...a blog by Richard Flowers

Wednesday, December 07, 2011

Day 3992: Tobin or Not Tobin: Why Paddy Ashdown is Wrong and We Need a Robin Hood Tax like an Arrow in the Head.


Time to take a leaf out of Daddy Alex's book – and take my life in my fluffy feet – by picking a fight with Lord Paddy!

Look, for starters Robbing Hoodie ROBBED the taxman; he didn't work for him! A "Robin Hood Tax" is a CONTRADICTION IN TERMS!

People say "it's an itty bitty little fraction of a percent but it raises oodles of dosh." Well, it's either one or the other. If it raises a lot of money then that's got to come from SOMEWHERE.

And here's the real kicker: it comes from YOUR pensions and insurance. It doesn't come from "the rich" or from "the bankers". It comes from YOU.

The RICH do not, on the whole, spend their time buying and selling their assets over and over. They leave their wealth invested – in bonds or shares or in gold or oil paintings or racehorses or whatever. That's your problem right there: money being locked away in unproductive assets instead of being made to work creating business and jobs. A tax on capital transfers WON'T TOUCH THAT.

The capital transfer tax or Tobin Tax is usually said to apply to buying and selling shares and bonds, although some formulations suggest that it might be applied to ANY transfer of cash (yes, including moving your own money from your current account into your savings account).

The Tobin Tax mostly affects the HIGH VOLUME of stocks and shares traded on stock exchanges, particularly in LONDON.

But Bankers, you may somehow not have noticed this, do NOT play the city casinos with their own money. They invest money on behalf of clients, and mostly that is money from the huge funds controlled by pension funds, insurance firms and other financial institutions. And THAT money comes by and large from ordinary people paying in money to their pension plan or insuring their health, home, holiday or the rest.

If you're going to take fifty billion quid in extra tax then THAT's where it's going to come out of. Pensions and insurance firms will make less profit on each transaction. It doesn't matter that it's only a little bit less per transaction; if it's going to add up to a LOT of tax raised then it's going to be a LOT less profit overall. So they will need YOU to pay that extra bit in to cover it.

We've been here before.

When Mr Frown raided the pension funds back in the days when he was Mr Pay Down the National Debt (following Fatty Clarke's plan for repaying the tripling of the national debt the Conservatories ran up under Mr Major Minor, oh those heady days), what he did was to abolish a little tax giveaway called the Advance Corporation Tax Credit or ACT.

What ACT meant was that when company dividends were paid, 20% of the dividend was sent to the treasury. Ordinary shareholders would pay tax on their dividend, but the ACT was like a payment on account, so some or all of the tax they owed was already paid. But Pension funds didn't have to pay tax, so they could reclaim ALL of the ACT credit. It was only a little thing, an itty bitty amount per dividend. But it added up to a BIG amount in total.

And through the effect of compound interest, that amount could be snowballed to really build up the value of the pension fund.

So when Mr Frown took the ACT away, that REALLY hit the long-term growth value of the funds in which pensions were invested. And that's a big factor in the way that pensions suddenly became HUGELY more expensive to fund. People with private pensions had to pay in a lot more. Many companies decided that they had to stop offering final salary pensions because they were just too expensive.

(Ironically, Mr Frown STOPPED using the pension money to pay down Britain's debts and instead started using it to pay lots more public sector workers. Which is another reason why some people are a LITTLE bit resentful about those public sector workers who are demanding EVEN more from tax payers to fund all the extra pensions that all the extra workers are going to need. It would be easier to believe "we want decent pensions for everyone" if Mr Frown had not explicitly funded public sector pensions – and salaries – by raiding the private sector pensions for the money!)

The government and the Liberal Democrats in particular say that people who are paying into pensions are doing the RIGHT THING.

Now we could have a great big debate about whether they are or they aren't – pensions are of course more tying up wealth in unproductive savings rather than spending or investing money in a business – but since we have made a retirement, and a COMFORTABLE retirement at that, not merely an ASPIRATION but an EXPECTATION for most people then someone has got to pay for that.

Until the Seventies, that someone was always the government, but since the Eighties successive governments have made it abundantly clear that they are not going to pick up the tab and people had better make their own arrangements.

So it's a bit bloody cheeky to then keep eyeing up the savings of those people and going "we'll have a chunk of that, thanks".

