I have an article on the Social Europe website this morning in which I argue that the time has come for a new financial transactions tax, which I see as important now to the role of tax within modern monetary theory. This is what I said (with minor edits):
Five decades on, a ‘Tobin tax' is no longer fit for purpose. Now what should be taxed, progressively, is all financial flows.
There are reasons for saying now is not a good time to discuss tax. In a great many countries demand is already weak and most taxes reduce demand. Increasing them would, in that case, reduce economic activity and so increase unemployment and corporate failures, favouring recession rather than recovery.
That, though, is precisely why we need to think about a new role for financial-transactions taxes (FTT). It may just be that this is the tax which, in contrast to all others, managing the coronavirus crisis requires.
All governments must currently run deficits to support their economies and this will remain so for a long time. Meanwhile, interest rates have ceased to be a tool for economic management: when they are already close to zero they cease to have an impact on behaviour. Both concerns, however, provide reasons why we might need an FTT.
Revenue-raising instruments
FTTs have traditionally been designed as very specific taxes on a very narrow range of financial transactions, including trades in financial commodities and currencies. The rates proposed have often been small. This has been because–oddly given the political perspective of many of those proposing them–they have been seen as revenue-raising instruments and not as Pigovian taxes designed to change behaviour significantly.
Pigovian taxes are placed on products, such as alcohol and tobacco, which generate ‘negative externalities' (in those examples for public health). They are primarily intended to reduce demand, rather than to raise revenue–even if they do that too. But it would seem that the proposed social use of FTT revenues has been the primary purpose of these taxes in the eyes of their proponents, which implies that their rates and impacts must be limited. The uncomfortable truth which modern monetary theory has exposed–that tax revenue is not a precondition for social spending to take place–has not helped their cause.
The FTT we now need is very different. Precisely because monetary policy has ceased to be effective, because the use of tax in conventional fiscal policies is an extremely blunt instrument and because rapid fiscal intervention in any economy is now essential to control demand, employment and inflation–in an environment where there will be persistent government deficits–new instruments of fiscal management are required. An FTT can fulfil this role.
Financial flows
This would, however, be an FTT of a type previously very rarely used. It would be imposed on financial flows through all bank accounts in an economy, without exception. The charge would be on both debits and credits, with the deliberate intent of reducing the scope for evasion. And the tax should be designed to be significant in overall amount, acting as a possible replacement for other taxes such as payroll and social-security charges, for example, which are such an impediment to employment now.
This FTT should be significantly progressive. As the flows through the bank accounts under the control of a person increased, so would the charge. Those with average or low incomes would expect very low rates to be levied upon them. It would even be simple to make the rate negative for some, as a means of delivering income support. In contrast, those with very large financial flows would expect significant charges.
It would be appropriate for any individual to link all the accounts they had under common control for the purposes of their charge being assessed. So, for example, a person should not have to pay an FTT charge when making a payment to their mortgage account, transferring savings or paying a credit card bill. Instead, the charge should arise when real interaction with third parties took place.
Deciding how a person and their household were related might be an issue for this purpose; equally it could be an instrument for delivering social support. Transfers into and out of the country, even to related accounts, would however always be charged. Put all this together and this would become an effective and progressive tax on consumption.
The charge would also need to be applied to business accounts, and again some progressivity could be appropriate: support for smaller businesses could be implicit in rates charged. And businesses should not object, especially if they were relieved of some of their social-security costs. The issue of cash usage would have to be considered: it would be a legal necessity to require that cash sales and purchases were declared for tax purposes, to prevent abuse.
This one aspect apart, administratively this tax would be easy: all the software to create the charge should already exist, even if some accounts are linked and even if multiple banks are involved. Since the charge would be a simple percentage of flows into and out of accounts, the calculation would be simple, as would annual aggregation to avoid unfairness if the charge in any month were excessive on a ‘pay as you go' basis.
Fiscal control
This would be a progressive consumption tax–which value-added tax is not–and it would extend the tax base to financial services and transactions, which are the preserve of the wealthiest and beyond the reach of VAT. It could, therefore, be a significant tool for tackling income and wealth inequality.
But the most important element of this tax might well be the opportunity it would provide for fiscal control. It could be finessed to promote or restrain demand very rapidly, without requiring anything more than changing the rates in a relatively small number of banks' charging algorithms.
So if there were, for example, a desire to provide an immediate stimulus, rates could be reduced at short notice. Most especially, those rate changes could be targeted at particular income groups–even rendered negative for some, if desired.
Equally, if there were a need to target inflation, then FTT rates could be quickly increased to dampen demand. This is important, particularly to proponents of modern monetary theory, since it is often claimed taxes cannot be used for this purpose.
Finally, the tax could still be used to control excesses in the financial-services sector, although special rates might be required. The Spahn variation on such a tax, as it was originally recommended by James Tobin in the 1970s, has automatic stabilisers built in–increasing rates automatically in the event of financial crisis in a way that increases the costs of transactions, so as to calm markets in panicked financial situations. The rate increase would induce calm precisely when that might be most required.
