Disastrous Tobin Tax would hurt UK

Over the last few weeks, most economists have been trying to work out how we can deal with the crisis in the eurozone. Will the banks go bust if there is a sovereign default? If so, should the governments bail them out? The EU now comes along with a clever idea to take £50bn a year out of the financial sector through a transactions tax. The likelihood is that, as transactions tax before them have failed to raise revenue, this will fail too – as markets migrate to other parts of the world.
Watch an interview with Prof Booth on the subject as part of Cass Business School’s latest edition of Cass Talks here.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

10 thoughts on “Disastrous Tobin Tax would hurt UK”

  1. Posted 11/10/2011 at 13:20 | Permalink

    Question: Why not apply the Tobin tax just to the eurozone?

    Answer: Because it wouldn’t achieve two of the key objectives, namely:

    a. raise £50 billion a year. (It might raise up to £5 billion a year, but probably wouldn’t.)
    b. destroy the UK banking supremacy in Europe: our partners are always trying to damage us.

  2. Posted 12/10/2011 at 16:43 | Permalink

    They need a new Sovereign Debt Restructuring Mechanism.

  3. Posted 13/10/2011 at 11:46 | Permalink

    Just not true I’m afraid – the argument about competitiveness doesnt stand up. The EU stock markets aren’t going to cease existing because of a tiny tax on financial transactions. And people will continue trading just like before. And banks will continue in the city, just like before. And all these apparently fickle people who live in the UK ‘only because of it’s tax regime, will all move abroad (if these people even exist, which I have great doubt about).

    The alternative is more taxpayer funded bailouts. It would also have the added bonus of stabilising currency and bond markets, making them less volatile, and reducing the chances of sovereign debt crisis happening in the first place.

  4. Posted 13/10/2011 at 15:48 | Permalink

    @Chris – I don’t see your argument at all. You say that the tax will stabilise currency and bond markets (though the opposite is just as likely if liquidity falls) but it is just a tiny tax that won’t affect anybody’s behaviour. Either of those arguments is plausible as a starting position but both are not. Secondly, a transactions tax has nothing to do with taxpayer-funded bailouts (of which there is no more staunch opponent than me). There is simply no relationship between a transactions tax and fewer taxpayer- funded bailouts.

  5. Posted 13/10/2011 at 17:16 | Permalink

    I agree with you Philip. In that the Tax would be terrible for the UK.

    My point is that the situation in the EU could be resolved by better debt products rather than more tax. The EU has some fundamental funding and payment flaws. This is where attention should lie. Not further taxes of wealthier states.

  6. Posted 29/10/2011 at 14:31 | Permalink

    an even bigger problem with the transaction tax is that it will hit pension funds and middle sized companies which use derivatives to hedge against swings in commodity prices and currencies, rather than other financial institutions. Unlike multinational companies, middle sized companies cannot pass their trading to other markets and will be the only ones left to bear the burden of the tax. This is therefore a tax that will stiff economic recovery even further as it will impose additional costs to the already troubled middle-sized companies which are according to the widely accepted paradigm – drivers of economic growth. It will harm all those manufactures, retailers and import-exporters that use derivatives to hedge against currency and price swings, even for low rates such as these ones. The imposed costs on companies who will have no choice but to bear the burden of the tax will reflect on the prices and competitiveness of these companies and finally the burden will fall on consumers.

  7. Posted 30/10/2011 at 22:13 | Permalink

    Firstly, yes, it can be both Phillip. It is possible for a tax to affect speculative trading, and reduce trading volume to some degree, whilst not having the ‘slippery slope of doom’ effect that you are suggesting.

    It wouldn’t wreck our economy, any more than increasing income tax by 1 percent would do. On the other hand, creating an economic cost to speculation helps denote the impact that it has on world economics. The tax is probably too small – but there has to be some compromise, because the banks are simply too powerful and influential now for something larger to be passed through the political system.

    Demand is reduced the same way as supply with a transaction tax, so your argument about liquidity is not really valid. In any case, reduced liquidity is a risk in many trading conditions – there’s nothing special about this tax, other than it makes each trade more expensive to do (therefore reducing trading volume – which is precisely the idea). Investors will change their trading habits, slowing down the volumes of trades somewhat, making markets slightly less volatile.

    It is simply too quick, easy and cheap to trade high volumes today, and as such, it has little or nothing to do with real economic events anymore. Market mood is dictating how real economies are allowed to operate far too much, and that power is damaging many people’s livlihoods, businesses and communities.

    It is being given a status which it doesn’t deserve, with FX trading, bond markets and so on, being an orgy of activity, with no sense of the impact or effect of their actions. The markets dont want to regulate themselves, any more than a child wants to give back the biscuit tin he took when his parents weren’t looking.

