Generating Revenue: The Robin Hood Tax

Robin Hood @ NikkiJones1991

Polls have shown that the vast majority of Americans believe that the rich should pay their fair share of taxes. However, the Republicans seem intent on driving the economy over the fiscal cliff on that sticking point. They keep insisting that taxing the richest one percent is going to act as a disincentive. There is one problem with that thinking. It doesn’t pan out in real life.

As Warren Buffet has explained in an op-ed piece in the New York Times, the ultra rich don’t decide on whether to invest based on the tax rate, but instead they do it based on whether or not something is a good investment. It’s a case of logic – get a return of less one percent in a savings account, maybe two percent on a CD, or get double digit returns on an investment.  When you have that much money it’s not about losing a small amount to taxes but, instead, losing a large amount that could have been made in an investment.

This is all well and good, but Buffett’s suggestion requires changes in the tax code for money that’s already been pocketed. It’s a lengthy and complicated mess, and frankly no one wants to untie all the knots that is our tax system. The problem with tinkering with the tax system is that there are numerous loopholes, loads of options for creative accounting, and it doesn’t even touch those off shore accounts. There is one work-around to all of this. It’s called the Robin Hood tax.

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The Robin Hood tax works around all those problems. Instead of getting money after it’s pocketed, it gets the money up front. It’s generic name is the “financial transaction tax.” Rep. Keith Ellison (D-MN) has introduced the bill as the Inclusive Prosperity Act or H.R. 6411. This bill essentially charges a fraction of a percent on each financial transaction. It does this while the transaction is taking place and not after the profits have been made. Stock transactions would be taxed at .5%  per transaction, and bonds and trade swaps would each see a .01% transaction fee.

So how much revenue does this type of tax or fee actually generate when the amount being taxed is so small? The sheer volume of trades that happen via computer algorithms will generate the vast majority of the revenue. It won’t even matter to the small time investor as the volume of their trades will result in pennies in fees. It will target those investors who buy and sell thousands in a single day. The fact is, those high stakes investors don’t care about losing a few dollars here and there. After all, they can make or lose millions in a day, and not lose their entire life savings.

So how much could a tax like this generate? According to the Center for Economic and Policy Research, the minimum amount would be a little over $176 billion. This total assumes that the tax would discourage 50% of the volume that the 2008 market saw. This scenario assumes that higher taxes do discourage investment, but since we know savvy investors make investment decisions based on whether or not it’s a good investment, that number would certainly be higher. So assuming that investors continue to think the way the always have, this fee could generate nearly $354 billion. That’s a tidy sum, for sure.

So let’s go with the Robin Hood approach. It makes sense, it’s works around loopholes, fancy accounting, and offshore bank accounts. And it generates lots of revenue.