Tobin’s time has come

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I wrote the following for CIPFA's Public Finance blog last week and now share it here:

"A decade ago almost no one had ever heard of Tobin taxes, financial transaction taxes or what have since been popularly called Robin Hood taxes. This week the European Union has proposed that such a tax be introduced across the EU.

Let me be candid, due to the opposition of the UK (and maybe other countries too) there is little chance of this tax coming into operation in the near future, but that does not diminish the importance of this proposal. For the first time since the UK joined the EU in 1973, Brussels has made a proposal for a new European wide tax. To date only VAT has had this status.

It has, perhaps inevitably, taken a crisis for this situation to arise and no one can deny that there is a crisis right now. If the prospect of sovereign default leading to possible collapse of scores of banks is not a crisis then little else is. But why does a tax first proposed in the early 1970s and largely ignored until it received the backing of a group of non-governmental organisations hit the international agenda?

First of all, the conviction of those NGOs and economic activists that such a tax would raise significant revenues for developing countries drove a small number of committed individuals (of whom I was one, but by no means the most significant - particular praise being due to David Hillman of Stamp Out Poverty) to challenge the idea that these taxes would neither work nor raise significant revenue. They did this during an era when bank profits appeared to be rising inexorably and as a result some countries – led by what are called the Leading Group of nations in which France plays a significant part – were convinced.

The consequence was that a number of European countries, France and Belgium amongst them, passed legislation to enact financial transaction taxes, subject admittedly to pan-European approval. The result was that the battle for this tax had already been won before the financial crisis erupted.

Second, when that crisis occurred the NGO lobbyists carried on with their demand for the tax on the grounds that, but for new sources of revenue being available, the commitment of many countries to pay 0.7% of their GDP into their development budgets would fall by the wayside. If anything the crisis added currency to the demand for this tax.

But, best intentions sometimes result in unforeseen consequences. Despite campaigners’ wishes, and with the euro descending into crisis, many eurozone politicians realised that this tax might offer a lifeline at a time when they were in urgent need of extra revenue. It appears that they have now accepted two arguments campaigners presented to them. The first is that these taxes would work. The second is that, despite the arguments presented by many economists that these taxes will simply be passed on to consumers, they will in fact very largely be paid by the banks themselves.

Most especially that is because much of their cost will be borne by bankers of whom there will be many fewer with many of those remaining being paid less than now. As such, somewhat inadvertently, we provided these politicians with a ‘shovel ready’ solution to their need for a new tax on the financial services sector to raise funds for euro bailout plans.

So are campaigners disenchanted by this takeover of their idea? The simple answer to that is ‘no’. This tax will still be used to relieve poverty; we just hadn’t anticipated it would be in Greece and other EU countries. But before being surprised at this it’s worth remembering Oxfam started to relieve poverty in Greece.

Moreover, remember that many who wanted this tax also wanted it to act as a brake on the banking sector. I am in that number. We believe that not only is the cash the tax raises important, the fact it might constrain banking is itself useful as this sector is almost certainly too big and, if it traded less, real benefits might arise.

Those benefits might be, firstly, easier access to skilled labour by other sectors in the economy. Secondly wages in banking might fall. This will thirdly have beneficial impact on house prices in southeast England and fourthly will reduce pressure on regional infrastructure including transport in that area and allow release of resources to other areas. Fifthly, because less effort will be put into speculation more might be put into real economic activity so that productive capacity will rise and GDP with it.

Lastly, perhaps a better allocation of resources in the economy will arise because banks will actually have to lend to business to make money, something they have long neglected to do.

So the path to a Robin Hood Tax has been unconventional and is not complete yet. But will it happen? I suggest that this is now just a matter of time. No government will eventually be able to resist the combination of benefits it can offer. And that’s why it is now on the table, waiting for adoption.