What You Need to Know About the Robin Hood Tax

What's happening in the headlines can affect you as an investor. Here's what's going on, what you need to know, and what you should do.

The cold, hard facts
The New York Times is reporting that the "Robin Hood Tax" -- a tiny, worldwide financial-transaction tax on trades, bonds, and other financial instruments -- is starting to get attention from the world's 1% and 99% alike.

The idea is backed by German Chancellor Angela Merkel and French President Nicolas Sarkozy, billionaire philanthropists Bill Gates and George Soros, and even Pope Benedict XVI. The tax has also become a rallying point for labor unions, Occupy Wall Street, and demonstrators around the world, including a group that marched on the G20 meeting recently in southern France.

Some context
Merkel sees it as a way to make the global financial system pay for its role in the financial crisis. Gates sees it as a way to funnel money from the G20 nations to the world's poor. Others see it as a way to curb the high-speed trading many blame for causing wild swings in financial markets.

In the opposing camp, British Prime Minister David Cameron says his country would adopt it only if it were levied globally; otherwise, trading would flee London to markets without the tax. Likewise, the Obama administration says the tax could drive trading overseas and would hurt pension funds and individual investors.

What you need to know
In recent years in the United States, bills of this sort have been introduced but haven't gotten anywhere. That's because the tax would hit high-frequency traders the hardest, which includes the likes of JPMorgan Chase (NYSE: JPM  ) , Morgan Stanley (NYSE: MS  ) , and Goldman Sachs (NYSE: GS  ) -- i.e., big investment banks that make a lot of money from high-frequency trading and have a lot of influence in Washington.

And with a tax-averse, Republican-controlled House of Representatives, and even a Democratic president who's opposed, it's unlikely this bill will get any traction here in the United States.

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Fool contributor John Grgurich loves the smell of newsprint in the morning, but he owns no shares of any of the companies mentioned above. The Motley Fool owns shares of JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of The Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a scintillating disclosure policy.


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  • Report this Comment On December 06, 2011, at 8:15 PM, iammainstreet wrote:

    The FTT is a cascading tax with multiple transactions hitting us with the tax. Every time we buy, sell, move our money, our transaction sets off a series of transactions that will be taxed. The tax cascades from vendor to broker to clearing member to market maker to clearing member to broker to pension fund, etc. Every time a firm is taxed when we start that chain of transactions, their cost of the tax will be paid by us through reduced yields, much higher spreads and higher commissions and fees. A typical purchase by a pension fund or personal account would make the effective rate as much as ten times higher than the advertised rate. Bid-ask spread cost will increase many times greater than the tax when liquidity falls from diminished trading activity. Expect yields in pension funds and accounts to be reduced by 2 percent or more. An annual 2 percent yield loss will reduce the potential account yield by one half over a working lifetime.

    Taxes in other areas would need to be increased to make up for the tax revenue losses the FTT creates.

    Anyone can read the European Commission's 1200 page impact assessment for FTT. The study estimates that a 0.1 percent transaction tax could reduce Europe's GDP by 1.76pc and reduce employment by as much as 500,000 jobs. They are suggesting raising revenue equal to 0.16pc of EU GDP requiring a rate of 0.2pc which could reduce GDP by 3.43pc or 421 billion euros and as many as one million jobs lost. That is 421 billion that would not receive many other taxes at a rate approximately 50 percent, or a loss of revenue of 211 billion euros. That is many times more loss than what the FTT creates in revenue.

    "The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax," according to an economic sub-committee of the House of Lords, the upper chamber of the parliament.

    "Swedish Finance Minister Anders Borg pointed out that a financial transactions tax in his country saw implementation costs out-run revenues."

    Real estate property with its transaction costs of several percent did nothing to prevent the bubble and crash. A few large banks helped create the crisis, so the solution is to tax every investor.

    Prepare for the first of many global taxes. Give them an inch...EU Tax Commissioner Semeta, "The moment in which we introduce a tax on financial transactions on a global level, of course, everything looks different. Then we can also raise the tax rates."

    IMF states in the Final Report For The G-20, June 2010 about the financial transaction tax, "Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector...A tax levied on transactions at one stage ‘cascades’ into prices at all further stages of production."

  • Report this Comment On December 06, 2011, at 8:42 PM, Swingset wrote:

    "It will tax the bank, not the people"

    That is the most idiotic and brainless thing I have ever read in my entire life. Because the banks won't pass the tax on to the people, no, banks are noble and honorable and will flip the bill willingly.

    Just tell me how to stop these Robin-Hood morons, please....

  • Report this Comment On December 07, 2011, at 4:50 PM, srwm4 wrote:

    Yes, by all means we should try to zap liquidity out of the market! I'm sure that will make everything better! No way would a lack of liquidity lead to a 25.95% intraday swing like it did on Black Monday...

  • Report this Comment On December 07, 2011, at 5:23 PM, Notabillionaire wrote:

    Bill Gates avoids making Forbes-like list of "Diritiest Billiionaires. The list includes Carlos Slim, Koch Brothers, and Berlusconi.

    http://www.billionairechronicles.net/forbeslike-list-present...

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