Is the FTT a good idea? You’d think that since we’ve been arguing about this for the best part of 30 years now, there would be some consensus. Oh no. The announcement by Jose Manuel Barroso, the President of the European Commission, that he was proposing that the EC introduce a Financial Transaction Tax (FTT, or Robin Hood Tax) has sparked off a flurry of claim and counter-claim on both sides. But there are two big problems in trying to evaluate the evidence, or work out what this argument is actually about:
Firstly, it’s incredibly difficult to predict the impact of something that hasn’t happened yet (this debate in the FT has two extremely knowledgeable commentators making opposite predictions with equal certainty). Despite the confidence with which both supporters and opponents of the tax state their case, no one actually knows what would happen if a tax were introduced. The best one can do is to guess on the basis of similar taxes. And of course you can pick the historical example that best suits your case. Love the FTT? Then cite the UK’s stamp duty on shares, a unilateral tax which has raised a lot of money and quite obviously not driven much business out of the City. Hate it? Then cite the attempt to introduce an FTT in Sweden which led to a collapse in trading, and so almost no revenue collection at all. There’s no actual conclusion possible to this argument – there are possibly hundreds of taxes out there whose effects can be examined for evidence, and inevitably it’s going to tell you different things – and none of them will necessarily be a good guide to a future that hasn’t happened yet.
Secondly, there’s huge confusion in the argument about what introducing a tax would actually be for. This inspires some cynicism among commentators who argue, rightly, that it’s unlikely that a single tax can achieve all the things claimed for the FTT. It also creates real difficulty for politicians and others who might bet trying to evaluate the costs and benefits of the tax (for there will certainly be both) – unless you know what the objective is, how can you know if it’s succeeding?
There are two possible contenders for the primary goal of an FTT – controlling volatility in the markets and raising revenue (James Tobin’s original proposal was all about curbing volatility, and he was reportedly horrified at the suggestion that the tax could actually be more about bringing in money) . Campaigners have tended to argue that there’s no reason to chose, you can have both. But the most comprehensive assessment of the evidence suggests that in fact a tax might not reduce – and under some circumstances might increase – volatility (despite which, the author of that assessment started out an FTT sceptic and changed his mind on the basis of what his ressearch found about the other possible benefits of the tax. Which tells you something about the way the facts stack up).
The problem is that if the evidence points in different ways, it’s useful to know which is the primary objective. Say the tax did reduce volatility – then it would also raise less money over time as taxable trades diminished, but that might not matter if controlling volatility was the main target. Say it increased volatility – this might still make the tax worth having, if it succeeded in what is really, for the Robin Hood Tax campaign, and for President Barroso, its main aim, which is raising money from people who can afford it.
The question then would be about the trade off between the two – there might, for example, come a point where increases in the volatility of markets were so destructive to other policy goals that it wasn’t worth the extra revenue. That would be an important consideration in setting the level of the tax. But unless the two possible objectives are separated, policy makers have no hope of knowing what choices they are making.
An FTT which is just about raising money from rich institituions and individuals is a perfectly laudable aim. The question then becomes a factual one – will it actually do that? Will the tax be paid mainly be banks and other big institutions and therefore be progressive (the rich pay more), or will it be passed on to consumers, pensioners and the like and be regressive (the poor pay more). We can’t actually know, again because it hasn’t happened yet, and there’s evidence on both sides (though on balance the evidence comes down on the side of progressivity). So that won’t quite settle the case either.
The argument is not going to end. There are heavyweight economists and good arguments on both sides. But at some point politicians have to make a decision. No one could have known exactly what the impact of introducing income taxes, or VAT, or stamp duty on house purchases, was going to be, but in the end governments have to take a punt, cross their fingers, and go with what seems like the right decision on the basis of the information they have. There might be a better idea out there, but this is the one that has the momentum behind it, so for the moment it’s the FTT or nothing as far as taxing finance goes.
(For the record, my money’s on Robin Hood – in a previous job, I was a member of the campaign and it’s always seemed to me like a bet worth taking)