Europe’s “Robin Hood” tax will claw back revenue from finance institutions that aren’t even in Europe

February 14, 2013
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Euro Crunch
February 14, 2013

The European Union is pushing forward with a proposal to tax financial transactions in 11 EU countries. The European Commission today proposed a plan to let Germany, France, Italy and Spain and other EU members charge financial firms 0.1% for stock and bond trades, and 0.01% on derivatives transactions.

Called both the “Robin Hood tax” and the “Tobin tax,” it is meant to make banks pay for taxpayer support received during the financial crisis. The tax would raise about €30 billion-€35 billion ($40 billion-$47 billion) annually, according to EU projections. (Individuals, non-financial firms and official institutions would be exempt.)

So what is this “Tobin Hood” tax? The Financial Times explains its origins (paywall):

The “Tobin tax” was originally proposed in the early 1970s by James Tobin, an influential American macroeconomist and recipient of the Nobel prize for economics. His idea was prompted by the collapse of the Bretton Woods system in 1971, which replaced an arrangement of fixed exchange rates ultimately based on the US dollar’s peg to gold with a period of volatile floating exchange rates.

Tobin proposed to reduce this volatility with a small tax – for instance 0.1 per cent – levied on every amount exchanged from one currency into another. He wanted to discourage short-term currency speculation, which makes it difficult for countries to implement independent monetary policies by moving money quickly back and forth between countries with different interest rates.”

European leaders are now dusting off Tobin’s tax, which never really caught on stateside, to allay public sentiment that banks haven’t borne the brunt of their rescue during the financial crisis. The European Commission says it’s a way to ensure the financial sector “makes a fair and substantial contribution to public revenues.”

But that’s a pretty large departure from Tobin’s original goal. For one thing, Tobin’s proposal focused on curbing currency speculation. In addition, before his death in 2002, he said the tax was not for revenue-raising but, rather, to limit the moral hazard posed by cheap trading.

Though only 11 EU countries will earn revenue from the tax, it will apply to some of the trading that takes place in all the major world financial centers. Max Lawson at the Guardian explains how the City, the financial center in London, will end up paying even though Britain is not implementing the tax:

“The tax will apply to any transactions on shares, bonds and derivatives where one of the parties to the transaction is based in a country where the tax is introduced. Accountants Ernst & Young estimate that, depending on the final number of countries that sign up, City institutions will still be liable for up to £21bn in tax. But rather than this being paid into our Treasury, it will go instead to governments on the continent.”

In the United States, the US Chamber of Commerce and the Financial Services Forum are protesting, saying the tax will hit US firms as well. A US Treasury spokesperson says the US also opposes (paywall): “We do not support the proposed European financial transaction tax, because it would harm U.S. investors in the U.S. and elsewhere who have purchased affected securities…. Treasury has raised these concerns with European counterparts.”

The Commission still needs to draft the final legislation, which the EU tax commissioner will then propose. If the 11 participating countries all approve the tax, it could take effect as soon as January of next year. Though the tax already has the support of the 11 member states who first proposed it in 2011, diplomats say the measure is likely to get watered down (paywall). For example, one sticking point might be pensions, which, as BloombergBusinessweek notes, would also be subject to the higher tax. In addition, delays are possible given that officials still must figure out things like making sure traders don’t just move outside the jurisdiction of the tax or, in another hypothetical, who would be taxed when traders in France or Germany do deals with traders in London or New York.

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