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What is a Robin Hood Tax/Financial Transaction Tax?
A Robin Hood Tax is also called a Financial Transaction tax. It is a tiny tax on the financial sector that could generate billions of Euro in the EU zone annually to fight poverty and climate change at home and abroad. Small change for the banks - big change for those hit hardest by the financial crisis. It is a tax of about 0.01 % or 0.05% on transactions like stocks, bonds, foreign currency and derivatives that could raise between €320 and €360 million a year in Ireland. FTTs are well-tested, cheap to implement, and hard to avoid. In fact, there are already lots of different transaction taxes implemented by many countries. They all work on the same principle: taxing every transaction a very small amount. Importantly, transaction taxes also reduce the number of the most risky transactions, the gambling which helped to trigger the financial crisis.
Why do we need this tax?
The economic crisis and the recession have left a massive hole in Ireland’s public finances and has driven many people into poverty. Frontline services and jobs are being cut. Many other developed and developing countries face a similar struggle. The financial sector is responsible for a big part of the mess we are in. So we believe that banks, hedge funds and the rest of the sector should pay their fair share to clear up the mess they helped create.
Ireland already has a stamp duty isn’t that the same?
The FTT would replace the current stamp duty but would extend the tax base for a range of financial activities that are not currently covered by the stamp duty.
How would the revenue raised be spent?
We are suggesting that revenue from an FTT would be used:
- 50% to fight poverty in Ireland
- 25% to fight poverty in developing countries
- 25% to fight climate change at home and abroad
Why tax the financial Sector?
Because it's responsible for a big part of the mess we're in. Because it has an obligation to all of us to help clear it up. Because it is the most profitable industry on earth, 26 times more profitable than the average business. Because it is under taxed - so it can afford to do so.
A tiny tax on the financial sector could generate between €320 and €350 million annually in Ireland alone. That's enough to help protect schools and hospitals. Enough to stop massive cuts across the public sector. Enough to contribute to transforming lives around the world – and to deal with the new climate challenges our world is facing.
Because the IMF and many other financial commentators believe that the financial sector is under taxed, and has grown to become dangerously large and destabilising for the global economy, as we saw when the crisis hit in 2008.
Doesn’t the financial Sector make an important contribution to our economy?
Absolutely. The Financial sector makes up 9 percent of all value-added created in the economy (valued-added is a better measurement of different sectors contribution to the economy; it is similar to GDP). But this tax will have minimal impact on the majority of the financial sector. Certainly it will not affect retail banking, which includes savings and mortgages. It will instead introduce a micro-tax on short-term, casino-style trading which employs a small number of highly paid bankers in London, not the tens of thousands employed in high street financial services.
Can the FTT reduce speculation and risky financial activity?
In recent years there has been an explosion in high frequency trading - transactions that happen every few seconds. There has also been a huge increase in derivatives, making the volume of financial transactions increase to more than 70 times the size of the world economy. Many serious commentators believe this volume is dangerously large and de-stabilising.
Many of the most speculative, risky and socially useless transactions are based on very small profit margins, meaning that even at a very low rate such as 0.05%, an FTT would shrink the size of the market by reducing the profitability of the most risky transactions. Many economists support the FTT for this reason.
At the Robin Hood Tax campaign we are principally supportive of an FTT because of the money it will raise to help the poor. However, if it also acts to reduce risky gambling and make the world economy safer that can only be a good thing.
Can this work without global agreement?
International agreement would be great, but it's not vital. In Europe, countries are negotiating to reach consensus on introducing an FTT. But in the meantime, individual countries can act alone. The IMF has clearly stated that FTTs exist in all the major financial sectors already, without driving business away. The best example of this is the UK, where they have a stamp duty of 0.5% on all share transactions. The UK’s major competitors do not have this and there certainly is no global agreement, yet it is a successful FTT that raises around £3 billion each year. It is designed so it can’t be avoided and London remains one of the biggest stock markets in the world.
Is the FTT proposed by the EU not a bit too weak as an instrument?
Right, this is not the worlds most progressive FTT. The proposed tax rate could be much higher and it would be great to implement it globally. However this is a very good start and one that is a cooperative move by the biggest EU economies, and therefore worth having!
Won’t companies just avoid the tax or move their businesses off shore?
This is a common and misguided criticism, and one that's easy to answer. The short answer is no. As the IMF says, financial transaction taxes (FTTs) “do not automatically drive out financial activity to an unacceptable extent”.
- The FTT is constructed so that if a financial instrument is traded from a FTT country, in a FTT country or the financial instrument involves a FTT country (e.g. a German share), then the FTT will be applied.
- The only way that a financial institution could avoid the FTT was if it was in a country outside the FTT zone, trading with a country that is not in the FTT zone, with the financial instrument not involved in a FTT country.
In other words, a company would have to stop all business and transactions with FTT countries. This would be self-defeating for almost all financial institutions. This means that were Ireland to adopt the FTT, there would be no incentive for financial institutions to move to London – as long as they trading financial instruments involving a FTT country or trading into a FTT country.
Were FTT adopted, Ireland would in some trades gain a competitive advantage over the UK. For instance, currently a share trade attracts a 1 percent stamp duty in Ireland. In the UK, the stamp duty is 0.5 percent. Were Ireland to adopt the FTT, the stamp duty would be abolished. Therefore, the FTT on the share trade would be 0.1 percent.
Won’t banks just pass the costs on to us?
No, because Financial Transactions Taxes (FTTs) are specifically aimed at casino-style trading, and the customer-base of hedge funds and investment banks is comprised primarily of high net worth individuals, not ordinary people. Hedge funds, investment banking divisions of large banks, and dedicated investment banks dominate this market, and so taxes on an FTT would fall primarily on these companies and corporations.
The IMF has studied who will end up paying transaction taxes, and has concluded that they would in all likelihood be ‘highly progressive’. This means they would fall on the richest institutions and individuals in society, in a similar way to capital gains tax. This is in complete contrast to VAT, which falls disproportionately on the poorest people.
Why should some of this money be used for fighting poverty and climate change in developing countries?
Research for Oxfam has shown that the 56 poorest countries are facing a $65 billion dollar hole in their finances because of the financial crisis caused by the banks. This means cuts in education, health and support for farmers. In desperately poor countries, that means people losing their lives. So a tax on the banks should help those hit by the financial crisis in poor countries as well as Ireland.
At the same time rich nations, who did the most to cause climate change, have promised to find $100 billion dollars to help poor countries who are being hit hardest by its consequences. It makes sense for the financial sector to contribute to the critical need for financing to fight climate change, a point recognised by both Chancellor Merkel and President Hollande.
It is for these reasons that we think that half the money raised should be spent helping the poorest in developing countries, and the other half spent in Ireland.