Rumour has it that proposals for a financial transactions tax for the UK will be published tomorrow. Good news.
A financial transaction tax for the UK
Transaction tax
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Dec 092009
Op-Ed Columnist – Taxing the Speculators – NYTimes.com.
Should we use taxes to deter financial speculation? Yes, say top British officials, who oversee the City of London, one of the world’s two great banking centers. Other European governments agree ‚Äî and they’re right.
Unfortunately, United States officials ‚Äî especially Timothy Geithner, the Treasury secretary ‚Äî are dead set against the proposal. Let’s hope they reconsider: a financial transactions tax is an idea whose time has come.
The Guardian has noted:
The controversial tax on financial transactions endorsed by Gordon Brown and Lord Turner, the top City regulator, was last night beginning to garner the support of leading financiers for the first time.
The idea of a Tobin-like tax was embraced by outspoken City figure Terry Smith as well as by Sir Philip Hampton, chairman of the Royal Bank of Scotland.
Smith, chief executive of the money brokers Tullett Prebon, told the Guardian his support was based on similar factors. "I’m in favour of some form of Tobin tax. There are elements of financial services that have become over-large and have no social purpose," he said.
Smith admitted he did not know how the tax would be set or levied but scorned those who said it would be too difficult to impose without international agreement. "It is possible to get international agreement on very difficult subjects," he said. "I think the vested interests of those saying it can’t be done are a bigger obstacle."
Smith’s endorsement came after Hampton backed a similar levy, which he suggested should be in addition to changes to capital and liquidity requirements, which will also increase the cost of banking.
I added the emphasis. It is a suitable riposte to those who have said in thne last week that the TUC support fro such a tax has been ill0-informed. I could not disagree more and it is clear that those w lot more experienced than those dogma driven cr4itics concur.
Adam Lent of the TUC makes a similar point:
The TUC call to use a tax on major financial transactions to help reduce the public deficit has created a minor blog bust-up. But one important point at risk of being overlooked here is the question of what might be the alternatives to a transaction tax.
The TUC believes that the deficit is not an urgent problem but it is one that will need to be dealt with over the medium term. In our submission to the Treasury ahead of the PBR, we argue that any measure designed to reduce the deficit needs to meet five criteria. It must be:
- effective: any measure must genuinely reduce the deficit;
- progressive: the costs of any measure must fall to those most able to pay;
- proportionate: any measure must meet the reality of the challenge posed by the fiscal problems rather than any exaggerated or understated claims;
- limited in its economic consequences: any measure must not prolong the recession of threaten recovery;
- just: the costs of any measure should not fall on those who bear no responsibility for the financial crisis and recession that has caused the fiscal problems.
Our concern is that the leading contenders for addressing the deficit – major public spending cuts, a big rise in VAT or a big rise in income tax – fail when judged against these criteria. A transactions tax, we felt, did meet most of these criteria. I accept not everyone will agree with that conclusion but given that we are in a tough fiscal situation, there must be a certain obligation on those entering the fray to identify their alternatives and explain how they meet these criteria.
Of course, they may not agree with the criteria but then they need to explain that position as well.
Quite so when closing comments on this issue on my blog I said:
[W] is curious to note is not one person has said [the tax the TUC propose] should not happen. All you have argued about (if I recall correctly) is the rate
So it may be introduced at less than the proposed rate – even at one fifth of that rate it could make a valuable contribution to closing the fiscal deficit – and it could be ratcheted up from there
But has the case for the tax been made? Yes, undoubtedly. And why? Because the only counter argument is that the neo-liberal view of markets must prevail. Nothing more, or less
And if the best that the opponents can come up with is that such a tax impedes the free flow of the market to do whatever it will they really have lost the argument. It seems to me that debate is over As the Guardian notes, even the new Lord Mayor of London says:
In a dramatic change of tone from his predecessor, the financial district’s mayor, Nick Anstee, will today tell an audience that includes the prime minister: "We need to re-establish a contract between the City’s financial institutions and the society they serve. This is right because society, the taxpayer, has just picked up an enormous bill for failings."
He’s right.
A Tobin tax would help pay for that. A UK based version is completely possible. Details will be refined, no doubt, but the case is now made. Only gthe timing really need be in question.
Note: I advise the TUC on tax issues
Nov 132009
A flaw in the TUC masterplan | Tim Worstall | Comment is free | guardian.co.uk .