(And the same thing goes for the so-called Higher Rate Pension Credits too. As I Twittered last week: that's not £40bn GIVEN to private pensions; that's £40bn NOT TAKEN from them. There IS a difference. Payments into your pension pot are supposed to come from your PRE-TAX income, because you are deferring that income until later in your life and you are going to get TAXED on it when the pension pays out. So it's somewhat NAUGHTY to tax it going IN as well.)

Anyway, the WORST thing about Captain Paddy's article is that he doesn't just want to raise yet more tax, but that he already has a wishlist of things to SPEND it all on.

Yes, of course it would be wonderful to end child poverty, or to reverse climate change, or to meet our Millennium commitments. But we are ALREADY spending more than we raise in tax. And we are already taking more than half Great Britain's GDP. Somewhere between none of it and all of it there has to be a limit to how much of what the country produces the government can take in tax. Adding a new tax burden and then hypothecating it to causes, no matter how laudable and worthy, just makes it more difficult to close the gap between what we are getting in and what we are forking out.

And, at the last election, the country made the choice to go for LESS tax and LESS spend.

That's the truth about the "ideological" cuts, incidentally. The country chose to accept the need for cuts. Just as in 1997 when the county accepted the case for more spending on public services, and so the largest vote went to the party "ideologically" inclined to SPEND, so OF COURSE in 2010, knowing that there had to be cuts, the largest vote went to the Party "ideologically" inclined to implement them. As opposed to the one which promised fiscal prudence and then spent like there was no tomorrow. Which in the end, there wasn't! And then promised us fiscal prudence again. And also promised us "Cuts deeper than Thatcher's". And now deny everything.

But never mind that Paddy is having a fit of the TAX-and-SPENDS; all this austerity is bound to give even the best of us a funny turn. But I want to say why this tax is WRONG no matter WHAT you spend it on.

You see, Paddy suggests that the Robbing Hoodie Tax will have a "calming" effect on the markets, as though it will act as an automatic regulator.

The logic behind this is that people will make choices about whether or not to do transactions if there's going to be a cost involved, so there will be fewer "unnecessary" transactions. The assumption here is that FEWER transactions is necessarily BETTER.

That's because people think that more trading means that the market is more out of control.

And there have been a good few occasions now where we have seen huge drops in the stock prices allegedly driven by computers chuntering away at huge volumes of trades and getting themselves stuck into automatic selling spirals.

But a free market isn't SUPPOSED to be "under control". And those incidents stand out because they are the EXCEPTIONS; they are NOT the way the markets behave day in day out almost all year round.

There're plenty of things wrong with Free Market Theory – like the assumption that investors will always behave RATIONALLY (have you SEEN the stock market?!) or that everyone has the same access to INFORMATION (have you HEARD of insider dealing?!) – but there being TOO MUCH trade is NOT one of them.

More transactions OUGHT to be MORE stable.

This is the most basic of those things called "market forces". A famous man called Mr Adam Smith wrote a book about it called "The Wealth of Terry Nations" (clue: invent the Daleks). Mr Adam Smith called this "the invisible hand" of the market, which "guides" people to find the right price.

If you happen to be a left-wing critic of liberal economics, you might talk about "the invisible hand" as some kind of crazy right-wing belief in MAGIC or WOO.

In which case, you need punching in the head, because it's NOT belief in magic; it's A GREAT BIG FLUFFING METAPHOR.

There isn't a REAL "invisible hand"; there isn't a magic pixie who "knows" what the proper price should be and "guides" the market to it. It just means that the market reaches a consensus without everyone having to sit down and agree on what it will be.

The theory of market forces isn't a made up belief like crossing your fingers for luck, or praying to Mercury for a safe journey, or the dialectic imperative of history. It's based on the way people really behave (or at least the way they behave a lot of the time).

It's like a weight on a spring. Let the weight go and it will bounce up and down as gravity tries to pull the weight down and the spring tries to pull the weight back up. At some point the weight will settle down and stop. No one has "decided" the height it stops at; it's just the point where the downward force and the upward force BALANCE.

So, somewhere there is a fair price; no one knows what it is. BUT if some people are charging more and some people are charging less then buyers will go to the people who are charging less. The people who are charging more won't sell until they drop their prices. Prices will fall. BUT (again!) if there are limited supplies, the people who are selling might chose NOT to sell if the price is too low, so the people who are buying won't be able to buy until they raise the price. Prices will rise. Between them, these two forces will reach a BALANCE point and that is the "market price".

