Why the banks aren't scared of the Robin Hood Tax

Thank God the adults have arrived, finally. The IMF has just come out with its suggestions for how we might want to tax and reform parts of finance and is saying things which are sensible, at least in part. In doing so they've continued the process of killing the Robin Hood Tax stone dead, which is great news.

Well, something like the RHT was bound to be proposed. Yes, the financial system fell over and at such times every crank with a shiv to sharpen will run out to slice up the carcass. The basic ideas rested on two - how shall we put this gently, highly contentious seems a little too weak - let's say insane propositions.

The first was that we could raise humongous amounts of tax money without anyone really noticing. Figures of $400bn globally were bandied about along with, looking at the underlying papers, some £100 billion in the UK alone. All from this teensie tax which only those pinstriped bastards in The City would actually have to pay. The reason that this is insane is because the total economic output of “The City” is less than £100bn a year. Something like £60bn is the usual figure. Quite how to get more tax than there is actually money produced from a sector without anyone noticing wasn't really explained.

Indeed, the RHT's proponents went out of their way to insist that we plebs wouldn't pay any of it at all. Only the bankers and the banks would... but as above, if we're trying to get more in tax than the banks and the bankers actually have then it just ain't gonna be so, is it? And indeed it wouldn't be so. Just one little example of how the tax would indeed end up being paid by all of us.

One of the sectors which they suggested taxing was foreign exchange trading. It's certainly a large market, $1.5 trillion a day or so in London alone. Stick 0.005 per cent (also known as 0.5 basis points or bps) on that stream and my word what a lot of money we can raise! They were intellectually honest enough to recognise that much of this trade goes on at very slim margins. 0.5 bps on standard size transactions in a well traded currency pair isn't unusual. They agreed that doubling the cost of trading would mean that the volume traded would fall. Excellent, but they then missed the next logical step, which was that a fall in volumes traded would lead to a widening of margins.

Quite why they missed it can only be guessed at. One of their supporting documents makes it quite clear that, back in the crisis days, volumes did fall and margins did widen. Another (their budget submission) pointed out that way back when, when volumes were lower, margins were more like 4.5 bps. So they did know that lower volumes would lead to wider margins but they didn't mention it.

Can't think why - unless it's that wider margins mean that it's not going to be just the bankers that pay the economic burden of the tax. It's going to be all of us who never have any interaction at all with the FX markets. Like if we change money for beer on our hols. Or if our pension fund (ha, ha, yes, I know, an amusing concept for all us contractors and freelances) is invested abroad. Or if we ever bought anything which was imported or worked for a company which ever exported anything. You know, like everyone in the country does. If FX margins widen then buying foreign currency is more expensive and we get less when we sell pounds (these two are of course the same thing): in every FX transaction the costs are higher.

Now it is true that no one at all is predicting that margins will widen to 4.5 basis points from the imposition of a 0.5 bps tax. But they will widen. A reasonable guess from one in the markets is 1 to 2 bps. Which means that for each £1bn raised in tax we're all paying £3-5bn (the increase in the spread plus the tax). And it is very much all of us paying that extra money, not just the shysters at their dealing desks.

So, the Robin Hood Tax is not a tax on bankers, it's a tax on us and a very expensive one to boot. The second aspect of its madness is that it wouldn't actually have cleared up any of the things that caused the financial crisis in the first place. FX markets didn't cause the crisis, futures didn't, options didn't, shares didn't and not even bonds did. Yet all of them would have been taxed as a method of making sure that a crisis none of them caused would never happen again. It's extremely difficult to trace the motivations for the tax to anything other than “bankers are icky so let's tax bankers”. Even if bankers wouldn't pay it and it wouldn't solve anything.