Worstall makes a fool of himself in the Guardian on the proposal by the TUC for a bank transaction tax in the UK. As I noted in response:
Worstall seeks to make a point and fails to do so
First, the interbank market seems to work on SWIFT, not CHAPs.
Second, the interbank market has dried up – that was what precipitated the crisis.
Third, transactions through the Central Bank – which is how this market functions right now – could be exempted from the tax.
Fourth – as the TUC note – there will be a behavioural response. Actually, one is desirable. Far from the paranoia about their being too little liquidity in the market – as was the mantra pre 2008 – the reality, as the likes of Roger Bootle and many others realise – was there was far too much. So massive short term speculation was the order of the day then – and we all saw where that led to. Reducing that liquidity is a major requirement of any banking reform. This one helps that.
Fifth, if Swift was included the rate could be much lower
Sixth, most important of all – Worstall misses the point of making such suggestions. They are put forward to stimulate constructive debate. Worstall is committed to snide and pedantic commentary based on a belief in the efficient market hypothesis (now so bankrupt that it’s hard to credit anyone with giving it the time of day) with the aim of a) suppressing debate and b) bolstering the myth of market supremacy.
Worstall needs to accept that markets will change, massive change in banking is required, banks will need to contribute significantly – and disproportionately to raising the revenues need to eventually fill the fiscal deficit and that the TUC has by opening this debate made clear that there are payment mechanisms for finance within the UK economy that could be taxed for this purpose.
Worstall might even need to recognise that long termism – even 30 day lending – may be what is needed to create stability in financial markets – with benefit for us all and an end to profiteering for the few.
No one submitting such a proposal expects the idea to be taken on board by the Treasury without considerable further work and due diligence. And as the TUC and others will show in their submissions prior to the Pre-Budget report ? this is just one of a raft of progressive options available that mean that cuts in public services can be altogether avoided in the UK economy.
This though is something Worstall ignores. From his UKIP perspective government is bad and taxes are an evil. Read in this perspective Worstall?s analysis is pure neo-liberalism ? and precisely the narrow minded analysis that got us into the mess we?re in now.
Disclosure: I advise the TUC on tax matters
Don’t let a backlash knock out Tobin tax | John Hilary | Comment is free | guardian.co.uk .
Gordon Brown’s statement of support for a tax on global financial transactions is a welcome call on the banks to repay their debt to society. It is also a victory for the international Tobin tax movement, which has laboured hard for this moment over many years. Our task now is to fight the political backlash which is already mounting, and to defend the idea of financial transaction taxes as a means to the progressive redistribution of economic gains.
Good summary of how we got where we are and why we need to keep going forward.
The first stage of the TUC’s submission on the Pre-Budget report has been released. As they note:
The Chancellor should introduce a 0.05 per cent transaction tax on instant transfers between UK financial institutions so that the finance sector makes a major contribution to repairing the damage done to public finances by the credit crunch, the TUC says today.
Ahead of its Pre Budget Report (PBR) submission to be published later this month, the TUC says that it would be wrong to take measures to reduce the deficit until 2011 because the major contribution to closing the deficit will come from economic growth and that nothing must be done that threatens recovery.
But when the time comes to deal with the remaining structural deficit, the TUC argues that the finance sector, which caused the crash, should make a proper contribution through higher taxes.
The TUC is proposing a transaction tax on the money that goes through the Clearing House Automated Payments System (CHAPS). This system is used by large banks to make same day, irrevocable payments. Transactions – which reached £74 trillion in 2008 – are dominated by the trading activity of large financial institutions.
A transaction tax of 0.05 per cent would have raised £37 billion in 2008, but would only impose a very modest charge on each individual transfer. A tax on the average CHAPS transfer of £2 million pounds would cost £1,000.
The TUC believes that after adjusting for changes in the behaviour of financial institutions, a transaction tax of 0.05 per cent could raise around £30 billion a year.
What is more, it is entirely deliverable. The vast majority of CHAPs payments relate to financial trading. Put them in context as the TUC does:
The total value of CHAPS annual transfers is 50 times greater than the UK’s GDP (£1.5 trillion) and more than 15 times bigger than all cash transactions such as debit cards, cheques and ATMs.
