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
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Which wouldn’t work of course, or at least not in the manner intended. CHAPS is one of many settlement systems available to banks and is generally used for gross settlements, which explains the high volumes.
Whilst it might levy a small tax on transactions such as salary transfers, which would create a monthly £1 levy on a £2000 monthly salary, the amounts levied from banks would be nowhere near the £37 billion figure, probably 2% of that figure if all the net business went though CHAPS but even less if other systems were used.
A 0.05% tax rate is equivalent to a £500 charge per £1 million, which makes SWIFT look cheap even though SWIFT is normally used for international transfers.
You might note that in the detail we refer to ‘other same day settlement systems’
And I do not suddenly think netting out would become the norm
How could it?
Evidence suggests that there are always behavioural changes – and we recognise that – but not of the scale you suggest
So, respectfully, I do not buy your argument, or anything approaching it
It wouldn’t be the norm for small payments so everybody would get their levy on their pay cheques, but my experience from the 1980’s when I was working in the automated funds transfer systems at a large US bank would indicate otherwise.
First of all their experience was that the most profitable component their foreign exchange business which was the largest in the world was driven by netting saving the smallest bid offer spreads. Secondly you suggest that £30 billion could be raised annually. That is a very big driver for behavioural change and in my experience more than enough to change the way that banks operate. After all CHAPS has only been around for 25 years. We did things differently beforehand and still do with BACS although that doesn’t give the same day clearing.
It is very easy to see how netting would work with financial traders. Assume that the interest swaps desk at RBS holds an in the money cash collateralised swap with Barclays. Barclays are required to post cash with RBS as collateral. At the same time another part of Barclays holds an in the money cash collateralised CDS with RBS. Margin on that is also posted through CHAPS and for ease of administration and general simplicity they are sent gross with a fixed cost.
If the cost was dependent on the size of the amount transmitted, which ever bank was responsible for the net amount would simply remit that amount under a bilateral netting arrangement and the banks would agree internally about the allocation of payments to cover collateral. That is a bit messy, but worth doing to save most of £30 billion.
Another point that you haven’t considered is that CHAPS also carries Euro payments and that business could just as easily pass through EBA Clearing in Brussels. It would be interesting to see how you would propose to collect that tax, to whom it would apply and how quickly London would disappear as a financial centre.
Actually you would probably see a rise in cheques, bucking the current trend.
I just spent a week visiting business clients in Europe and the general message from many of them is that is that maximizing savings and cutting costs is paramount for them and many of their clients.
So much so that a couple told us that decision-making has become very simple in that if they can (ultimately) save even a Euro by making a change, they will make the change. Big on their list was wire transfer fees and courier charges. We have established ‘draw-down’ accounts for our clients who have gone from sending wire payments every month to once every couple months to save on SWIFT charges and other clients who only want electronic copies of documents in order to save $25 – $40 in courier fees.
I can only image the lengths they will go to to avoid paying out another £500.
Keep in mind that these are large companies, many of which are bleeding money at the moment. They traditionally did not bother with these trivial fees. However, someone bothered to add them all up and the total is much bigger than they imagined.
hmmm, but surely if the aim is to raise £30bn in tax from UK banks then why not simply raise a one off tax? Why try to complicate it. BUT you might have noticed that at the moment tax flows are going the other way as far as banks are concerned. So where do you think the banks are going to find £30bn? What you actually achieve is killing the short term liquidity market, and adding a cost to bank customers where CHAPS is the settlement means (such as mortgage advances for example).
What I don’t understand is why you want to shut down banking in the UK. Perhaps you would like to explain that.
On the average mortgage fee the fee will be £100
Complete non – event and as for the short term market – it’s dead anyway
Richard
Congratulations Richard. You’ve just closed down the overnight interbank market.
You know, that market we’ve just spent hundreds of billions trying to keep going?
Tim
a) as a matter of fact they have not been re-opened
b) the data is 2008 based when there wasn’t that lending
c) is that degree of liquidity actually of benefit
Richard
what mortgage fee is £100? Typically new loans are seeing arrangement fees of £1K plus – they will just add an advance fee to cover the tax.
if you think the short term market is dead then you are clearly well out of date. What do you think LIBOR represents?
Two fees sorry
On the average mortgage
setting Libor does not mean they are lending
R
I would very much like to see what the predicted behavioural response is based upon.
Presumably whoever did it has ready access to a breakdown of the composition of CHAPS payments, into categories like overnight lending, commercial payments between firms etc. etc.
As Tim points out, short-term loans where the return is less than 0.05% of the transferred amount, will simply be wiped out. Payments where the “real time” bit isn’t so important will move to non-real time.
Richard, could you tell us what you think the consequences would be of eliminating overnight lending?
In principle losing over night lending would have appeared serious at one time
If you’d written in 2007 I would take your concern into account
But this is 2009
So, what is your concern?
And there are transactions … not just CHAPs which it now agreed are not needed
Do I understand you correctly – you think wiping out the overnight lending market would have no important consequences? This is what your advice to the TUC is predicated upon?
