The financial system is broken and campaigning organisation The Robin Hood Tax claim that we can fix it. To be specific, they claim that the banks can fix it - if we make them. A tax on financial transactions could generate billions in income for governments to spend on, in theory, exactly what we want them to spend it on.
In other words, they want the banks to bail us out of the crisis they created. It’s a beautiful idea, but could it really work?
The global financial crisis
We live in a economic and political world shaped by the financial crisis of 2008. The collapse of the US economy in 2007, due to a policy of jam-tomorrow over-lending, caused an earthquake in the global economy, exposing fissures in financial regulation throughout the world. Sub-prime mortgages were the bullet, but the banks pulled the trigger. Caught in a domino crisis of over-lending and overspending, economic growth collapsed in one country after another.
The UK has been through two periods of recession since then, the first directly triggered by the global financial crisis, the second a response to the coalition government’s austerity policies. We could argue that the growth in the UK that we have now is uneven, concentrated in London and the Home Counties - because it is. But that would be another story.
Recovery remains sluggish across Europe. Though the UK is no longer in recession, technically, Cyprus, Croatia, Italy and Greece still are. The Netherlands, Spain, the Czech Republic, Denmark, Finland, France, Portugal - and the shared fortunes of the Eurozone only emerged from recession in the first quarter of 2013.
It’s easy to talk in the abstract about “growth” and “recovery”. But these tiny percentages; 3.1% UK growth in 2014 mean little in comparison with our lived experience of financial inequality. Nearly a million people have used food banks in the last 12 months for example - triple the number in 2012-2013. The NHS is facing a financial shortfall, according to its own director for patients and services, Tim Kelsey
“We are about to run out of cash in a very serious fashion,” Kelsey recently told a meeting of technology entrepreneurs recently,”Next week NHS England will be publishing a call to action. .. our analysis will disclose that by 2020 there will be a £30bn funding gap in the healthcare system.”
The result of six years of global hardship in the world’s most developed countries has begun to make economics, once the least compelling of all academic disciplines, interesting again. Thomas Piketty’s post-Marxist peon Capital in the Twenty-First Century has finally drawn an empirical correlation between the concentrated accumulation of personal wealth and sluggish economic growth. It has effectively neutralised the central ideology of Conservative financial policy; the mythical trickle-down effect.
We are emerging from the longest period of global recession since the Great Depression of the 1930s. And, though we are experiencing a fragile economic growth, it is the poorest who continue to suffer. Are we ready to take more direct measures? Are we willing to redirect some of that wealth for the common good?
Take from the rich…
The Robin Hood Tax is a persuasive brand for taxation mechanisms that many countries already have. The campaign proposes the introduction of Financial Transaction Taxes or FTTs. These taxes would not affect day-to-day personal banking, but would rather be aimed at the stock market; the legalised casinos at the heart of our financial system.
They’re sometimes known as Tobin taxes. Though the description is not entirely accurate, James Tobin is widely accepted to be the first to suggest taxation of banking transactions in 1972 - though his version specifically targeted currency exchange.
Correctly implemented, FTTs should redistribute wealth from the very top of the hierarchy.
“The IMF has studied who will end up paying transaction taxes, and has concluded that they would in all likelihood be ‘highly progressive’,” say Robin Hood Tax campaigners, “This means they would fall on the richest institutions and individuals in society, in a similar way to capital gains tax. This is in complete contrast to VAT, which falls disproportionately on the poorest people.”
In a modern reading, small taxes would be levied on stock market mechanisms like shares, bonds and derivatives - and ideally extended to other transactions. And we really are talking small numbers here. In 2012, France introduced an FTT of 0.2% on shares in companies with a market value over €1 billion. The market did not collapse, share purchasing continued pretty much as it had before and the government raised half a billion euro.
