Global Finance and the Robin Hood Tax
Valentin KATASONOV | 16.02.2016 | OPINION

Global Finance and the Robin Hood Tax

After the first wave of the global financial crisis (2007-2009) receded, economists began to ponder how a recurrence could be prevented. Thus the idea arose of introducing a «Robin Hood tax» – a tax on interbank transactions that would cool bankers’ speculative fervor and preclude the formation of bubbles in the financial markets.

Back in 2010, a collective petition with such a proposal was sent to the G20 leaders. It was suggested that the proceeds from this tax be used to fight poverty, address the problems of education and health care, and stave off climate change. Even a negligible tax rate of 0.05% could bring in about $100 billion in annual revenues, far exceeding the amount of Western aid to third world countries.

Originally this joint letter was signed by 350 of the world’s leading economists. But by the next year thousands of economists from 53 nations had added their signatures to the petition. The signatories included the Nobel laureates Paul Krugman and Joseph Stiglitz; Jeffrey Sachs, an influential adviser to UN Secretary-General Ban Ki-moon; and professors from prominent universities in Europe and the United States.

The concept of the tax was supported by many public and political figures. In particular, British Prime Minister Gordon Brown, Greek Prime Minister George Papandreou, and many well-known government officials in Germany and particularly in France spoke out in favor of the tax. There were also quite a few opponents, primarily the United States.

The concept of the Robin Hood tax did not arise in a vacuum. In the 1970s American economist James Tobin (1918-2002) argued for such a tax, which was eventually named after him. In academic writing this is known as the «Tobin tax». The American economist suggested that in order to reel in financial speculators it would be enough to establish a tax rate ranging from 0.1% to 0.25% of the value of a currency transaction (sale).

Such a tax was introduced in Sweden in the 1980s. As a result, Swedish speculators withdrew from their domestic financial market and moved into the neighboring market in Great Britain. After seven years Sweden got rid of the tax. It became clear that the tax could only have the desired effect if it were introduced simultaneously in all countries, or at least in those with well-developed financial markets. Meanwhile, financial speculators were playing a game that grew riskier every year, and the tax rates originally suggested by James Tobin were no longer sufficient. A more powerful «tax brake» was needed.

The deterioration of the financial and economic picture in Europe (the debt crisis sweeping the continent, the financial crisis in Greece, etc.) has forced Brussels to look for fast and effective ways to stabilize the situation. Tobin’s tax was remembered once again. On Feb. 14, 2013, the European Commission (EC) decided to introduce a Financial Transaction Tax (FTT). The rates for the FTT were set at 0.1% for trades in shares and bonds and 0.01% for derivative transactions.

The American banking community responded to this novation with protests, claiming that if the FTT were levied, US banks and financial companies would pull out of the EU. Great Britain joined the US ultimatum. British Prime Minister David Cameron declared that his country would veto a pan-European tax on financial transactions, explaining that London would be willing to introduce the FTT only if such a tax were collected globally and not merely throughout Europe. The current prospects for establishing a global FTT look quite uncertain – any country may levy the tax on its own, but has no right to impose it on others.

In the end, the implementation of the EC’s decision on the FTT was postponed. After Cameron’s protests, Sarkozy stated that France would unilaterally introduce the tax. Eventually France and Italy authorized this tax after all, in a somewhat truncated form, and as a result, some of their financial transactions shifted to neighboring countries. After the tax was introduced, the volume of trading on the Italian stock market fell by 12% in 2013 compared with the previous year. During that period sales on every other stock market in Europe grew by 7%.

Exactly two years after the first unimplemented EC ruling on the FTT, the finance ministers of eleven countries (Austria, Belgium, Germany, Greece, Spain, Italy, Portugal, Slovakia, Slovenia, France, and Estonia) discussed and endorsed an updated plan for establishing the FTT. The shift in the French position was the most important. Thus far Austria and Germany had urged the taxation of what are known as financial derivatives, such as futures, while France had been opposed, explaining that its banks controlled at least a quarter of the European market for such instruments, which are issued on the basis of shares. François Hollande has now declared his support for taxing the maximum number of items that are involved in financial transactions, including traded derivatives, but at a minimal rate. Last year Brussels announced that the parties had managed to reach an agreement about rates and taxable items and declared the inauguration of a new tax system to begin on Jan. 1, 2016. Preliminary estimates of tax revenues come to 57 billion euros per year. And more than half of that will come from taxes on transactions involving derivatives that are tied to interest rates.

Now everyone is worried about whose budget coffers should get the tax money. Take, for example, the buying and selling of shares. The tax revenue could go into the treasury of the buyer’s country, the seller’s country, or the country in which the issuer of the shares is registered. But there is also another option: the FTT could pass into the general EU budget. Many European politicians and economists find the asymmetry of the European Union very confusing, although it has been that way for many years. It is evident in the fact that the EU has a central bank but no ministry of finance (treasury).

For this reason, the joint statement released on Feb. 8 by the heads of the central banks of Germany and France – Jens Weidmann and François Villeroy de Galhau – was a significant event. The statement listed demands for the immediate and radical reform of the EU. At the heart of those reformations lies the insistence that the EU member states cede yet more of their rights and powers to the European level. One of the suggestions was to create a joint European ministry of finance. If such a ministry were founded, the FTT could become the first pan-European tax to fill a common EU coffer.

Over 40 years have passed since Tobin began expounding on his idea to tax financial transactions, but very little progress has been made toward its practical implementation. It’s true that some countries do collect taxes on financial transactions, but that works a little differently. There are many examples of countries that stabilize their economies and the exchange rates of their national currencies by resorting to restrictions on the cross-border movement of capital, such as through taxes on cross-border financial transactions. Naturally, those tax rates are much higher than what Tobin recommended. Brazil in particular introduced such a tax on foreign investment in 2009, at a rate equal to 2% of the capital involved. But this was not enough to halt the appreciation of the local currency (the real), and the following year that rate was raised to 4%. After Brazil’s economy stabilized in 2013, the tax was repealed.

It’s hard to call Europe’s plans to introduce the FTT a «Robin Hood tax». There is no intention to use the revenue from the FTT in the European Union to fight poverty. Today, one of Europe’s biggest problems is how to stabilize its banking system by improving the oversight of lenders that are considered «too big to fail» and replenishing their capital. Approximately 150 banking giants such as Deutsche Bank and Société Générale are seen as «too big to fail». But these giants cannot augment their insufficient capital on their own and are awaiting help from Brussels (the European Commission) and Frankfurt (the European Central Bank).

...If the supporters of a «united Europe» manage to introduce a pan-European tax on financial transactions and establish a common EU budget, the taxes collected will be returned to those who paid them, which means – to the banks. No one today in Europe or anywhere else in the world hesitates to call bankers «robbers», but not noble robbers like Robin Hood was, just ruthless, greedy thieves who don’t understand the concept of mercy.