Editorial Board

Europe's Robin Hood Tax Is a Risky Proposal

The levy won't avert the next crisis.

Are those pretax numbers?

Photographer: Thomas Lohnes/Getty Images

It has been called a Robin Hood tax (a term favored by acolytes of British Labour leader Jeremy Corbyn) and a Tobin Tax, after the Yale economist James Tobin who popularized it. Whatever the name, a tax on financial transactions first proposed in 1936 by John Maynard Keynes may soon become a reality in 11 European countries.

Its ostensible purposes are to raise revenue and reduce risks from financial markets. Unfortunately, the evidence to suggest that it will achieve those goals is too, well, speculative.

The proposal, which European finance ministers are likely to discuss informally this week in Brussels, is not principally about raising revenue. Both supporters and detractors agree that no net revenue will be raised because the income will be more than offset by a decline in gross domestic product, which in turn will erode general tax revenue.

Sweden's attempt at a transaction tax in the 1980s, for example, raised little revenue and sent more than half of its stock trading to the U.K. The tax will also cost more to implement in smaller countries than it will produce in revenue, prompting mind-bending discussions about how to compensate those countries that lose out.

While the prospect of it being a money-loser isn't a deal-breaker, the likelihood that its costs will be passed on to consumers should be. As the International Monetary Fund said in a 2010 report: "Distorting business decisions reduces total output ... A tax levied on transactions at one stage 'cascades' into prices at all further stages of production."

The idea that the tax would be stabilizing for markets or help avert another financial crash sounds appealing, but doesn't hold up. The tax wouldn't have much effect on mortgage bonds or complex derivatives, which trade infrequently and which were largely responsible for exacerbating the credit crisis. Instead, it would mostly apply to currencies, equities, futures and options, which trade more actively.

However, the bigger problem with the tax is its inability to distinguish between what Tobin called "the stabilizing transactions of fundamentalists" and "the destabilizing transactions of speculators." Even if it were able to do so, it remains true -- as the IMF also points out -- that some amount of speculation is necessary for a healthy market. And no one, least of all regulators, can say exactly what that amount is.

If a financial transactions tax discourages trading and reduces liquidity, it may even make markets more volatile. The first job of regulators is to do no harm. This tax risks hurting both investors and the wider economy with no demonstrable benefit.