Tuesday, 18 March 2014

Robin Hood Charity or Not Giving A Friar Tuck

You may have heard of a tax called the Robin Hood Tax - it's been getting a lot of attention recently.

The website I linked starts with the words - "A tax on banks..."

First things first, it's not a tax on banks, it's a tax on financial transactions.

And then it goes on - "The Robin Hood Tax is justice. The banks can afford it. The systems are in place to collect it. It won't affect ordinary members of the public, their bank accounts or their savings. It's fair, it's timely, and it's possible."

Ok, before we get to the positives, let's have a reality check - I'm afraid that's just not going to be the case - the cost of this tax will be borne by ordinary members of the public, largely through their pensions and/or their savings. Just about every tax of this kind is filtrated down to end users. If the government suddenly whopped an arbitrary tax on Argos, the result would be a price hike at Argos, and it would probably culminate in Argos going out of business. Similarly, a tax on financial transactions will hit the customer making the transaction, either in their pockets or in prohibiting them from making the transaction.

The big problem with the Robin Hood tax for individual nations is that any government implementing it will put its own nation's financial sector at a disadvantage compared with all the countries that do not implement it. It is potentially terrible for early adopters (as the disastrous outcome of Sweden's adoptions showed, who lost about 60% of their banking trade to the UK as a result of transaction taxes). Here's why it's bad for early adopters.

I said that if the government suddenly whopped an arbitrary tax on Argos, the result would be a price hike in Argos goods, which as a consequence would probably eventuate in no one buying anything at Argos. If the government suddenly whopped an arbitrary Argos-tax on Argos then customers would make a rational decision and switch to every shop that isn't Argos. In the analogy to financial transactions, the world's countries are represented by shops in the UK, with the UK being Argos. The imposition of transaction taxes on UK bank transactions by the government would be equivalent to Argos lobbying the government to impose an Argos-tax on Argos. That is to say, if the UK government introduces a Robin Hood tax on UK financial transactions in its own banking system, then UK financial services will simply relocate to countries without a Robin Hood tax, similar to how Starbucks, Amazon and Google use tax havens to do their accounting.  

For those who don't relocate, the Robin Hood tax would mean increased risks for speculative bankers, and a disincentive for ordinary users to save for the future. The general reason that taxes on banking transactions are unwise is that they have a different true value to their face value. As an analogy, take car insurance. Betty pays £350 car insurance to be insured by Admiral, but she knocks down a man and permanently disables him, costing Admiral £750,000. The true value and the face value differ by £749,650. A 10% tax on Betty's value costs her an extra £35. If Admiral taxes Betty 10% to insure against the full loss it's going to add £75,000 to her premium. This is what will happen in the banking world with transaction tax - it will encourage risk and injudicious spending for the bankers, and it will be an increase that is passed onto the banks' customers.

And as regards the disincentive for ordinary users - to give you an illustration of why a surcharge incentivises imprudence, suppose all banks implemented a 10% service tax every time you used the cash machine. In response people would make fewer withdrawals of larger amounts, and disposable spending would increase as a result.

Now let's look at the positives. The idea that relatively wealthy people can be taxed to give directly to relatively poor people has plenty of mileage - but that is the primary way on which Robin Hood taxes should be capitalised. There is so much need in the world, and in the absence of enough drive to do more, I support this kind of enforced-charity.  But if this is going to work properly, the effort needs to be a collective, with every developed country being co-signatories in this policy. This will guard against the disadvantaging of those who sign up for it.

What will also really help is when banking becomes more advanced, enabling individuals to simply place money directly in other people's accounts - it'd work like the sponsor a child systems work, but much more directly. This has been tried in Kenya with a charity called GiveDirectly - it is a charity that passes donations straight to poor families in Kenya (among other places) - and I believe it has yielded good results.

A similar scheme has been tried in Uganda too. Poor entrepreneurs are given grants by people like you and me, and they manage to achieve a high rate of return. This emerged from a study by Chris Blattman, Nathan Fiala and Sebastian Martinez. They helped the Ugandan government give out $10,000 to young people in various project groups, as well as some random selections. Per person, these donations worked out about twice the annual income of the young people in question. Blattman and his colleagues then tracked their stories over the following four years, and they found that many of the young people set themselves up in a new skilled trade or as budding entrepreneurs who were able to transform their opportunities and help others too.

Naturally in terms of meeting global need, projects like this are part of an incipient process. They are the first signs of what can emerge when the banking system can facilitate more and more personal accounts and easier access to charitable donations. Benefactors can sponsor individuals more directly; they can exchange letters, and play a more intimate part in helping those that that currently can't get themselves on a higher rung of the economic ladder do so.

While it is not without its problems, I'm all for the kind of Robin Hood Tax that helps lift the world's most desperate people out of poverty and into an economic system in which they learn skills and trade self-sufficiently in a country with right of ownership and a stable government enforcing the rule of law.

* Photo courtesy of creative-collaborations