The latter total as follows:
|
Payment type |
Total |
|
£’m |
|
|
Cash withdrawals |
195,316 |
|
Debit cards |
245,451 |
|
Cheques |
1.075,664 |
|
Direct debits |
3.076,855 |
|
Total non-CHAPs payments |
4,593,286 |
Of non-financial trading use of CHAPs the only serious impact on the public is with regard to house purchasing, where the average additional cost would be £100. In practice, this could be eliminated by allowing the CHAPs tax to be offset against stamp duty due.
As Brendan Barber noted:
A transaction tax won’t be painless. But no deficit reduction plans are. Putting up VAT would hit consumers, particularly the poor, and encourage evasion. Raising income tax would hit ordinary taxpayers hard and cutting public services would also increase unemployment and bankruptcies.
A transaction tax need not be permanent and the pain will be much more fairly distributed than making middle Britain pay for the mistakes of our financial institutions.
Exactly.
There’s another dimension as well. Historically 14 or 15% of total VAT has been evaded. As the rate goes up so does the incentive to evade and its absolute cost. This makes VAT increases very inefficient as a means of raising revenue. This alternative tax would be hard to both evade and avoid: any bank found facilitating payments due in sterling in settlement of UK debts through other media or currency would be deemed to be party to UK tax evasion. And they would pay the penalty. Banks cannot afford that risk. Of course the person making payment would be liable, but make the banks a party as well and the risk is largely removed: we have to make the suppliers of avoidance and evasion liable in this way. Then the action is eliminated.
This tax has everything going for it.
Note: I advise the TUC on tax matters
Nov 102009
Alex Brummer of the Daily Mail has written a good article on transaction taxes (just to prove don’t always pick on this paper), saying:
No one should consider the transactions tax on the banks dead and buried, despite the scorn poured on Gordon Brown’s brief appearance at the G20 summit.
What the critics of the tax fail to acknowledge is that wholesale banking is an imperfect market where the domination of a handful of really major players allows super-normal profits to be made, which drive bonus payments.
This is not the ‘work of God’, as argued by Goldman Sachs chairman Lloyd Blankfein in his Sunday Times interview. It is profiteering by the few on the backs of the many, and the Prime Minister deserves some credit for buying into the argument.
So that deals with the justification just about as succinctly as can be. But he’s got his head round the detail too:
It is only too easy for people to say it cannot work because any such tax is too porous. Transactions taxes of a kind have always existed, including stamp duty on share dealings. This may be a bad tax as far as the City is concerned but it has raised money for the UK Exchequer despite the fact that hedge funds have all kinds of avoidance strategies such as trading through contracts for differences.
There will always be people who will try to outwit the system. But the betting must be that the bigger players Goldman, JP Morgan, Barcap et al, have too much riding on not alienating governments in the G20 economies to try such tactics.
So while there will be leakage it will be limited. Indeed, the clampdown on tax havens demonstrates it is possible to bring them within the purview of global regulation with enough willpower.
I happen to entirely agree with this logic.
Polly Toynbee in the Guardian asks a different question – and one I know much asked by the chattering class at Westminster – which is why has Gordon Brown done this now? As she notes:
There is plenty to remember and regret about the Brown chancellorship. The sum total of Labour’s tax regime has been little change in tax distribution. A graph would not reveal to a Rip Van Winkle that a social democratic government had been running tax policy. Compare that to Labour in the 1960s with its radical changes to corporation tax and capital gains, or Denis Healey’s inheritance tax. New Labour has not used the tax system to make the country fairer, while green taxes have gone down, not up. Brown thought it enough to use the proceeds of tax for progressive purposes, without redistributing tax itself. As a result Britain became less equal, and income and wealth were shared less fairly. Instead of shifting attitudes to appreciate the social value of tax, he colluded with an anti-tax ideology that calls all tax a burden.
That is why his sudden espousal of the Tobin tax looks unconvincing. It doesn’t belong in his back story – unless he redefines that story as a journey of rediscovery of lost social democratic tax ideas. Then he might take people with him: because his Tobin tax should be a roof-raising, banker-bashing, debt-defying, public-service-saving, rabble-rouser of a political winner.
Polly’s analysis is consistent with my own of Brown as a Chancellor. He has not shown commitment to social democratic tax ideas – which has been one of the most important failings of his time in office. But there’s always time for reform.
I hope it is genuine.
I hope that there’s time for delivery.