The ACTUAL price you might pay at any one moment will wobble up and down around this level as the market is constantly adjusting and readjusting. INDIVIDUALLY people don't "know" the market price but they can see from the trading around them what SORT of price it should be and can either squeeze a good deal out of a seller or pay over the odds if they're in a hurry to buy and so strike their own deals accordingly at ABOUT the market price.

Now if there's a REAL change to the supply in the REAL World – like frost destroying the broccoli crop or a new oil strike – then the balance of the forces CHANGES and the price goes up or down.

(That's true of demand as well – e.g. it is thought that when the Roman Empire was turned CHRISTIAN by the Emperor Constantine all the temples had to stop making sacrifices to all the other gods so there was a big fall in demand for INCENSE, and as a result the price of Frankincense collapsed, wiping out the economy of Yemen. Which, frankly, has never recovered!)

The bigger the market, the more trades there are, the better this works.

Think about it: if there's just you and a farmer, then she can offer you a price and you can only take it or leave it. But if you are at the farmers' market, then she can offer you one price and you can either take it OR go and see what several other farmers are offering for their goods. So she's less likely to quote you over the odds. And the more farmers there are at the market, then the more the market forces will work to balance out the price.

This, incidentally, is another reason why MORE TRADE is ALWAYS BETTER.

A Tobin Tax would have a CHILLING effect on the financial markets, maybe not much of a one, but a little bit and that would make them LESS efficient.

A proper REGULATOR, like the controller of a steam engine, depends on a NEGATIVE FEEDBACK mechanism. That's CYBERNETICS. If the machine goes too fast, the controller starts to slow it down; but – and this is what the Tobin Tax doesn't do – if it slows too much the controller ought to speed it back up again. Tax just takes money out; it doesn't put anything back if the market grinds to a halt.

At the moment we want MORE transactions, specifically in the form of more BANK LENDING. So, sorry Captain Paddy, but a tax that is specifically designed to make FEWER transactions is EXACTLY the WRONG prescription.


Jennie Rigg said...

This came through as one big paragraph in my feed reader.

* glazed eyes *

Millennium Dome said...

Oh dear. I think that's something to do with the "upgrade" to Blogger and the way that it reads the HTML for carriage returns. But it's also because I write offline and then drop it in as a block, HTML and all, and new Blogger doesn't seem to like that. Sorry :(

Simon Fernandes said...

Only just caught up with this one. You make a good case. I was previously very much in favour of a Tobin tax, until Barry pointed out an even more fundamental problem/contradiction with it: it can't simultaneously act as a fundraiser AND a detereent to excessive financial speculation!

That said, I'm not sure I agree that more market transactions based on the purely abstract - financial speculation - rather than the tangible really helps. It's a complex system, and people continually exploiting its very complexity to garner themselves fortunes at the expense, sometimes, of whole nations, does not seem to me a very good thing.

I'm also none too sure about Adam Smith and his 'invisible hand'. It's interesting that people are considering Keynes discredited because he's less relevant to modern economics, but still holding up a man from the late 18th century as a standard. There's a good article by Cambridge economist Ha-Joon Chang which explains this better than I could: . Worth a look.

Millennium Dome said...

Is Prof Keynes discredited now? That is rather sad - on the whole I like his government borrows and spends when the economy is weak and repays when it is strong approach. If there's a problem with that I think it is the lack of political will to do the hard part which is the repaying when the economy is strong.

You're right that the free market arguments are a bit ABSTRACT - it's certainly a problem of free market theory that it IS rather heavily THEORY and does not take account of irrational behaviour by investors (such as in bubbles, credit crunches, market crashes, panics, pretty much most days at the office... etc...)

And again, fair point that I've not touched at all on SPECULATION, that is buying stuff in the anticipation of the price rising (or shorting in anticipation of the price falling).

In a REAL free market, actual speculation is impossible (or at least you've got a 50:50 chance of guessing right) because everyone has the same information, so any future fall or rise is already "priced into the market". Only it doesn't really work, because we don't have perfect information, so yes people do speculate.

I would add, though, that it is noticeable that the banks were in the business of increasing their profits by increasing the VOLUMES of trades, not the VALUES. That would suggest that the market prices were getting very much closer to the "correct" price and that people were losing or gaining LESS on any particular transaction, so the only way to make more profit was to trade FASTER and FASTER.