The Big Question: Will a tax on financial transactions really help the world's poor?

Why are we asking this now?

The campaign for a financial transactions tax on the banks to help the world's poor is gathering pace. Yesterday, some 350 of the world's leading economists wrote to the G20 leaders asking them to bring the tax in as a "matter of urgency".



What is the idea?

A small tax on the world's banks going about their less socially useful business could yield fantastic sums to fight poverty and climate change. The campaigners propose a tax rate of 0.05 per cent – a 20th of 1 per cent – on the value of all financial transactions – such as foreign exchange trading, share-dealing, bonds, futures, options and other derivatives – that is conducted between financial institutions (not your holiday money).



What sort of figures are involved?

Such is the scale of the financial services industry around the world that the sums involved – though trivial in relation to each deal – would yield enough to make a substantial impact on issues such as climate change: some £250bn a year. At 0.05 per cent it represents, say, £500 on a £1m deal. That is 10 times less than the existing rate of stamp duty on share transactions in Britain, which the Robin Hood Tax campaign says has had little impact on the financial markets or the wider economy. The economist Joseph Stiglitz argues that taxing socially useless activity is a good idea: "Very little social returns come from short-term trading. Does anybody seriously believe that anything happens because of the sort of micro-second trading we're now seeing? It's a function of speed. No investments are being made as a result of it, no jobs are being created."



What would the money be spent on?

The campaigners suggest that half could be used in home nations, for example to improve the NHS here in the UK, while the other half could be spent on the Millennium Development Goals and tackling climate change.



Is there a downside?

Very possibly. Even though it seems trivial in terms of each trade, that £250bn has to come, in the end, from the profits of the banks, and each pound taken away from them makes it less likely that they will be able to build up their balance sheets and, in due course, to return to lending to small businesses and first-time buyers. (Though the need to build up the balance sheet doesn't seem to stop some from paying out big bonuses).

There's also a strong argument against deeming certain activities as socially useful and others as socially useless, and the therefore to be specially taxed. Some companies need the banks to undertake complicated financial transactions for the sake of their real business – for example, British Airways buying fuel in the futures market and hedging its currency exposures to protect its passengers from the business going bust. In other words, lots of trading is not as socially pointless as it looks. the social cost of, say, smoking is obvious. But is art socially useful? Or advertising? Or religion? "Fiscal neutrality" is a principle that avoids such awkward questions, and treats individuals and companies equally, including banks.



Are these tax plans fair?

In the big sense of taking from richer organisations and workers and sending the cash to the poor, then it is. But not every banker was personally responsible for the credit crunch, and not every cause that will benefit from the Robin Hood Tax will be deserving. There will, inevitably, be the usual waste and corruption often associated with NGOs' efforts in the developing world, which can wind up helping the rich in those countries. Some funds will end up in Swiss bank accounts: an odd redistribution.



Where does charity begin?

Indeed. Critics say that too many charities already benefit from tens of millions of pounds from taxpayers, and the formalisation of a flow of funds from a tax to charities would greatly accelerate this trend. The blurring of government and charity is potentially fraught with many conflicts of interest. Earmarking funds from a bank tax to be spent on the NHS, say, also means "hypothecation", usually regarded as a dangerous trend that can undermine the basis tax collection more widely.



Aren't the G20 and the IMF working on a 'bank tax'?

Yes and no. The "tax" they have in mind is more like an insurance levy, to provide a fund that will help rescue financial institutions that get into trouble, so helping prevent the sort of financial meltdown we have seen in the past few years. It's a little like the deposit insurance scheme that operates in the US, or the UK, where the banks all agree to pitch in and compensate deposit account holders in banks that go bust (whether by "pre-funding" or passing the hat round after the debacle is a point of detail for the new fund not yet decided on).

Also worth mentioning is that the G20/IMF tax will probably not be related to the number of transactions made but rather to the size of a bank's capital or the risks it runs and the borrowings it makes. Thus banks that engage in risky business pay higher insurance premiums than the ones that stick to the boring stuff, a bit like the way younger drivers pay more for car insurance because they have more crashes.



What about the Tobin tax?

Nowadays almost every tax on the banks or on bankers is described as a "Tobin Tax", which is misleading. The American economist James Tobin proposed the idea way back in 1972, purely to dampen the sort of destabilising speculation that was just then starting to develop in the international currency markets. Before then, the world had enjoyed a system of "fixed exchange rates", so the room for speculation was usually limited; when the old Bretton Woods system collapsed and capital controls were relaxed in the 1980s, the floodgates opened. But even though he might have though it a good idea, Tobin did not propose that funds be sent to the developing world or the NHS.



What happens next?

The G20/IMF scheme will be agreed by the summer and perhaps even implemented by the end of this year. But the chances of international agreement on the Robin Hood Tax are about the same as of finding Friar Tuck in the McDonald's in modern-day Nottingham's city centre.



Will the bankers pay?

Only tangentially, though the lower profits the banks may constrain their remuneration. But there is no sense in which this is a tax on individual bankers' pay and bonuses. The lesson of experience is that, one way or another, banks will pass the cost of the Robin Hood Tax on to consumers.



What's Bill Nighy got to do with this?

Whether you like the Robin Hood Tax or not you can enjoy Nighy's performance as a squirmingly embarrassed banker on the robinhoodtax.org.uk website. Even if the idea gets nowhere, it will have left us with this small satirical gem.

Should we introduce a Robin Hood tax with immediate effect?

Yes...

*The several hundred billion pounds that could be raised is not a sum to be sniffed at



*It's such a small rate – 0.05 per cent – that it needn't affect banks' capacity to continue trading profitably



*Some forms of financial speculation helped cause a global crisis: it's right and proper to disincentivise them

No...

*Banks, who need to repair their balance sheets, will ultimately pass costs to their customers: on mortgages and loans, foreign currency changes, or savings in insurance or pension funds



*Capital itself will become costlier, which will hurt poor countries most



*It's impossible to calculate what "socially useful" activity is

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