I am, I'm afraid, now on Twitter. I read it for the links to articles, you know. Anyway, I saw this Tweet retweeted by people that I know (and generally think of as sane):
A Robin Hood Tax is a tiny 0.05% tax on transactions in the financial sector. This could raise 20 BILLION GBP a year. RT if you support this.
To me, this illustrates perfectly why anything even vaguely subtle shouldn't be discussed on Twitter. Fortunately, the Wikipedia entry on Tobin taxes does have a lot of detail. It's a bit long. I thought I'd do my take on it, even though I don't have a Nobel prize in economics (yes, I know it's not a real Nobel anyway).
I've just left a job in the finance industry after ten years, so I think I have a reasonable understanding of it, without having a huge investment in its future.
First of all, I'm not sure how a tiny tax can raise mind-boggling amounts, unless because it's not a tiny tax, but actually a huge tax, pretending to be tiny. To put the twenty billion in perspective (using slightly old data), the UK's finance industry contributed sixty billion in taxes, and pays out fifteen billion in bonuses. In other words, this tax would more than take away all those evil banker bonuses everyone likes to complain about, and up the total tax take by about a third. This is not a subtle tweak, it's a pretty heavy bludgeon.
Of course, it wouldn't raise twenty billion, because unsurprisingly people's behaviour would adjust to take into account the extra costs. The possibilities I see are:
The "don't trade" angle is perhaps worth going into a bit more detail on, for those who don't know the area. When I was working on a precious metals gold trading system, doing a test trade, buying and selling a future for 100oz of gold, worth over $100,000, the bid-offer spread costs came to around $20. In other words, each transaction cost around 0.01% of the nominal value. FX is not exactly dissimilar. Taxing an extra 0.05% is going to strongly discourage trading in such situations.
Just because a transaction isn't necessary doesn't make it a bad idea. Banks like to hedge their transactions - they want to get rid of the risk associated with their positions, so that if prices move they don't end up losing big piles of money (yes, I know, they may not always be good at this). However, they don't hedge freely, because hedging costs money. If you up the transaction costs, hedging will cost more and it'll be done less. Banks will hedge less and take more risk. Or they'll keep hedging, but pass the costs on to their customers. It's not great, either way.
Finally, what's the point of this tax? I don't think it's really to raise money. It wouldn't raise anything like the suggested amount, due to the reasons above. It's also a very distorting tax, which will affect particular kinds of banking more than others.
Indeed, it's so distorting that it's either put together by an idiot, or it's intended to target a particular sector.
The sector that would be affected is the "flow" sector - the simplest, most straightforward products. The sale of complex derivatives such as the mortgage CDOs blamed for the credit crunch, which are much less liquid, with much bigger bid-offer spreads would not be affected by this rule. If it's a reaction to financial meltdown, it makes no sense.
Anyway, let's go with the "bad bankers" narrative, and assume that there are some people who need to have their lives made more difficult. Who is problematic in "flow"? I can see two sets of targets - bad traders and high-frequency traders.
The bad traders keep getting huge fines from the regulators. Fines and jail for wrong-doers seem the way to go here. Blanket taxing everyone involved is hardly an incentive for those who aren't crooked!
The other lot are high-frequency traders, who trade a large volume on tiny, tiny margins. They would be hit extremely hard. They're not actually bankers. They tend to be fairly small companies, operating with their own capital. The main objection is that by being faster than everyone else, they're taking their money away. However, they do seem to have reduced spreads and made the markets more liquid for small traders (i.e. retail customers). HFT basically takes money from the big players by doing what they traditionally did (have an information advantage over everyone else). So far, so meh.
What are the objections? It's socially useless? Candy Crush Saga is probably a bigger waste of time. Anyway. It's an unfair advantage? In the grand scheme of things, the resources required are not huge, and it's a very competitive area.
Let's say it's deemed bad. A Tobin tax is still not a clear winner. The big banks and institutional investors don't like HFT either. Surely they can find a way to deal with HFT? Why, yes! There are dark pools for large trades, exchanges with randomized timing to reduce latency advantages, etc. The problem with HFT may not be that they trade too much, but place too many (unfilled) orders, so you can cap the order to fill ratio. All these things can be fixed in a more targeted manner by adjusting the market mechanism. No tax needed.
I don't know, as I'm not sure what the aim is. If you want to deal with the problems of flow trading, there are better ways. If you want to deal with problems outside flow trading, there are ways that are actually relevant. If you want to raise more taxes, you can try to increase the tax rates in less distorting ways, or perhaps actually reduce the opportunities for tax avoidance, and clamp down on the "borderline" tax behaviour across the whole of big business. If you want to "fix" banking post-2008, you've got to balance what you want. Extracting large amounts of money is incompatible with making the banks build up large reserves. Getting the banks to lend is incompatible with reducing the risk they take. Taxing banks heavily may not actually be very sensible if you own large chunks of them. If you don't like bankers' pay, regulate it (there are guaranteed to be unintended consquences).
In all cases, "Let's have a transaction tax" sounds suspiciously like "We must do something, this is something, let's do it".
Posted 2015-05-24.