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European parliament loves the Tobin tax

But if it becomes law, it's us plebs who'll be paying

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Sometimes it seems the Gods themselves are trying to screw us over. At other times it is our own politicians who attempt to to fubar the world all on their lonesome. This seems to be the case with the European Parliament's recent decision to try and impose the Tobin Tax upon us all.

The logic behind the decision seems impeccable. The banksters do too much, get paid too much and governments are short of dosh. So, tax the bankers: they'll do less, get paid less and governments will have lots of money. No doubt kittens will frolic in the bindweed again too.

There are, however, a few problems with this logic. Sure, it would be nice to be able to raise £200bn to do all sorts of lovely things from nowhere, without anyone getting hurt: but it is not one of those things that seems all that likely. Even in an economy the size of Europe's (£11 trillionish) we're still talking about real moolah here, not the sort of sums we find down behind the sofa (we'd need £1,000 each from the 200 million households in Europe, this really is more than the sofa money unit, or SMU). Someone, somewhere, is going to have to be paying that money; it is not something that can simply be conjured out of the ether.

The cost will be passed on to us...

The part of the dismal science that tries to work this out is called "tax incidence". It often is not the people who are handing over the cheque who are bearing the economic burden of a tax. Of course, for all you technical types, self-employed, as you all are, you know you pay your own income tax and national insurance. But for those on PAYE it is the company that hands over the money. Nevertheless, we know absolutely that the economic burden falls upon the workers. This is even generally thought to be true of so-called "employers' national insurance" as well. While technically it depends upon the relative elasticities of the supply and demand for labour, a rough and ready approach is that employers have X amount to pay to get a job done and they don't care whether it is tax, NI or wages that make up X.

So this Tobin Tax, this "Robin Hood Tax", may or may not end up being paid by the bankers and the banks... in theory that is. So this claim by the Robin Hood tax people is quite brave really:

The banks can afford it. The systems are in place to collect it. It won't affect ordinary members of the public, their bank accounts or their savings.

This is rather something we need to find out, not something we can assume. Or, as the IMF put it (PDF/2.9MB):

Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector.

Yes, that's us now frantically scrabbling behind the sofa, isn't it?

Now I know, you might not want to believe this, so why don't we look at who really does carry the cost of a financial transactions tax that is already in place? As the various proponents of this Tobin Tax keep pointing out, the UK already has one, in the form of Stamp Duty on share purchases. So, um, who pays that? (PDF/173KB) Well, there it turns out to be our pension funds – in the form of lower returns, and the workers in companies – in the form of lower wages. For the Stamp Duty increases the cost of capital-raising for companies, and it is capital added to labour that raises productivity and thus wages.

Why we shouldn't penalise wealthy entrepreneurs

So, we now have a real world example of how supposedly taxing those bastards in the City really just ends up taxing us.

We can go further though. Think how much good we could do if we simply took Bill Gates' and Larry Ellison's money to put to those same good uses? Only two people would get hurt and millions would benefit, no?

Well, again, no, not quite. For while Gates and Ellison might have made their money by doing good (feel free to disagree and insert bile and virulence about either/both of them in the comments section), that isn't actually the reason that we let them keep it all. Sure, there are these things called property rights, even the marginal utility of money, but the real calculation is entirely pragmatic. We let them keep it so as to encourage the next few tens of thousands of geeks/megalomaniacs with bright ideas about how to change the world to give it a go. The reason we don't tax entrepreneurship to the hilt is because we tend to think that more entrepreneurship in the future is going to make things still better.

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