Tuesday, November 8, 2011

Bill Gates Doesn't Understand the Robin Hood Tax: There is No New Revenue

Bill Gates is announcing that he supports the Robin Hood, or Financial Transactions, Tax in order to raise revenue to be spent on aid to the poor in the Third World. He was asked to prepare a paper for the G-20 meeting on the point.
Bill Gates will tell the G20 group of developed and developing countries on Thursday that they could raise an extra $48bn (£30bn) a year to fight global poverty by levying a small tax on share and bond trading.
Despite hostility from Britain and the US, the Microsoft founder will add weight to the growing campaign for a so-called Robin Hood tax when he tells the two-day summit in Cannes that a levy on finance would help hard-pressed rich nations to meet their aid pledges to the poor.
The idea of extra aid to the poor is one I certainly fully support. Vaccines do indeed save lives and I’ve certainly no problem with the idea that the rich should chip in to pay for them to be made available to the poor.
We’ve also got Ralph Nader arguing for a similar tax in the US:
Occupiers throughout the country are pushing elected officials to break the corporate stranglehold on our economy. Both Rep. Peter DeFazio (D., Ore.) and Sen. Tom Harkin (D., Iowa) have proposed legislation in the past that would enact a 0.25% tax on the value of stock, bond and derivatives transactions.
But that is far too small. National Nurses United and other progressive groups believe that we would be better served by a rate of 0.5%. This could help curb the wheeling and dealing on Wall Street and raise hundreds of billions of dollars in revenue to help with our country’s economic recovery.
I might not agree that raising more revenue to sort out the US economy is a good idea (I tend to prefer cutting spending but it’s your country, not mine) but if that’s the way you want to go then fine, raise taxes and get more money to spend on such things.
However, there’s just one small problem, only a tiny one, not much to worry about really, about a financial transactions or Robin Hood tax. It won’t actually raise any money.
Sounds a little strange, I agree. For we’ll all be able to see the revenues that come from adding just a tiny tax to each financial transaction. However, that’s not quite the end of the story. We also need to look at what happens to the rest of the economy as this tax is imposed. I could tell you a long story about all of this, take you through the process that will inevitably happen, but instead I’ll just point you to the European Commission.
They just released a big report about how they would like to have an FTT. And in their 1200 page report (yes, 1,200 pages) they say:

[A] stylised transaction tax on securities (STT), where it is assumed that all investment in the economy are financed with the help of securities (shares and bonds) at 0.1% is simulated to cause output losses (i.e. deviation of GDP from its long-run baseline level) of up to 1.76% in the long run, while yielding annual revenues of less than 0.1% of GDP. [Vol. 1 (Summary), p.33]
Apologies for the stilted language but best to quote them accurately. Now, let me tell you what this means.
In a modern economy, makes little difference whether we’re talking about the US or Europe, some 40-50% of any marginal change in GDP is tax revenue. If GDP goes up by 1% we expect 0.4, 0.5% of GDP to be tax revenues. If GDP falls then we expect a similar fall in tax revenues. We see this argument being made all the time right now anyway, as all too many people run around saying that it isn’t that spending is too high, it’s that tax revenues have collapsed in the recession. Yes, quite, this is exactly the same point.
So, look at those numbers again. We have a tax which will bring in 0.1% of GDP. That same tax will also cause a 1.76
% fall in GDP and we expect 40-50% of a change in GDP to be taxes. So we have a fall of 0.7 to 0.9% of GDP in tax revenues.
That is, we gain 0.1% and lose 0.7%. So what extra revenues is everyone talking about that we can go spend on the poor? We’ve just lost 7 times more in revenue than we’ve gained.
There are all sorts of problems with an FTT. But here’s the really big one.
A financial transactions tax doesn’t actually raise any more tax revenue, it loses it.

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