Why does the White House oppose the “Robin Hood” tax?
France and Germany like it. Liberal Democrats and Occupy Wall Street are rallying behind it. But the White House opposes the growing movement in Europe and at home to impose a broad-based tax on financial transactions.
Sometimes called the “Robin Hood” or speculators’ tax, the proposal would impose a tax on all financial market transactions — a Congressional bill would put it at 0.03 percent per trade, while a EU proposal hikes it to 0.1 percent per trade. Supporters say the tax is a twofer: It curbs volatility in the financial markets while raising money to cut the deficit. But though the White House professes support for both goals, it believes that the financial transactions tax won’t work in practice and favors, instead, a fee on the biggest banks making the riskiest transactions.
“We share the goal of wanting a more stable financial system. We share the goal of wanting a more progressive tax system. The only real questions are — what’s the best way to do that?” a senior administration official told me in an interview. The White House argues that there’s significant evidence that the tax could actually make the markets more volatile by reducing the volume of trade but encouraging “bigger, more irregular financial transactions,” as one Financial Times columnist put it.
Secondly, the Obama administration believes that a financial transactions tax would be easy to game by driving money offshore and creating shadow markets to hide transactions from tax authorities. In the administration’s view, a lot of ordinary investors would get hit, but sophisticated investors would avoid it — the primary objection that’s also coming from independent community bankers.
Finally, the administration points to a recent analysis by the European Commission showing that the European Union’s proposed tax would increase revenue but also have a “small but non-trivial” impact on employment and GDP, resulting in a decrease of anywhere between 0.53 to 1.76 percent of GDP, as The Guardian reported.
Instead, the White House has revived an idea that it’s pushed in past budget proposals: a fee imposed on banks that would only apply to the biggest banks engaging in the riskiest transactions. Calling it “Financial Crisis Responsibility Fee,” the administration says that it’s intended to reach the same ends in a more targeted manner that holds those responsible for the crisis accountable.
Supporters of the financial transactions tax aren’t necessarily opposed to the White House alternative. “Tax economists would tell you that incidence of financial transactions tax can fall on retail traders, pension funds. A bank fee that the White House is talking about is really targeting big banks...smaller banks get a comparative advantage,” says Jared Bernstein, former economic adviser to Vice President Joe Biden. But he doesn’t think the White House’s bank fee would tackle the excess volatility problem, particularly as compared to the financial transactions tax. “In a sense I could see them as complements — one targeted at inefficient trades, the other for accountability,” Bernstein concludes.
Other “Robin Hood” tax advocates are less sympathetic in their characterization of the White House’s position. Rep. Pete DeFazio, a sponsor of the transactions tax proposal in the Congress, dismissed the administration’s skepticism and the evidence that the EU version could reduce GDP. “If you believe that sort of volatile, speculative investing is valuable, then you make that case. GDP is an indiscriminate number...it is a very poor measure of a healthy, productive economy,” he tells me. DeFazio pointed to a new Joint Tax Committee study showing that his bill would raise some $350 billion in revenue, arguing that his proposal would only be detrimental to “millionaires and billionaires.”
By contrast, the Oregon Democrat believes that the administration is simply conceding to rich financiers by rejecting the financial transactions tax. “Tim Geithner came from Wall Street, he’ll go back to Wall Street. I wouldn’t except anything less of him. That’s all they’re about — they are going to defend speculators until their dying breath.”
*Update: Per DeFazio’s remark, I should have noted earlier that Geithner was president of the Federal Reserve Bank of New York—the private bank that’s the Fed’s primary fiscal agent—but hasn’t worked for any private Wall Street firm.