    If anything is clear from the derivatives problems and the credit crunch, tax payer fuelled bailouts and entire lack of responsibility any of the investment banks have taken for the problems they caused, it is that they really are acting like spoiled children – and they need to be treated as such. It’s clear that traders are just too detached from real world economics to make any useful suggestions or have any useful impact on improving economic conditions in the UK or the rest of Europe.

    The issue we have with this is that it has far too big of an effect on our economies. Whether Greece is able to be more productive and pay off it’s debts has absolutely nothing to do with the bond markets, yet their people suffer endlessly for the needs of fickle speculators, who neither care, nor feel any responsibility for their endless doom mongering. Restructuring debt is irrelevant – to avoid defaulting, what is needed is stable economic conditions. Greece and other countries like Italy aren’t abstract entities, they rely on the will of their people and governments. Bond markets grinding their public sector into oblivion isn’t going to help them become more productive, or make their people suddenly produce more economic output. Things don’t happen that quickly – economic turnaround in Greece will take years, not seconds. What use is minute by minute speculation to their situation?

    Trading is simply mass psychology – it shouldn’t have a status above any other activity in our economy. Trading does not, and should not be free from responsibility to the wider world.

    Having a small transaction tax, starts to put some of that responsibility on investment banks and traders, and make them aware of the impact ruthless speculation has on ordinary people, and the real economies. The only way they can be made aware, is through economic cost to them – which is the only blunt instrument that can be used to regulate markets.

    Speculative trading has no more relevance to real life than the results of the next horse race do. But sadly, investors spend too much time behind computer screens looking at stock tickers these days, and far too little understanding businesses and real economies.

    Essentially – they are out of touch. Both with the country they live in, and the economic effects of their actions. If people really are leaving this country because of our tax regime, then frankly, we don’t want them here. We could do with more people helping build our country’s economy, and less trying to take what they can get from everyone else.

    So, spare a little thought to most people of this country, who dont give two hoots about investment banks. The real economy existed long before computerised stock exchanges, derivatives or any complicated trading instruments, and will continue to exist long after these terms and techniques are resigned to history.

  8. Posted 31/10/2011 at 13:10 | Permalink

    have a look at the European Commission staff report and assessment on the impact of the tax on real macroeconomic variables. They estimate up to a -1.76% of an impact of the FTT on the EU GDP in the long-run (this is a cumulative effect). The impact on investments is even larger (around 4%) – this basically drives the negative GDP.
    So, it is very likely that the tax will hit the economy even with an immediate impact, so your argument that it’ll have the same effect as an income tax increase doesn’t quite stand. First of all, the volume of financial transactions is huge, this is why even a small tax such as the one proposed can have substantial effects.
    And second, you’re missing the fact that by taxing transactions in Europe will move trading elsewhere (New York, Hong Kong, Tokyo etc), decreasing the volumes and decreasing the expected revenue gain. I see no problem for multinational corporations to move their derivatives trading out of europe – they don’t have to leave the country as you stress out, they will simply run their trading from other accounts.
    Such a tax is only effective in decreasing trade volumes if applied simultaneously in the whole world, which isn’t very likely.

    Furthermore, this statement:
    “Whether Greece is able to be more productive and pay off it’s debts has absolutely nothing to do with the bond markets”
    isn’t true, as I can think of a few ways how bond markets influence Greece to pay off its debt. Investors do pay attention to bond yields. Therefore, the riskier Greece gets on the bond market (higher yields), the harder will it be for them to service its liabilities and hence pay off its debt – this is in fact why they need help from everyone.

  9. Posted 31/10/2011 at 20:35 | Permalink

    I think you missed my point about Greece – the issue is that their economic stability in the real economy is only negatively impacted by bond markets – never positively.

    Their economic productivity, output and efficiency have nothing to do with bond markets. All bond markets do is make their borrowing more or less expensive – which is precisely why the issue has nothing to do with their actual domestic economy. What the bond markets decide to charge them is not relevant to anything other the mood of the investors on a given day (or perhaps, fraction of a second).

    Why should we worry about the investors yield levels in a serious situation such as they have? My point is that the speculation in the bond markets is precisely what is stopping them from gaining footing and stability.

    Of course they can pay off their debts eventually – they have a large market and workforce, and a lot of potential for growth. The question is, how much are the markets going to make their people pay for it? The only people who are profitting out of the situation are bond speculators – the greek people certainly aren’t. Its no use reducing their rates of interest, if tax revenues fall considerably because half the working population has lost their job.

