with the worst forms of arbitrage? And if indeed it did affect asset prices, would this be viewed as a distortion or a correction?

The Last Word
I'm personally not sure exactly how a robin hood tax would work, my guess would be buy taxing transfers across international borders. I'm not sure if there are any holes in this approach but nothing obvious comes to mind. I accept some of the arguments put forward by critics, but personally I don't think they make a strong enough case against this tax.

1 comment:

Harpalarp said...

I think you raise a bunch of very good points about the Robin Tax. I personally admire the goal that this idea aims at, but I don't think it will make good economic sense, like the one's that you raise.
Another point is that an implicit assumption of those behind this tax idea is that the money only moves once. I've read that they plan to tax 50 cents on every $1000 dollar. But banks make thousands of transactions like this each day, so the same money moving around is taxed every time.
Also, this idea aligns a coalition of progressive sectors,the poor, and international aid recipient countries against the interests of business, middle and upper classes, international finance, exporters, etc. It could be expanded to be like the system in Office space where it takes .01 % of a cent on every financial transaction so that it affects people universally.