Forgive me for returning to the Tobin Tax (Financial Transaction Tax) yet again — but it illustrates one of those fundamental leftist misconceptions that I have railed against for years. I call it “the static model”.
It’s the assumption in economics that you can change one element of a complex system — the tax structure, say — and expect that nothing else changes. Of course in the real world it isn’t like that. But our left-liberal friends — like our Deputy Prime Minister, the Clegglet — fall into the trap again and again.
Take the 50% tax rate on incomes over £150k (sadly, this doesn’t include me, so no special pleading here!). I don’t know the statistics, but as a “for instance”, say there were 200,000 people earning over £150k, with an average income of say £170k. Then your leftist will say, OK, 200,000 times £20k (170 – 150, that is) times 10%. Easy. We’ll raise an extra £400 million.
Except of course you won’t. Some high earners will work less, or cancel investment plans, or hire a smarter accountant. Or they may move abroad, perhaps taking their business with them.
So we certainly won’t increase the revenue by anything like £400 million. And for those who leave altogether, we lose not just the extra 10%, but all their income tax, and national insurance, and the VAT on purchases they would have made, and corporate tax on their businesses — for them and perhaps their employees. It’s difficult to make a precise estimate, but it’s a fair bet that the 50% tax rate actually loses revenue for the Treasury,
The Tobin Tax has exactly the same problem. As I have written elsewhere, the European Commission’s own cost/benefit analysis predicts it would reduce GDP by 1.7%, decimate the derivatives business, depress growth and cost nearly half a million jobs. The Commission analysis recognises that the tax would cause individuals and businesses to move off-shore — but doesn’t include estimates for off-shoring in its analysis. So just like the 50% tax example above, the Tobin tax would raise much less than they estimate — and taking account of off-shoring, could actually reduce total tax revenues.
Yet its proponents are still salivating over the the €50 billion that the static simple-arithmetic model suggests it would raise (four fifths from the City of London, of course). When will they realise that killing the goose means no more golden eggs?