The UK General Election campaign is fundamentally not very exciting, as the result is a foregone conclusion: the Conservatives will win a significant majority and Labour will suffer a humiliating defeat. But it is interesting in one respect: not since before Tony Blair reformed Labour in the 1990ies has the UK had an unapologetically socialist party on offer. But Jeremy Corbyn’s political programme is one of huge spending commitments, renationalisation of industries and extortionate taxes on business and the “top 5%” of earners.
In the latest policy to be disclosed, Labour has pledged to introduce a so-called “Robin Hood Tax” if they win on June 8 and Jeremy Corbyn is handed the keys to 10 Downing Street. The tax, a transaction levy on all share, bond and derivatives traded in the City of London, is a recycling of a proposal which has been widely discussed since the financial crisis of 2008, and which enjoys backing in principle from such luminaries as the EU commission and Hillary Clinton. Labour is predicting that they can raise between £4.7bn and £5.6bn a year from the tax – a 0.02% levy on every transaction – which they badly need to fund their spending commitments, the cost of which runs into tens of billions of pounds.
According to Labour, there is an un-fairness in the current system, where private persons already pay a levy on share purchases (they pay 0.5%) from which banks and hedge funds are exempt. That may well be unfair (taxes are!), but the illiteracy in just assuming that you can translate a tax which pertains to private individuals over to business without taking into account the differences in their behaviour is just staggering. Private persons typically buy shares to keep; it is a tax on the value of what they have bought. Market makers in investment banks and hedge funds, on the other hand, may buy and sell the same securities multiple times a day, for a profit of a fraction of a percent each time. The value they are looking at is not the underlying security and its long-term prospects, but rather the actual buying and selling of it, the profit of which is typically tiny compared to the nominal they are trading. A tax on the nominal of the transaction is therefore completely disproportionate to the value of the transaction they are undertaking. And yet Labour thinks they will continue to do this business if they are subject to this type of tax. It is delusional and naïve beyond belief; these businesses WILL leave.
Politicians have a tendency to think incentives work when they try to micro-manage our lives – a sugar tax, for example, is designed to make us consume less fizzy drinks and chocolate bars – yet somehow when it comes to taxes, they discount incentives to re-arrange our affairs to minimise our tax liability. Decades after Arthur Laffer’s famous curve helped Ronald Reagan make an argument for cutting taxes in the US, Labour are still oblivious to how incentives actually work. They don’t even have to look far for examples: the previous Labour government hiked taxes on wage earnings over £150,000 from 40% to 50%, but when the Conservatives came into power in 2010, calculations from the Treasury showed that the tax had raised zero (or even negative) revenue, as those subject to the tax had taken measures to avoid paying it.
The Robin Hood Tax is more kindergarten economics from a bunch of dilettantish economists. The tax is destructive; when Sweden tried a similar tax in 1984, trading in long-term bonds declined by 85% and almost half of all trading in Swedish stocks moved abroad. And as is the case with all taxes levied on business, in the end it is consumers who will pay: investors will see lower returns on their portfolios as banks hike fees to pay the tax and capital is allocated less efficiently. The supposed virtues of the tax touted by its supporters are also highly dubious; for example it is unlikely to reduce market volatility (in fact there are studies suggesting the opposite to be the case).
Robin Hood himself would be appalled at being associated with a tax; he fought injustice and was on the side of peasants who tried to protect what they produced from being raided by their overlords. Jeremy Corbyn and Labour are not only stupid, they are siding with the Sheriff of Nottingham.