Move over, Robin Hood tax. Make way for the FAT tax and the hot money levy.
The European Union’s plan to put an impost on financial transactions, popularly known as a Robin Hood tax, is dying. That’s a good thing. The idea was taken up by the Occupy movement as well as luminaries such as Bill Gates. But it never made economic sense. Taxing transactions wouldn’t have dealt with any of the causes of the financial crisis such as too much leverage and excessive reliance on hot money. It would just have driven business offshore.
Britain has always opposed the tax, meaning it had no chance of being adopted by the EU as a whole. Now the Netherlands has come out against it, so it can’t even be applied across the whole euro zone. With Germany’s finance minister saying that the “smallest thinkable unit” for the tax is the euro zone, it is only a matter of time before the Robin Hood tax is buried.
EU finance ministers will discuss alternative ways of taxing finance later this week in Copenhagen. The guiding principles should be to rein in excess risk-taking and remove distortions that bias one form of economic activity over another. With these ideas in mind, there are three specific things Europe, and for that matter the rest of the world, should do.
First, countries should impose a “hot money” tax on banks. Such a levy would apply to a bank’s wholesale borrowing. Ideally, short-term wholesale money should face an especially high levy: excessive reliance on such easy-come-easy-go funding was a big reason why banks from Royal Bank of Scotland to Lehman Brothers came a cropper. A hot money tax would encourage banks to raise longer-term money or attract relatively stable retail deposits. It would also mean that, if governments did have to bail out banks in future, the industry would at least have paid towards its own rescue.
So far 11 of the 27 EU countries – including Germany, Britain and France – have imposed such a levy, according to KPMG. The rest should follow suit. So should the United States, which has been toying with what the Obama administration calls a Financial Crisis Responsibility Fee. Although nothing will happen before the presidential election, a hot money tax could be one of the ways America eventually brings down its deficit.