Please explain how you think the behavior of banks will respond, once overnight lending is closed down. Why do you think banks lend money to each other overnight? What do you think banks will have to do differently, if they cannot do so? And how will that bear upon, say, the spread between the rates at which people can borrow and the rate which they receive on savings?
not just overnight lending, although that is still active – the short term liquidity market is equally active – lots of organisations have treasury and lend short term at libor – and settle using CHAPS. It would be absolute nonsense to slap a transaction tax on that.
“c) is that degree of liquidity actually of benefit”
Given that the Bank of England stepped in to replace that lending (ie, banks now lend to the BoE, the BoE lends to others, instead of banks lending to each other directly….this facility likely to be withdrawn as volumes rise from their current low but not zero levels) then yes, at least some serious financial market professionals think that it is beneficial.
BTW, do the banks use CHAPS to send their excess reserves to the BoE and to borrow when they are short currently?
Actually you would do more than wipe out the overnight money market. Assuming that the tax would apply on the transfer of funds to place a deposit and the return of the funds (not unreasonable because the clearing system doesn’t know that the two payments are connected) then the total tax is a bit over 0.1%, which is a bit over a week’s interest at a hypothetical 5% annual rate. In fact you have probably killed the short term money markets completely because even on a 30 day deposit 25% of the interest would disappear in tax.
Now that is just the sort of thing that is really going to annoy big business and get them to move their treasury operations to Ireland or Switzerland.
Luis
As a matter of fact this lending has substantially dried up
Alistair
Why? Treasury functions appear to cause at least as much harm as good to many organizations and are a massive source of tax leakage
Tim
BoE transfers could be exempt – the estimated revenue is just that and clearly allows for a downward revision
Richard
You may have noticed many have tried to do that already
This measure would include steps to prevent them doing so
The Bank Of England are members of CHAPS, so the presumption is that they do.
And I’ve already dealt with the issue, above
http://www.bankofengland.co.uk/markets/money/documentation/resguide.pdf
You can’t stop a company or group moving its Treasury business or changing its functional currency to whatever it chooses.
I should add: observing that the interbank market dried up during the crisis does not amount to demonstrating the interbank market can be shut down without adverse consequences. Of course the BoE had to step in. Is a consequence of this proposed tax that the BoE is going to be in that business for perpetuity? In which case, you need to explain why the BoE preferred not to be, in the first place.
Those commenting here are, of course, amongst the regular right wing commentators on this blog.
I think without exception all adhere to pretty fundamental belief in market supremacy
Most of society does not
Adair Turner got it right when he said banks should not be undertaking a lot of what they do
I could add much the same of a great deal of what is done by corporate treasury functions – many of which will have had the primary purpose of distracting attention from the real goal of the entity – which is to ensure profit is earned in real markets – not financial ones.
They are not the same thing
And I’d wholeheartedly agree that the net sum of much money market and inter bank activity – however originally contracted is not a zero sum game but a net loss, possibly of serious amount to the economy
And yet the demand is that I support the status quo
That banks be allowed to trade as before
That it be assumed the structure is right
I don’t buy that
I can’t speak for the TUC. I am saying I do not buy that
And the TUC acknowledge that the proposal they have made is designed a) to charge banks not ordinary people for at least part of the fiscal deficit that must eventually be made good b) implicitly I think ensuring that the charge is progressive – which it would be if applied to banks and which it would not be if collected via VAT in full as far too many think likely and c) to change behaviour – the likelihood of which is acknowledged
The proposal was put forward for debate
The option ‘go back to where we were’ is one that has been rejected
Which is why all written her by all who have commented is irrelevant
Now, in accordance with the blog’s comment policy join the real debate or don’t bother to comment further. the point that you want the City to carry on abusing as it has been has been well made by you
It is utterly rejected as viable, as is much of the trading that underpins it
Now would you like to address the broader issues?
Luis
I may be entirely right that it does
Then old model was based on false assumptions about how markets work – in the new paradigm of awareness it may be right it plays this role
What was failed
Haven’t you noticed?
Richard
Richard,
I do not wish to return to business as usual. I think of myself as a left winger. I am interested in debating this wisdom of this proposal. I don’t want to see the left wing put forward bad policy proposals. I am concerned that rather than “charge banks but not ordinary people”, this proposal may bear upon ordinary people via higher loan rates and lower savings rates. I’m distressed to see you delete my comments.
You know, there is an argument that closing down interbank lending might lead to a more stable banking system. I’m staying away from that argument, because I don’t know enough about the banking system to comment. It may seem that because the collapse in interbank lending was one of the symptoms of the crisis, that shutting it down would be a good thing, but I don’t think that necessarily follows.
Swift is the Banks requirement
The interbank market serves two purpose. The first is as conduit for banks to place excess cash efficiently for short periods. The second is a as a determinant of pricing on floating rate loan agreements. By pricing loans at a fixed margin to their costs of funds banks avoid a substantial amount of market risk which allows them to operate more economically. If all lending was at fixed rates the banks would experience a higher volatility of earnings from long dated asset books and shorter dated liabilities, thus requiring either more capital or
higher margin lending.
If the interbank market failed that was due to a lack of confidence between market participants. It does not imply that interbank lending should be restricted.