France’s introduction of an FTT on shares prefigures a wider European drive to introduce a modest tax on shares, bonds and derivatives by January 1st 2016. The proposal suggests taxes of 0.1% on shares and bonds and a smaller tax of 0.01% on derivatives. The initiative could raise £8.4 billion in the UK alone. Money that could be channelled back into the NHS and the welfare system. Money that could even be used to support small business growth and self employment.
Except that the coalition government government has unequivocally opposed it.
With a stunning lack of self-awareness, George Osborne first expressed his opposition to the EU’s financial transaction tax as far back as 2011.
“There are very considerable practical obstacles to its successful implementation unless you can get every jurisdiction in the world to sign up to it,” Osborne told The Telegraph. He then went on to do everything he could to stop other European nations from signing up, mounting a legal challenge through the European Court of Justice. The complaint was thrown out of court in April this year, but Osborne plans to fight on.
Osborne had previously told the press that he wasn’t opposed to the idea of financial transaction taxes per se. Which is just as well, as some very lucrative FTTs are already enshrined in our own economic policies. Stamp Duty, for example - the tax we pay on transactional documents - is an FTT. Stamp Duty is very profitable for the UK government, bringing in over £3 billion a year - and applies to UK shares over £1000.
The chancellor’s current argument is that the EU legislation proposed will damage the UK economy. But Osborne was opposed at the beginning of the process and, as a consequence, the UK didn’t take part in designing the European FTT. As the fictional U.S. President Bartlett once said, “Decisions are made by those who show up”.
The sky is falling
Osborne has previously and publicly worried that an EU transaction tax would drive business to other markets. It’s the fiscal right’s familiar argument; tax the rich too hard and they’ll run away. Indeed, most of the arguments against FTTs assume a conservative view of where money should end up.
Writing in Forbes magazine, economist and business writer Tim Worstall suggests that the EU FTT will accrue no additional revenue for the union. The EU’s own figures suggest an expected offset in production of 1.76% - which translates to a loss in taxes from gross domestic product. But this is, at worst, short-term economic rebalancing and, at best, not proven in anything but economic modelling.
In France, for example, according to data from Reuters, trading in equities actually rose in the first month of the French FTT. By 32.95%. Figures since show a similar, modest upward trend in trading - despite protests that the sky would fall and the French economy would collapse into a vortex.
Another argument is that the money for taxes always has to come from somewhere and Worstall suggests that, eventually, it would come out of the pockets of workers. But, he writes from the perspective of a Robin Hood Tax taking hold in the USA, where minimum wage law needs more of an overhaul than it does over here. Living wage legislation is essential to counteract any tendency corporations might have to rebalance profit by cutting salaries. Wasn’t that one of the main things we learned from the global financial crisis? Corporate enterprise cannot be expected to overseeitself.
The right legislation
There is one doubt that remains. While an EU transaction tax or, preferably, global FTTs would redirect a lot of corporate cash back to government, what control do voters have over how the money is spent? The answer under current legislation is, not a great deal.
The Robin Hood Tax campaign tells us:
“A tiny tax on the financial sector can generate £20 billion annually in the UK alone. That’s enough to protect schools and hospitals. Enough to stop massive cuts across the public sector.”
And yes - it could, if The Robin Hood Tax campaign has all its suggestions met. Because, this is about more than accruing funding - it must also be about legislating so that those funds are used in a specific way.
The campaign suggests that a Robin Hood Tax should be distributed to specific causes. In the current campaign manifesto, it’s 50% at home, 25% in developing countries and 25% on climate change.
While the European FTT proposals and even the coalition government’s 2011 bank levy are a start, for these taxes to truly work in favour of the poor they must be joined with legislation that governs their distribution. It must be made clear what these revenues are for.
There is precedence for this. In 1911, the National Insurance act became the foundation of funding for NHS service provision; a direct tax taken for a specific purpose.
The Robin Hood Tax campaign has more work to do and more battles to fight. But one day we may be able to look back at these formative years with the same pride as we look on the formation of the NHS in 1948 - and agree that we campaigned to make the world better for everyone.