My Tupp'orth On The Tobin Tax

I'd agree with the prevailing view that the Tobin Tax on financial transactions is a very bad idea indeed, and not just for the reasons given by the usual cheer leaders such as City AM, but because the results of such a tax are so wildly unpredictable. It's simply not clear whether the tax would actually raise any new net revenues (i.e. you have to deduct all the other taxes we would lose if financial activity moves abroad).

FWIW, my opinion on the City of London is much the same as my opinion on British pirates of old - as long as they are plundering foreigners and bringing the spoils back home, that's all good stuff, but what they seem to have spent the last ten or fifteen years doing is bleeding the UK dry, but hey, I digress. And of course, Merkel and Sarkozy are fighting a desperate rearguard action to 'save the Eurozone' (for reasons which escape me) and couldn't care less about the City of London or UK tax revenues, if they seriously imagine that they can trick the City of London into bailing out the Eurozone, then they are seriously deluded. According to this fag packet (via Tim Worstall), UK-based banks would end up paying about three-quarters of all revenues. Yeah right.

Then again, it's safe to assume that while the Eurozone itself might have been dreamed up by Eurocrats, the likes of Goldman Sachs were goading them along, because something that artificial is going to require constant tinkering to keep it spluttering along, and Goldman Sachs are the only people who can provide that specialised kind of tinkering in return for billions and billions of dollars in 'advisory fees' and all the money they can make taking and placing bets on the inevitable wild fluctuations where they have inside knowledge.

So quite who is robbing from whom here is unclear, to say the least.

Nonetheless, we know that a tax on transactions is the worst kind of tax, and this goes for a Tobin Tax as much as any other transaction tax. The whole idea behind free-market capitalism is that people specialise a bit and trade with other people, and each of these trades generates a small producer/consumer surplus and signals information to others as to where to direct their efforts or how best to spend their money and so on.

The effort that goes into making all these little trades then cascades 'downstream' to generate profits and ultimately rents. It's easier and more reliable collecting water (tax) from the river (the profits or rents) just before it flows into the sea that it is to try and collect it from lots of little streams (individual transactions).

To give some examples:

Air Passenger Duty is the worst kind of tax on air travel; a per plane tax would be better; but best of all would be for the government to auction off landing slots at airports.

VAT on mobile phone bills is the worst kind of tax on telecomm companies; corporation tax isn't quite so bad because it's levied on the net result of a vast number of individual decisions; and best of all was raising money by auctioning off the 3G licences.

Stamp Duty and Capital Gains Tax on buying and selling shares are worse than income tax on dividends; but this in turn can be avoided by the company by simply not declaring dividends; so even less bad is corporation tax on the profits.

Stamp Duty Land Tax and Capital Gains Tax on buying and selling land and buildings are the worst way of taxing land rental values (they discourage efficient allocation); Council Tax is OK; and Business Rates is even better (but could be improved if the rental value of the buildings were exempted and only the site value taxed).

So, if you want to get more tax money out of banks, a Tobin Tax on financial transactions is the worst kind of tax. Banks will simply route a lot of their transactions abroad and/or put up the charges for customers a bit. It won't raise much money and it won't be the banks who bear the cost. Corporation tax on underlying profits is sort of OK, even though the whole aim of the UK government is to reduces taxes on banks and increase them on everybody else.

The best kind of tax on banks must be a bank asset tax, which we already have in the UK, albeit at a very modest rate of 0.05%.

For sure, if you tax something that's not in fixed supply (like land) you'll get less of it, but that's a good thing in this context - we wouldn't have had a credit bubble, and to the extent that banks really do have surplus deposits, they'd have lent them to businesses rather than using them to try and drive up house prices.

Remember also that loans create deposits and not the other way round, and the house price bubble got going at a time when banks were lending out on wafer thin margins, or even at a loss to try and 'grab market share'. That's exactly the sort of lending that wouldn't take place if the rate of the bank asset tax were increased to a proper figure, like 1% or 2% per annum - banks would have to stick to higher margin lending like lending to businesses or indeed on credit cards, both of which are much better for the economy.