As the “Occupy” protests have spread across the world, their participants have proudly resisted producing any specific political demands. But at this week’s G20 conference, a Canadian magazine supportive of the Wall Street movement, Adbusters, plans to demand one particular reform — namely the introduction of a global financial-transaction levy, which the magazine has termed a “Robin Hood tax.” Two liberal congressmen have proposed the tax in the House. Adbusters presents the move as “a radical transformation of casino capitalism” and a way “to slow down fast money.” But in reality, it isn’t an effective way to steal from the rich and hardly prevents them from engaging in risky financial activity.
A financial-transaction tax would apply a percentage levy on the value of every financial trade. Adbusters’ call for applying such a tax across the entire G20 is utterly fanciful, but a tax across an area like the EU might be feasible — at least if the union’s main financial power, Britain, did not vehemently oppose it. Most likely, such a tax would have to be enacted in one country at a time.
A transaction tax might appear to tax only those who can afford it — i.e., Wall Street investors, especially hedge funds and aggressive traders. Unfortunately, this wouldn’t exactly be the case — the tax would raise costs significantly for all investors, even those invested in vanilla mutual funds or planning to collect retirement from public-pension funds.
Given a U.S. tax code that already disincentivizes saving, we can ill afford to tax investment even more. Increasing the price of trades would cost ordinary savers significant amounts of money — for example, managing a mutual fund requires making trades, and funds will pass the fees associated with those trades to their customers. If taxes on long-term capital gains are reduced concurrently, an argument can be made for the transaction tax as a de facto levy on short-term capital gains, discouraging risky and active investments without discouraging investment overall — but conservatives rarely win such bargains, and no revenue would be raised.
The argument for across-the-board transaction taxes is twofold: Supposedly, it would raise a significant amount of revenue, and it would reduce activities that have negative effects. These are worthy goals — the government is sorely in need of revenue, and even many conservative economists support the idea of taxing behavior that is harmful to others — but in fact, the proposed tax would probably not accomplish either.
The two notable examples of existing transaction taxes are in Sweden and Britain. Sweden attempted to implement a 50-basis-point tax on Swedish equities in 1984, and, as a marginal financial market, saw most of its trading activity move overseas as a result — the policy generated little revenue and was repealed in 1991.
Britain has had significantly more success with its tax, a stamp duty on all British equities regardless of where they are traded, and does not seem to have driven much capital from its shores. The City of London is a financial center that banks cannot afford to ignore, but trading has easily migrated to financial instruments, such as derivatives, that are not taxed.
From its 0.5 percent stamp duty (probably the highest rate possible, and higher than proposed by most analysts), the United Kingdom raised about 5 percent of the government’s tax receipts in 2007 and 2008. Why impose a tax that could force capital to flee the U.S.’s financial industry — a sector that generated, in 2007, half of the profits earned by American corporations — for that amount of revenue? Studies examining the British stamp duty showed little capital flight in the 1990s, but in today’s world, with East Asia and the Middle East aiming to become global financial centers, a transaction tax could represent an unprecedented economic opportunity for them to grow.
Supporters also argue that the “Robin Hood tax” would be worthwhile as a disincentive to destructive behavior, particularly speculation and high-frequency trading (HFT). Technology has evolved and markets have expanded to the point where the costs associated with executing many trades has become negligible — as low as one tenth of a basis point for currency trades. This has led to massively increased trading volumes. HFT involves computerized algorithms rather than human traders executing trades within tenths of a second. One might assume that by discouraging HFT, the “Robin Hood tax” would reduce market volatility.
But while the new tax’s burden would fall disproportionately on speculators and high-frequency traders, reducing their trading significantly, these actors’ influence on the market is not necessarily destructive, pernicious though it may appear to observers (including traditional investors). As Kenneth Rogoff has argued, the putative effects of the tax appeal to liberal commentators and even conservative ones, but the empirical and formal theoretical evidence does not bear out their case — the tax would not reduce volatility, its supposed aim, but would instead decrease trading volumes and increase costs.
Liberals may make the case for a financial-transaction tax on the basis that much of the burden would fall on our “fat cat” financial sector — but in doing so, it would raise the costs for everyone participating in financial markets. They have only philosophical grounds, without economic or empirical support, to argue that, for example, eliminating HFT would provide other social benefits.
The financial-transactions tax may sound nuanced and even beneficial, but fundamentally, it is no better than any other attempt to exact a supposedly harmless tax on those who “can afford” it.
— Patrick Brennan is a 2011 William F. Buckley Fellow.