    Yes, speculators can move elsewhere if they wish. But they still need to trade with European countries. The vast majority of derivatives trades are OTC, as you well know. Since this is the case, they can’t take place on other exchanges elsewhere in the world. If you want to trade with a UK based bank in this way, then you need to trade with a UK based bank.

    Of course, the followup argument, is that banks are simply going to move their operations abroad to avoid the OTC taxes too. Which may be the case. The thing is – you can’t make it a worldwide tax, without a huge number of countries taking the lead – which is what the EU is doing. Whether or not there is this tax, banks will continue to trade in Europe. Why? Because they have to – they have no choice. They might trade less – which is fine. After all, none of that trading currently goes back into the economy – it stays in private hands. We all know that the trickle down affect of investment banks into the real economy is a myth – if it were true, then the more investment banks made, then the healthier our real economy would be – and that’s not the case, is it?

    Saving money is a useless way out of recession – after all, recession is the absence of growth, is it not? Doom mongering and constant speculation just makes the situation worse. Essentially, it has nothing to do with whether Greece can pay back their debt or not, and everything to do with emotional trading in the bond markets. Whether or not people have jobs and are paying taxes is infinitely more important to Greece’s economic future than what the bond markets do.

    Even if the -1.76% you state proves to be accurate – it is pretty much irrelevant. Whether or not that is the case, then the additional tax revenue raised is positively beneficial to the economies of the EU. The idea is to precisely reduce trading volume – so of course it will impact GDP. But GDP is not the be all and end all of a country’s economic health. Not to mention in the long term, economic growth offsets the loss in this particular area of the economy. All the money raised in tax is spent somewhere else. It doesn’t just disappear.

    The trading and derivatives markets are not relevant here. If the speculators make a bit less money, but the EU takes in more in tax, then that most of that money will still be spent in the EU economy. The thing is, all tax revenue is eventually spent, almost all in the private sector. The whole point in this tax is that it is a redistribution of wealth away from financial institutions, and into the real economy.

    Which is what our country needs – we could all get a long fine without investment banks. They are not particularly useful at the best of times. All the impact they have on GDP is precisely zero use to the average person. That’s not to say they shouldn’t be allowed to continue – but the time of them acting as law onto themselves ought to be over. We shouldn’t save our sympathy or arguments for worthy businesses – they have little useful effect on real economics, and take money and investment away from useful developments in our economy.

    The point is – people have become obsessed with complex financial instruments, at the cost of almost everything else in economics. If we are to rebalance our economy, we need to get away from the square mile, and start looking at what is happening outside of London, and where the vast majority of people spend their time. The party is over – it’s time to stop flogging a dead horse and take some responsibility for what we are actually producing. At the moment, all the city seems to be producing is hot air, but people seem happy to keep inhaling it all just the same. All businesses make money – it’s just some do it in more useful ways than others.

  10. Posted 02/11/2011 at 16:42 | Permalink

    the sovereign bond market acts as a signal of whether a country is financially capable to service its liabilities. The less able it is to pay off its interest on debt (through rising fiscal deficits and debt levels) the higher the yield on its bonds since these securities becomes more risky. That is the link it has to a domestic economy. And it is also important for investors to evaluate in which country to invest into.
    The signals on the bond market in the years preceding the crisis called Greek debt as low risk and encouraged investors from the core eurozone economies to invest into its debt. The rising capital account deficit of Greece and its growth beyond the potential level from 2000 to 2006 is proof that the capital inflows into Greece fueled its economic growth. The domestic government ran large fiscal deficits as well in order to “buy” votes via populist policies such as over-employment in the public sector and high salaries there, huge pensions, free public transportation etc. Once the credit inflow stopped (in 2009) all these instabilities came to surface which was reflected (and still is) in the bond yield.

    Concerning the FTT, I still don’t think it will yield any positive result for the eurozone recovery. It will just like all other rescue efforts currently proposed by EU policymakers only make things worse.

    Allow me to raise this argument however – you say the bankers are producing nothing but hot air, and keep the money for themselves. And yet for tax revenue raised by the EC you say the money doesn’t disappear and that it will be invested into something, or better yet redistributed.
    Do you see the paradox? An investment banker with loads of profits makes the money disappear (i.e. doesn’t contribute to ‘society’) while the government is using the money efficiently. Doesn’t the investment banker use this money to buy consumer goods? Doesn’t he buy houses, cars, cloths, go to restaurants, pays for other services? The money doesn’t disappear at all. It is being spent on consumer goods. While the money redistributed via the EC goes either to subsidies for struggling industries (who don’t create growth but use the money to pay off existing debts) or for further bailouts of the very banks it’s taking money away from.

    This is why I deem any revenue raising plan by the EC as complete failure to begin with. They have no way to use it efficiently.

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