… and dispels the case for the Robin Hood Tax in several elegant paragraphs.  A financial transactions tax

is not focused on core sources of financial instability. An FTT would not target any of the key attributes—institution size, interconnectedness, and substitutability— that give rise to systemic risk.

Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector. No doubt some would be borne by owners and managers of financial institutions. But a large part of the burden may well be passed on to the users of financial services (both businesses and individuals) in the form of reduced returns to saving, higher costs of borrowing15 and/or increases in final commodity prices. … It is far from obvious that the incidence would fall mainly on either the better-off or financial sector rents

These startlingly obvious points needed making, which is why I have made them here, and here and so on. They are not controversial, and don’t need a particularly high level of empirical investigation.  An FTT is a bit like a higher price of doing something – a higher commission, say. You don’t need a massive regression analysis to work out that higher wholesale commissions tend to end up in higher retail prices.

What the IMF DO propose (for it is them) is extremely interesting and worthy of examination and possible support.  The levy on balance sheets has been explored by Pres Obama; the FAT tax – on the total rent-surplus extracted by the shareholders and employees – much more intruiging.  Naturally, Robin Hood Tax campaigners don’t like it, and call these sensible objections ‘tired and discredited’ (unlike the idea that you can take hundreds of billions from an industry without further serious ramifications, which is no doubt ‘fresh and interesting’).  But their major objection is that it is NOT ENOUGH:

So, is it enough? No, not by a long chalk. The IMF report accepts that the costs of the financial and economic crisis amount to 2.7% of GDP in the advanced G20 economies (ie nearly£50bn), but the Financial Activities Tax would raise (in the UK, the only place where it gives a figure) just 0.1-0.2% – or £1.75bn to £3.5bn

That is about what CGT raises – it is not chicken feed.  And it is just the Value added part – a levy on the balance sheets (15 bps on 1 trillion, say?) might raise some more too.  But no: these wouldn’t on their own eliminate world poverty.

But it is still too much for some, who call it a ‘Punishment Tax’. Those freemarket lunatics the French are leading the charge:

French banks are opposed to increased taxes, arguing that the country’s regulatory and lending frameworks prevent excess, and that it has cost the taxpayer nothing. The industry has paid €2bn ($2.7, £1.7bn) to the Treasury in interest for a government support package, most of which has been repaid.  The French Banking Federation argued that a tax would reduce economic growth by hampering banks’ ability to lend and has instead argued for better regulation and supervision across G20 countries

And as the recent money figures have shown, bank deleveraging is still a risk.  A further interesting observation:

“The proposed taxes, however calculated, would certainly bolster government revenues but would not reduce risk in the system and, ironically, could increase it by implicitly building in an insurance to pay for banks’ risky behaviour,” said the Association for Financial Markets in Europe.

The longer term intention of the IMF is to raise 2-4% of GDP. (Is that a stock or a flow?) If a flow i.e. yearly amount, then it is a huge tax. But it is not clear and I have not read enough.  But ‘Analysis by Credit Suisse, a bank, showed this could result in the loss of up to 20 per cent of pre-tax profit for the European banking sector’.

About which I don’t know what to think.  If (see previous posts) banking is one big oligopoly, getting at their profits is no bad thing. But as CG observes (below), “the fact is that taxing banks removes potential equity capital and will require banks to raise more equity to be as safe as they would be without the imposition of a new tax.”

For a far superior discussion of bank taxes, whether they will happen, and so on, the peerless Chris Giles has it on his blog (which you can all read, unlike the FT, I hear)


16 thoughts on “Up-and-coming Washington Think tank peruses Transaction Taxes …

  1. I am an advocate of the taxation of unearned income from privileged use of Commons, rather than the taxation of earned income. A levy on land rental values is one such; a levy on use of non-renewables is another.

    In this context, what is essentially a ‘limited liability levy’ on the rents extracted by the management and shareholders from the Credit Commons is an excellent proposal, and if that is what the IMF are coming up with, I congratulate them on their return to sanity from Planet Neocon.

  2. Well I like the idea of FAT, but something Krugman said worried me about what made banking relatively peaceful before we started deregualting.

    “Gorton and other have suggested that an important part of the story was the simple fact that banking wasn’t very competitive: with limits on the interest banks could pay, coupled with barriers to entry, banks had a large franchise value – and this made bankers reluctant to take risks that could kill the cash cow that kept laying golden eggs, or something like that.”

    If we cut a banks profitability, will it encourage risk tasking and just lead to different problems?

    1. I suspect that it will cause a migration of those risk seekers who need that sort of thrill into industries with a structure more suited to it. Like hedge funds – a good thing, which can generally fail without systemic problems (LCTM the exception that proves the R).

      banking definitely needs to get a bit more dull.

