The Tobin Tax, which is now dubbed the "Robin Hood Tax" in an attempt to increase its appeal, has attracted the support of "350 economists from across the world". They have written to G20 leaders calling on them to introduce a financial transactions tax on speculative dealings in foreign currencies, shares and other securities.

This assembly of opinion calls to mind the letter sent to The Times in March 1981 and signed by 364 economists. They denounced the Conservative governments anti-inflation policies, saying they would never bring economic recovery. The 364 represented one for every day of the year (yes, they got that wrong, too). It is now a matter of record that what they said was impossible occurred soon afterwards.

Their modern successors call for the tax to be levied at 0.05 percent, which they say makes it a tiny tax that will raise big revenues of $400bn. This is indeed a substantial amount, representing more than half of the profits of the worldwide banking industry ($788bn in 2006). They also say that it will hit only the rich, since it will not affect the retail banking sector.

This fails to recognise that taxes are always passed on to the customer. Many of these financial transactions are done as insurance, to guard the value of contracts against possible adverse currency changes. The notion that an industry will blithely accept the confiscation of half its profits belongs in fantasy. Banks will pas it on, and ultimately it will fall on those with mortgages and loans, changing foreign currency, or saving in insurance or pension funds.

Capital will be made more expensive if this tax ever comes about, hitting the ability of poorer countries to raise investment funds. Fortunately the tax is not likely to come about, since it would require the agreement of every tax jurisdiction to make it work, and the record of international consent, as illustrated by the stalled World Trade talks, is minimal.

Without that consent, traders would simply move to where it was not levied. The "Robin Hood Tax" might look superficially attractive, but it would do profound damage to the world economy and, far from hitting "the rich", it would be the world’s poor who suffered most. This could be one reason why Bank of England Governor Mervyn King described it as "bottom of the list" of options.

If campaigners want to spend charitable funds on these campaigns, they would be more effective in calling not for higher taxes, but for the end of the protectionist tariffs that prevent poorer countries from selling their goods.

Published on Telegraph.co.uk here.

Old Teaser

A new tax on financial transactions is the wrong way to help the world’s poor, argues Madsen Pirie.

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