I know the world is angry at the banksters and Wall Street, and for good reason. They made out like bandits in the good times and got us taxpayers to bail them out in the bad times. Hedge fund managers and master brokers make most of their income on capital gains and dividends, which have a lower tax rate than regular income. Bankers are sitting on the trillions of cash the Fed printed for them, or reinvesting it in government debt, instead of lending it out. They all have lobbyist connections in Washington that enable them to write custom tax exemptions for themselves into the tax code. And that's just for starters.
But the principal-based Robin Hood tax is attacking the problem from a bad angle. It'll severely damage or destroy the low-risk, low-yield, day-to-day investments that keep our economy running, and encourage investment in high-risk, high-yield securities like junk bonds and derivatives. The world financial markets will become more corrupt than ever.
Consider a 1% Robin Hood tax (proposed by some of the Occupy X leaders) and a one-year Treasury bill (one of the most common securities bought). The T-Bill is currently yielding 0.11%; you pay about $99.89 for it now and get $100 a year from now. Add in the Robin Hood tax, which is 1% of the $100, and you'll now pay $100.89 for $100 a year from now, a net loss of 89 cents. Nobody will be buying T-Bills or other low-risk securities because they'd be losing money. Either the Treasury will have to increase its yield and lending costs tenfold (at taxpayer expense) to provide a positive return on the investment, or nobody will be buying T-Bills anymore. Likewise all low-risk, low-yield debt will become unattractive to investors.
What would still look good? The high-risk, high-yield securities that would more likely cause disasters in the future. A junk bond with 10% yield would still look good at 9% yield. Wacky derivatives where you either make a fortune or lose your shirt would still look good. We'd be turning the financial sector from a dull bank with a shady casino in the back room into a full-sized shady casino. We'd be setting ourselves up for another bailout-or-depression devil's choice, and it would undoubtedly be worse than the 2008 version, because all the safe haven investments would be gone.
But would the banksters and Wall Street suffer, at least? Not a whole lot really, they'd pass all the fees on to their customers, maybe even add a markup for extra profit, and continue to live high on the hog until the economy completely tanks and they retire to the Cayman Islands with their gold bullion.
If you really want to punish investment, a more effective approach would be to Federally tax capital gains and dividends as normal income, rather than a discount rate as is currently done. This is a tax hike on the PROFITS, not the PRINCIPAL. Warren Buffet and the hedge fund managers make most of their income in these areas, so tax hikes there would hit them the hardest. The poor and middle class would pay a little more too, but they're in lower tax brackets, so it wouldn't hurt them as much. Whether punishing investment will help or hurt the country as a whole is left as an exercise for the reader.
One more problem with the Robin Hood tax: we'd need some sort of international tax collection authority to enforce it, possibly as part of the United Nations. You do NOT want the United Nations to have worldwide taxing authority, seriously. Within twenty years, there will be an Americans Suck tax that'll drain half of our GDP and give it to countries like Somalia and Uzbekistan. The world wants the Americans' money as much as the poor Americans want the rich Americans' money, and in a worldwide tax environment, they'll be able to take it.