    2. Not necessarily–you should read Gorton’s paper (everyone should read Gorton’s research output: it is excellent). Gorton’s point was that when we ring fenced the different aspects of financial intermediation, firms received rents due to their protected status. As we liberalised the system (made it more competitive), these rents dried up. Profits, of course, did not.

      1. …and now it’s Capital that has dried up.

        But dis-intermediation – and a switch by financial intermediaries to service provision – will solve the capital problem, because service providers need only sufficient capital to cover operating costs.

        That’s why direct creation of public credit (aka QE – but by Treasury Branches, I think) – managed by service providers with a stake in the outcome,and accountably supervised – would actually be in everyone’s interests, and above all, the banks themselves.

        Naturally such credit would NOT be used for acquisition of existing assets, but for the creation of new productive assets (and domestic capacity to build them) in the public and private sectors.

      2. link pls! Then I just have 300 pages of IMF to get through, this chap Buchanan whom several people have made me feel stupid for not knowing, and recent MPC output – and then Gorton. Unless this election sarts getting interesting, yawn …

  3. You can get many of Gorton’s papers from: http://www.som.yale.edu/faculty/gbg24/html.html

    “The Panic of 2007” and “Slapped in the face by the Invisible Hand” are the famous ones delivered at Jackson’s Hole, which got mentions from Bernanke, etc. You can get the former from the above link and the latter here: http://www.frbatlanta.org/news/CONFEREN/09fmc/gorton.pdf

    I think he’s just collected all the GFC related stuff in a book as well.

  4. Thanks for the pingback Giles, but ….

    You strangely don’t mention that the IMF say that an FTT would in fact be workable (obvious from the examples of it already in action that they quote) which is quite a step forward, and that the reason they give for not recommending it is simply that it doesn’t fit what the G20 asked them to do (they’re sort of right on that, but to be honest I don’t think the FAT tax is what thne G20 asked them to do either – but I welcome the new radicalism of the IMF under its socialist leadership!)

    You do mention the issue of incidence. The issue has been dealt with far better than I have by many people, but do see my more extensive analysis of the IMF report on Ekklesia this afternoon – it isn’t the incidence point itself which is tired and discredited, but the way that the incidence of an FTT is used to suggest we shouldn’t do it.

    You also seem very worried by the numbers. I know that calling for a global tax raising $400 billion a year is a lot of money ($400bn here, $400bn there, pretty soon it mounts up to real money). However, if that amount of money taken out of the finance sector will have an impact, won’t the sums that have to be cut off public services if we DON’T have a Robin Hood Tax have a terrible impact as well (on poor people, to boot?)

    That’s always been my point about the Robin Hood Tax. Like Churchill said of democracy, it’s the worst option – except for all the others!

    1. I am sure it could be workable. Banks are experts at collecting money from transactions; so long as it was globallly enforced, it might work. I am more interested in whether it is a good idea – whether it incentivizes the right behaviour, pushes resources in the right direction, and so on.

      I don’t think money out of financial sector into public services is a nice zero sum game – otherwise, your point would be uncontroversial. What the credit crunch showed us is that when the financial sector (stupidly/evilly/etc) loses $X, then the consequences for the rest of the world are $X times a very large number.

  5. I haven’t read that paper, but from what can tell in the news reports, the IMF wants the money raised to go into a special pot to deal with future financial crises. Have they resigned themselves to the possibility that another crisis is inevitable? They might be right, but I don’t think we can be certain enough of that to go along with this policy. I think this policy is mistaken:

    1. Does it not increase moral hazard, with governments having funds ready and waiting for future bailouts?

    2. Surely the fact that the taxpayer is likely to profit from the bailouts when all settles down, means that we don’t need some fund to fund bailouts? We can cover costs after any bailouts if they have to happen again, just like this time.

    3. And I don’t see the money raised being useful to deal with loss of output: we are not going to raise trillions from this tax.

    That all said, I’m not opposed to taxing banks in general, but the use of that money should go towards paying down the deficit (for now), not to cover future bailouts. And in the years after, a tax could perhaps be kept in response to externalities from finance, although really you would hope regulation would deal with that.

    1. All good points. The first I know is raised a lot. Otherwise, am yet to read it fully myself either …

  6. “The longer term intention of the IMF is to raise 2-4% of GDP. (Is that a stock or a flow?) ”


    And yes, of course there’s moral hazard. But then we’ve already got that, for we ain’t gonna let the system fall over anyway. So banks should pay for the insurance not get it for free.

    And nice to see Owen Tudor here. Owen, are you going to change the RHT pages so that they no longer say us plebs will have to pay the tax? That it will be carried only by those eeeevil bankers?

    “But a large part of the burden may well be passed on to the users of financial services (both businesses and individuals) in the form of reduced returns to saving, higher costs of borrowing15 and/or increases in final commodity prices. … It is far from obvious that the incidence would fall mainly on either the better-off or financial sector rents”

    My point all along as you’ll recall?

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