Following the global financial crisispeople all around the world were angry and they wanted someone to blame. Giventhat the crisis seemed to originate from credit markets, it became natural foreveryone to blame bankers. In Britain there have been calls to make bankerspay through the introduction of a tax on speculative banking transactionscalled a "Robin Hood tax". It even has the all important celebrity backing ofBill Nighy, and 131,919 fans on Facebook. Economists have seen this tax beforein a different guise â€“ we call it a financial transaction tax. Instead ofattacking bankers, lowering financial market volatility, and raising money forthe needy the burden of such a tax would fall mainly on ordinary people whilehaving few of the claimed effects.
A financial transactions tax is a generalname for a tax charged on some
However, just because a tax is placed onbankers does not mean that they will face the ultimate burden of the tax, as theywill typically pass on the increased cost to their customers. Whether they canpass on the extra cost associated with the tax depends on how highly peoplethat hire them value their services relative to the cost of their service.
If the value of financial transactions tocustomers is very low, the number of transactions will fall drastically as aresult of the tax, leading to very little extra revenue and significant damageto the efficiency of financial markets. If they value these financial transactionshighly a lot of revenue will be raised, but a significant amount of it will becoming out of the pocket of pension funds, businesses, and small time investorsthat use financial services. As a result, the tax will either destroy asignificant amount of activity in the industry, or will fall on manyindividuals that the proponent of the tax did not mean to charge.
Although the tax is unlikely to punish bankersin the punitive way that its proponents desire, some will claim that the taxhas value as it lowers the volatility of stock prices and the exchange rate. Thisis because it will make it less attractive for speculators to buy and sell in financialmarkets. This idea was articulated most clearly by James Tobin when trying tosell his own version of this tax â€“ a Tobin tax.
However, this interpretation is tenuous. According to a myriad of economic studies the introduction of a small Tobin taxis not likely to decrease volatility, and may even lead to higher volatility astraders work on the basis of larger bid-ask spreads and market liquidity driesup.
In order to side-step this criticism somesupporters of a Tobin tax have stated that taxing speculative transactions willprevent bubbles so, although measured volatility might not be lower, harmfulbubbles would be avoided. This argument does not stack up either. Although itis true that bubbles are associated with high trader volumes, these high volumesare a symptom not the cause of a bubble. Fundamentally, a bubble involves buyers’expectations of assets prices falling out of whack from their "fundamentalvalue". Taxing an asset will do nothing to prevent this from happening.
Personally, I do not blame the bankersfor the crisis, and I find such punitive aims to punish them undesirable. Instead we should be asking why the crisis happened, and if we do find issuesin the credit market we should work out how to fix them at their source.
For example, the too "big to fail" creedfollowed by many regulators around the world ensured that large players infinancial markets had, in effect, a government guarantee. This created expectationsthat the downside risk from bankers’ decisions was covered by taxpayers. Asthese market players received the full benefit of risky behaviour, but onlypaid part of the cost, there was an incentive for them to take on too muchrisk. If this is the problem then we should be asking how we can ensure thatmarket participants face the full social costs of their actions withoutcreating undue financial market instability.
Policies such as an insurance levy,counter-cyclical capital requirements, and higher information requirements fromfinancial firms are all attempt to do this. Although they are imperfect theycould well be an improvement on bailouts for the rich that seems to beoccurring at the present time. A Robin Hood tax is punitive and poorlytargeted â€“ and as a result, is a policy that should be avoided.
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