Robin Hood Tax: Populist Simpletonism

by JT McGee

nurse, robin hood taxHave you heard about the aptly named Robin Hood Tax?

The Robin Hood Tax is a financial transaction tax, a levy on financial transactions, especially those in the equity markets.

How the Robin Hood Tax Works

The Robin Hood Tax would tax all transactions on the financial markets. The tax proposal would charge $5 or $50 on each $10,000 transaction. Thus, the tax is equal to .05% or .5%, the latter being 10 times bigger than the former.

The scale of the tax is often lost in the talking points used to support the tax. $5 or $50 both seem very small against the $10,000 of securities changing hands.

But there is a real downside: the tax is essentially a tax on efficiency.

Previously, I wrote about high frequency trading, a supposed “evil” that is absolutely not. High frequency traders provide liquidity and efficiency in the market by arbitraging price discrepancies from market to market. High-frequency traders operate their businesses with profit margins of way less than 1%.

Naturally, these companies would be the most adversely affected by a Robin Hood Tax.

Ordinary investors like myself and those of you reading this would also lose out.

Excise Taxes

The United States already has a financial transaction tax equal to .0034% of each trade. These fees, known as Section 31 fees, pay for the Securities and Exchange Commission.

According to a report on India’s transaction taxes, the US section 31 taxes generated almost 5 times the SEC budget in 1998.

Excise taxes are absolutely fair. We have excise taxes on gasoline, which pays for roads, bridges, and other infrastructure necessary to use gasoline-powered vehicles. Obviously, this tax isn’t entirely perfect; one could argue that gasoline consumed in a lawn mower, for example, is free – lawnmowers do not create “wear and tear” on public roadways.

Of course, the Robin Hood Tax would stretch even further than the gasoline tax. Proponents who operate the site RobinHoodTax.org allege that proceeds would be used to tackle poverty, climate change, and other societal problems. In the UK, the tax would fund health care as well, which is why the AFL-CIO nurses union is so adamantly supportive of the new tax.

Why not negatively affect one industry to support your own? Nothing wrong with that, right?

Robin hood taxes, excise taxes, lawnmower

Tax the Nurses!

Medical care is far too efficient! I can’t stand the fact that nurses spend no time chasing their tails before going to work.

Since the workday is 480 minutes, we should tax both sides of it at a .5% rate. Thus, for 4.8 minutes each day, nurses should work to fight climate change on treadmills. This human energy can be used to turn a generator, which will produce real, carbon-negative energy to fight climate change.

It’s not like a nurse time tax would send health care overseas! This is obviously a far better tax, since no one can avoid basic health services.

I love this idea. It’s brilliant. Besides, it’s about time that nurses pay their fair share.

Robin Hood Tax Outcomes

The Robin Hood Tax has the most support in the UK, where it was originally proposed. In the United States, there have been similar proposals for financial transaction taxes.

Supporters cite the benefits of transaction taxes in other markets. These markets include Singapore (.2%), Poland (1%), Taiwan (.1% to .3%), and many other nations. (See more at the Wikipedia page on Financial Transaction Taxes.)

As you probably realize, none of the countries with financial transaction taxes are even close to the biggest financial markets. The United States and the UK have the finance business in their back pocket.

The UK opposes financial transaction taxes unless they are made to be global. Otherwise, the UK endures capital flight for modest tax revenues. President Obama was previously against the tax, but as it gains momentum, his administration may turn in favor of a transaction tax. He just wants to make sure that more than 50% of voters support it first!

What do we have to lose?

Companies in foreign lands routinely list on American exchanges to tap the vast American financial industry. Many others work with depositary institutions to create American Depositary Receipts, which allow foreign securities to sell on American markets.

Why do countries list on the American financial markets, even if they operate overseas? Many reasons, including:

1) Liquidity
2) Size
3) International influence
4) Expertise

Why else?

It could be argued that the nations with the largest financial taxes are not large markets for that very reason. It’s not the only one, of course, but it is just another factor that prevents them from becoming major financial centers.

tl;dr on the Robin Hood Tax

Seeing as financial services are one of the biggest American exports, maybe we shouldn’t try to send it overseas to other, untaxed markets.

http://www.flickr.com/photos/drregor/

{ 6 comments… read them below or add one }

Eric J. Nisall - DollarVersity December 26, 2011 at 16:40

Sorry dude, I missed the whole point of the post once I got a glimpse of the naughty nurse!

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JT December 29, 2011 at 17:45

It happens.

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Darwin's Money December 27, 2011 at 15:02

These politicians are such moronic, pandering blood-sucking leeches, I just can’t emphasize how much the country would benefit if they just went away. Stop legislating. The economy would stabilize, markets would rally, we could get back to having a well-run country. The law of unintended consequences is completely lost upon these morons. I cannot think of a single piece of legislation they have passed in the past decade ranging from bailouts to tax law changes to financial regulations to healthcare reform that did not have massively damaging unintended consequences.

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JT December 29, 2011 at 17:46

Being a politician has to be a great job.

I agree that politicians need to stop legislating, something I wrote about in a post about the power of looking ahead.

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John @ Curious Cat Investing Blog December 28, 2011 at 02:26

Having a “robin hood” purpose tax is silly. Having a tax to eliminate artificially supported front running by high frequency trading is very sensible. http://investing.curiouscatblog.net/2011/10/18/high-frequency-trading/

I am all for a tax to reduce the ludicrous high frequency trading stuff going on the last few years. That is the main purpose, I support. If we then also get a few billion that can be used in place of other taxes, that is fine with me, but no significant revenue is going to be raised this way. if you did try to raise serious revenue this way it would not work and would have negative consequences in the market. At a very low level it won’t have any effect on investors. The effect on speculators will be minimal. Only high frequency trading would suffer in any serious way – and I am 100% fine (in fact encourage it, to eliminate their market distorting behavior).

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JT December 29, 2011 at 17:44

Front-running isn’t distortion. False orders are a problem, and the SEC can and should take care of that. Why should we tax everyone else for problems created by a few traders? Why should I pay for someone else’s fraud?

I’m glad you’re willing to pay for other’s bad behavior, but I’m not.

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