Tobin Tax - Implementing The FTT Is In Britain's Interest
Published Monday, February 13, 2012 - 09:05
Hardly a day goes by when the Financial Transaction Tax is not in the news. Four of Europe's five biggest economies are pushing for its implementation in 2012 but our Government is opposed.
Some of the biggest European economies are calling for the implementation of the Tobin Tax. Our Government's vociferous opposition, Cameron having branded it 'madness', has not deterred 9 EU countries this week from vowing to plough on at a faster pace.
The closer an FTT edges to reality, the louder critics protestations become. A slew of 'reports' outline how an FTT will variously destroy the financial sector, pensions and jobs. Yet amidst the hyperbole, it is worth taking a step back and pointing out financial transaction taxes are neither new nor untested. Over 40 have been implemented around the globe: South Korea and Brazil raise billions in revenue from successful FTTs; in the US a small FTT funds the Securities and Exchange Commission; but perhaps the best example, ironically, is right here in the UK.
We have an FTT on share transactions, which at a rate of 0.5% currently raises a tidy £3 billion a year for the Exchequer. The key design feature is that no matter where in the world a UK share transaction takes place, London, New York or the Cayman Islands, the tax is still collected here. This severely limits opportunities for avoidance and makes a mockery of the Government's position that FTTs need to be global to work. The IMF has underlined this, saying FTTs “do not automatically drive out financial activity to an unacceptable extent”.
It is precisely such well-designed financial sector taxes that the Robin Hood Tax campaign has been calling for over the past two years. Rolled out to other asset classes (bonds, derivatives and currency) FTTs are capable of raising tens of billions in revenue.
Critical for the Robin Hood Tax campaign is that proceeds are linked to tackling poverty and climate change at home and abroad. Financial institutions precipitated a financial crisis that cost the UK economy at least £1.8 trillion, according to the Bank of England. Around the world the crisis pushed 200 million more people below the $2 a day poverty line. The financial sector must pay its fair share to those suffering as a result of a financial crisis they did nothing to cause. France and Germany have repeatedly made clear that at least part of the revenue should be used in this way.
Revenue will not simply disappear to Brussels' coffers as some of the more strident headlines claim. The European Commission is calling for that, but it hasn’t got the political support from Member States to make it happen. At Germany and France's insistence the revenue would be collected nationally, meaning participating governments would be free to use the money to pay teachers and nurses, create jobs or live up to their international commitments. This is the proposal our government is turning down, forgoing billions in revenue. The irony is that an FTT implemented by other European countries would still apply to some trades taking place in London, meaning the Government will not even succeed in its dubious aim of protecting the City.
Much has been made of the European Commission's impact assessment that an FTT would negatively affect growth and jobs. Yet as EC Tax Commissioner Semeta said, opponents “twist the Commission’s official data and thereby invent apocalyptic scenarios”. It is wholly misleading to talk only of tax extraction whilst failing to mention the positive impact tens of billions in additional revenue could have on the real economy. It is curious such arguments should emanate from the Treasury. A study released this week by renowned economists Stephany Griffith-Jones and Avinash Persaud looked at both sides of the equation and concluded that an FTT would be likely to increase rather than reduce economic growth.
What's even more curious are arguments that pensioners or ordinary families would pay this tax. The rate is set as low as 0.01% precisely to avoid having an impact on retail banking or traditional investments such as pensions funds, most of which hold stock for an average of two years. The impact is likely to be felt at the other extreme of the banking spectrum - high frequency speculative trading. Described by Adair Turner as socially useless, this exclusive area of banking is characterised by hedge funds, high net worth individuals and the proprietary desks of banks themselves. The IMF has said an FTT would in all likelihood be highly progressive - being paid by the richest in society. Compare this to VAT, which the Institute for Public Policy Research has shown hits the poorest 10% in our society twice as hard as the richest.
The injustice that the poorest pay for the financial sector's mistakes with cuts to services, tax rises and job losses is never more apparent than during bank bonus season, when financial sector excess is on display. But this is just the tawdry tip of the iceberg: as the Confederation of British Industry and PricewaterhouseCoopers have reported the UK financial services industry grew for the seventh quarter running and at the fastest pace since June 2007. This will be hard to stomach for ordinary families and businesses who continue to struggle in an economy that is flat-lining at best, contracting at worst.
The fact is that the same underlying problem that allowed the financial sector to swell so disproportionately large in the lead up to the last financial crisis, remains unchanged. It is a point made repeatedly by the IMF and it is point our own Government has chosen to ignore: the financial sector is under-taxed.
While goods and services in the real economy are VAT liable at the new rate of 20%, goods and services in the financial sector remain VAT exempt. The Government itself has said this exemption costs the rest of us more than £5.5 billion a year.
Add to this the £46 billion 'implicit subsidy', whereby Britain's four biggest banks can borrow money cheaply because creditors know the Government will bail them out if things go wrong, and you have a sector plumped up on economic steroids. This is not only bad economics – allowing the financial sector to crowd out other areas of the real economy - but it is also fiscally irresponsible, turning down much needed revenue.
A financial transaction tax would not only raise billions of pounds that could protect jobs, services and the poorest, but it would help rein in an out-of-control financial sector. By blocking international momentum, the Government has set itself on a futile course to protect the interests of the Square Mile ahead of the interests of Britain as a whole.
