Yesterday, the European Parliament (EP) voted to pass the Tobin Tax, otherwise known as the Robin Hood Tax. The tax proposal represents a 0.05% levy on all financial transaction passing through the EU and it is estimated that it will raise €200bn annually. Whilst the EP may have backed the proposals, the measure will not come into force until it is passed by national legislatures. Herein lies the main obstacle...
Is it a good idea? Well in theory it’s certainly a nice idea. Banks would barely notice the impact of the levy and it would reduce exchange rate volatility caused by short-termism, but the fund could also be used to ease global poverty and the effects of climate change.
However, although the tax is appealing the pitfalls are glaring. The tax is likely to have the damaging effect of reducing liquidity in the FX markets as speculative investors would turn elsewhere. The EU wants to press ahead with EU-wide coordination of the levy if a worldwide tax proves too difficult to attain (as surely it will). However, in light of this the tax would simply be unenforceable as EU financial centres would be a far less attractive place for banks to do business. Inevitably major institutions would relocate en-masse to more tax-friendly centres, taking with them a vital source of income for the EU.
Nonetheless, France and Germany are right behind the tax, and accuse the UK of “dragging its feet” on the issue. London is the global financial centre of the world and Britain’s economy is heavily reliant on the financial services industry. Banks relocating is a heated enough debate as it is so can we blame George Osborne & Co for balking at the prospect of adding yet another tax?
It seems highly likely that, despite the renewed energy the EU is putting behind it, the Tobin Tax will not gain the widespread approval that such a measure requires. Whilst so-called “banker bashing” is an excellent way for political leaders to bolster their own popularity, the Tobin Tax reeks of over-ambition and impracticality. And as for “banker bashing,” don’t be fooled by the label of “Robin Hood Tax,” the burden that the tax will impose on the banks will, as ever, simply be passed on to the consumer, so be careful what you wish for…
Richard Driver
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
