Readers Question: Also what are the negatives to the Robin Hood Tax that has been suggested and is it akin to the suggested European transaction tax?
A ‘Robin Hood tax’ is a popular name for a Tobin tax that was proposed by Nobel laureate James Tobin.
Initially, the idea was to place a small tax on foreign currency trades. Although a small %, the volumes of foreign currency traded would mean that this would raise substantial sums. Since its first proposal, others have suggested a more widespread tax on trades in shares, bonds, options and other complex financial instruments such as credit default swaps.
Supporters suggest such taxes:
- Would raise substantial sums
- Help redistribute income within society
- Play a role in discouraging speculation which can destabilise the wider economy
- Can be more efficient than higher income taxes. (higher income taxes of more than 50% can create disincentives to work)
- Such a tax has been supported by many prominent economists such as Joseph Stiglitz.
Potential Problems of Robin Hood Tax
- The main argument against a Tobin style tax is that it would cause financial companies to move to other countries where they can avoid the tax. For a financial centre like London, a Tobin tax might cause a big drop in the number of companies who operate from London.
- To some extent, this argument is mitigated if the tax is adopted on a global scale. However, critics argue that it is very difficult to get global co-operation. There will always be the incentive to not charge tax and seek to attract big financial firms to that country.
- It could make certain assets more illiquid and make it more difficult for firms to respond to investment opportunities.
- Effective implementation would be very difficult because it would be hard to prevent cross-border arbitrage and attempts to avoid the tax.
- Discouraging purchases of currency and assets could actually increase price-volatility as investors would be less able to hedge against price fluctuations.