The Taxing Issue of the Tobin Tax, part 2

When you are having dinner with friends who live outside of the development bubble and they mention a paper by your colleagues, you know it has had an effect beyond the insiders. Such is the case with  McCulloch and Pacillo's systematic review of the merits and demerits of the Tobin Tax.

This post is labelled part 2 because I blogged on the review in June. It is fascinating to see how the same systematic review has been used to support contradictory positions.

Larry Elliott in the Guardian gave it a neutral "just the facts" treatment, with an accompanying pro-Tobin Tax statement from Max Lawson from OXFAM. The readers’ comments that this article generated ranged from “Meaningless twaddle proposed by people who don't like or understand finance" and "It's a nonsensical idea proposed by people who clearly have no understanding of the fine-line ramifications" to "The Robin Hood tax would be a small step in the right direction. A start. But why so low - why not 5 percent?”

I suspect that not many of these commentators read the paper that Larry Elliott was reporting on. Someone who did, was Owen Barder. Owen is on record as being skeptical of a Tobin Tax and as he said on Nov 9 2010: “as I explained in February the Robin Hood tax isn’t a very good way to achieve any of these perfectly reasonable objectives. They would be much better pursued separately. This analysis was confirmed by this new research published today by Neil McCulloch at the Institute for Development Studies”.

So, this paper gives succor to both perspectives—pro and con. Duncan Green has been blogging on this issue for some time (but not lately) and his blogs give a good sense of the complexities.

Neil’s paper, is however, the first serious review of the research literature on a Tobin Tax and tries to debunk some myths:

• Will a Tobin Tax Reduce Volatility? The empirical evidence suggests no decrease in volatility and in a few cases, even an increase.
• Is a Tobin Tax Workable? Although these questions are not easy, there is a large literature on these questions and the consensus is that a Tobin Tax could be successfully implemented.
• How Much Money Would a Tobin Tax Collect? If a tax rate of 0.005 % was applied only to spot transactions it would raise $26 billion globally and $11 billion in the UK only.
• Who Would be Affected by a Tobin Tax? Would this really soak the rich? Or would it simply be passed on to consumers? The evidence base is weakest here and the politics most raw, but this is what the authors actually say:

“In summary, the incidence of a Tobin Tax is far from clear. On the one hand there is general agreement that wholesale traders, particularly those involved in short-term foreign exchange transactions would bear the initial cost of the tax. However, as Spahn points out, the final incidence will depend on the extent of competition in different segments of the financial sector. Most casual reasoning suggests that, in the long run, a significant proportion of the tax would end up being passed on to consumers in the form of lower returns or higher spreads. Even so, given that most households earn relatively little of their income in the form of returns to capital, it would seem likely that a Tobin Tax would be more progressive than several other forms of taxation. However, we currently have no credible estimates of what proportion of the tax would be passed on to consumer nor a clear sense of how it compares with the incidence of other forms of taxation.”

So the authors are clear: they think a Tobin Tax would be more progressive than other forms of taxation, but are also clear about the lack of evidence.

As I said in my original blog, what is really interesting is that we get a sense that the authors were surprised by their findings. The review made them more predisposed to a Tobin Tax than they were prior to having done the review.

I wonder if it changed the minds of anyone else or just reinforced their pre-held positions?

Is the systematic nature of systematic reviews helpful in reconciling different views or do they merely offer the cover of authoritativeness to opposing sides? I have to think the former will outweigh the latter in the long run. The short run, however, is a different matter.