Last week I attacked the “Robin Hood tax” campaign, and somewhat less passionately, also attacked the Robin Hood tax. In light of some of the comments, I wanted to respond briefly.
Nerdy points out of the way first:
First, on the insurance example: yes, a tax on reinsurance might or might not be levied in the way I describe. (It’s hard to say with no specific policy proposals.) That’s not my point. I was trying to point out that there are all kinds of ways to structure a financial transaction, some with a huge nominal value, others – almost identical – with a far smaller nominal value. The tax is likely to have a rather whimsical effect and some transactions can be structured to avoid it, perhaps with unintended consequences.
Second, on the wallet example: again, my point is that it is not that the RHT would work in exactly this way (who knows?) but that transaction taxes create incentives for fewer back-and-forth transactions and it’s hard to see how that helps. Yes, it seems intuitively obvious to a non-economist that a transaction tax would reduce volatility, but most reasonable theoretical treatments point the other way, and so does much (but not all) of the limited evidence available on the question.
But the main thrust of my argument is not against the Robin Hood tax, about which I am puzzled and a little sceptical, but against the Robin Hood tax campaign, which I view with ever-greater astonishment. It’s simply not okay to launch a vast public relations campaign without the slightest interest in the pros and cons of your case. The Bill Nighy video is an insult to the intelligence. So are the “arguments” I am typically sent, the chief one of which is “Nobel laureate Joseph Stiglitz supports the tax, and Nobel laureate Paul Krugman supports the tax”.
Fine. What do RHT advocates think of the following arguments?
- We should not levy a price on carbon. Why? Because Nobel laureate Thomas Schelling thinks that cap-and-trade schemes are a silly way to think about climate change policy.
- We should be able to buy and sell kidneys. Why? Because Nobel laureate Gary Becker thinks that it would be a good idea. [pdf]
- We should stop laying into economists. Why? Because Nobel laureate Robert Lucas thinks macroeconomics performed well during the financial crisis.
Satisfied with these “arguments”? Of course not. They’re not arguments at all. They are appeals to authority. If you follow the links you can begin to evaluate the arguments for yourself, but (if I recall correctly) not a single RHT advocate, either in blog comments or twitter responses or in private emails to me, ever actually pointed me towards the arguments that Krugman and Stiglitz made. That makes me suspicious that the RHT mob don’t actually care what Krugman and Stiglitz said. They just like the idea that some big guns are on their side.
I, on the other hand, do care what Krugman and Stiglitz say.
Here’s Krugman – not on the RHT at all, but on transaction taxes in general: And he makes excellent points about how – despite what one might think – the tax would actually have helped prevent the crisis. (Krugman focuses on volatility, but now several RHT advocates tell me they don’t actually think the tax will reduce volatility, the point is just to raise cash. )
As for Stiglitz, I haven’t been able to find him making an argument, just the press reporting his support for the tax. (Please, help me out!) He has a paper from the 1980s showing theoretical conditions under which a tax could reduce volatility. I am not very convinced the conditions apply in reality, and neither are Stiglitz’s peers: they gave him the Nobel prize and made him one of the most cited economists in history, but nobody ever seems to have published that paper. (Again, happy to be corrected here.)
Sadly for the RHT advocates who’ve tried to bamboozle me with appeals to Professor Stiglitz’s authority, I actually interviewed Stiglitz a couple of weeks ago and asked him what we should do about the banks. He didn’t mention an RHT. He’s also just published a 300 page book which doesn’t seem to mention the tax (there’s no index, but I’ve read most of it and skimmed the rest and couldn’t find it). I don’t get the impression the tax is really at the top of his agenda.
One other argument that has been made is that many financial institutions operate in a competitive market and thus they won’t pass on the tax. I am genuinely baffled by this argument, which seems entirely backwards. Competitive businesses make zero profits; if a tax is levied on them, they must all raise prices or else go bankrupt. It’s that simple. (It’s like saying, “you won’t get wet in the rain, because it’s made of water” – um, it’s exactly because it’s made of water that I will get wet in the rain.) Have I misunderstood here?
The most thoughtful response I received forwarded a confidential policy briefing (it is intended for publication later) which didn’t itself recognise any arguments against the RHT but did contain references which I looked up, one of which – by Dean Baker – did recognise arguments against the RHT although not convincingly refute them. Have a look [pdf] and see whether you agree.
So, where does that leave us?
The basic proposition of the RHT is that it is a tiny tiny tax which will raise a humongous sum of money. Nobody is really going to have to pay it – ‘coz it’s so very tiny – but if anyone does, it will be bankers. (If you think I am exaggerating go and look at the video again.) The tax may or may not be intended to reduce volatility.
My tentative answer is: the RHT is a very large tax with an uncertain incidence. We don’t know who will pay it, but $400bn is a lot of money so let’s not act like it’s going to come from nowhere. It might reduce volatility but the balance of both theory and evidence is that it won’t.
I have much more confidence in my other conclusion: that the RHT campaign has little or no interest in the evidence. So I’m going to stop arguing now, and crack on with my next column – which is about the importance of evidence in policy. Hopefully some of you will still be reading.
PS The RHT is supposed to raise $400bn. Is that a lot of money? Andrew Ross Sorkin says (p4, “Too Big to Fail”) that “Those who worked in the finance industry earned an astonishing $53 billion in total compensation in 2007″. Yes, that is astonishing, even for the bubble year. Possibly Sorkin is referring only to New York financiers, but that’s still a very large slice of the industry. But $53 billion is a lot less than $400bn. I remain unconvinced that only bankers are going to pay this tax.
EDIT: Link by amantley below to “a Stiglitz article” – thanks. But this is not very satisfactory, is it? Stiglitz asserts that there is a parallel between short-term trading and pollution, and suggests (without evidence) that short-term trading increases volatility. But I repeat, there aren’t many reasons to believe this. And, again, RHT advocates tell me that the tax isn’t about reducing volatility anyway. Hopefully someone will link to a piece written by Stiglitz in which he argues the case properly, as we all know he is capable of doing.
Alex Wilks accuses me of being selective about reporting the RHT evidence base. You be the judge. There are links to papers about how much the tax would raise, but I am not disputing that. There are also links to people such as Dean Baker without actually linking to their research. These papers do not evaluate pros and cons. There is, however, a link to one paper by Stephan Shulmeister which does. I did overlook it. Apologies.
Mr Wilks also asserts that I ignore the evidence that the investment banks have been engaging in some economically dangerous activity. I am rather at a loss at this argument. Here is an argument with the same logical structure:
Harford: “Homeopaths don’t seem to be able to point to much evidence that homeopathy cures disease.”
Wilks: “Harford is ignoring the evidence that some people are sick.”