I see little point now in promoting for its own sake an FTT of the type proposed over the last five decades, when neither the economy nor economic understanding demands it. In contrast, an FTT that promotes employment, reduces inequality, can be used to deliver income support and enhances fiscal management is a tax for this moment. It is a genuinely 21st-century tax, which is needed now and in favour of which a coalition of the willing should be created.
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First reaction taking a broad overview….this is pure genius.
Thank you
I just posted this comment on the Modern Money Scotland FB Page.
“This is pure genius from Richard Murphy. It is a perfect example of what I have been calling “rewiring” of the money system. This rewiring proposal will significantly reduce the drain of credit (unredeemed debt) from the real economy into the financial system…..a restraint on wealth extraction.”
Wow! This is a big one. I need to go for a walk to chew it over……..
But there are a few questions…..
Is this idea driven MAINLY to (A) make VAT progressive, (B) deliver a tool for fiscal policy adjustment or (C) reduce “financialisation” of the economy ?
I will, of course, think about all aspects of the idea……. but I probably have most expertise in (C).
Do you see this as a policy that could be unilaterally implemented by the UK or does it require wider participation?
If I move money into an offshore investment vehicle (hedge fund?) I presume that transaction
gets taxed. But what about the transactions that then take place in the Hedge fund? (in GBP? In USD?).
Are all interbank transactions taxed? Does it depend on purpose? Are there any provisions where transactions are netted?
I am sure there are loads more questions…… but that will do for now.
A) No, it leaves VAT in place
B) Yes
C) Yes
and
D) Poenttially replace employer’s NIC
and
E) Also create space for a negative tax – a UBI delivery mechanism
It could be unilateral
Moving money offshore is taxed
Moving it back is taxed
I would require comparison of data on this tax with income tax returns to try to identify outliers e.g. users of offshore, to avoid tax charges
Interbank settlements are interesting: if purely clearing outside the scope as already taxed
If trading, taxed I suggest
GST is partially refunded for low income groups in Singapore their VAT. they have CPF so easy for their government I guess.
Excellent tax proposals but the gnomes of Canary Wharf and Zurich will fight it tooth and nail.
Indeed they will
Hello bitcoin and barter.
2% of the economy?
“2% of the economy?” That 2% would increase and subject to much abuse and that abuse (even if very small) fuels cries of unfairness. Just as Clive Parry has noted about the ability of technology to identify transactions to tax; technology will also emerge to counteract that tax.
I like the idea of some new thinking on taxation and I see merit in transaction taxes, but this one will need a lot of work as well as getting behavioural scientists on board to help identify the weaknesses and possible solutions.
Meanwhile an own goal from HMRC – since 6th April you need to declare capital gains tax on the sale of residential property, unless private residence relief applies. As yet, there seems nothing in the system for all sales to make any kind of declaration. So people who would in any event have declared the sales in tax returns will be those that will comply with the new rules. Nil sum game in my view.
The idea seems attractive. It is the ultimate broad tax base and diversity in way tax is levied is a good thing. However, if we load too much on one tax we create problems of evasion. So, happy to consider the idea as an additional tax tool but not willing to have it replace (too many) other taxes “wholesale”. (Having said that, anything to reduce tax on labour should be considered sympathetically).
These days all economic activity involves the movement of money and the vast bulk of this is through the banking system with very few physical cash transactions. In theory we could take each transaction, decide (according to some algorithm) what tax it should attract and then levy it automatically. With modern technology this is quite possible and at one extreme, it could replace all other taxes and benefits (or at least revolutionise the collection of all other taxes and benefit payments).….. well, in theory at least.
No doubt there would be efforts to circumvent payment but could we really return to a barter economy? I doubt it. Could we return to a cash economy? Well, cash withdrawals could be deemed “suspected tax evasion” and be taxed at a rate to reflect this fact. In Sweden, I believe that most bank branches refuse to take or dispense cash so it is not so far fetched. Most youngsters do not use cash from one month to the next and COVID makes that true for most people now.
I presume there is a different levy depending on what the transaction is for; bread would attract a lower levy than cake. I also presume the levy depends on size; a £50 a month electricity bill would attract a lower rate than a £500 a month electricity bill. Finally, if I was buying a lot of cake and electricity (and other stuff) the levy would rise further.
So far so good but what about the following transactions……
What if I send my child £1,000 a month — it could be to (a) pay university tuition (b) their food and rent (c) help to build a deposit to buy a house (d) avoid inheritance tax. Should all these be taxed at the same rate — and if not, how do we distinguish what a £1,000 a month payment is for? …. or maybe they are all taxed the same regardless of purpose and that other taxes are used to penalise/encourage certain activities?
If the tax rate on “family transfers” is nil should I just get my family of 8 penniless children to pay my bills for me (at a low tax rate)? Also, who is family? If cousins count then I am sure that you could transfer tax free in about 6 steps! Now, none of this may matter is the levy is low…. but at higher levels these issues will become important and people can be quite ingenious if it saves a few quid!
Perhaps most important, is how the financial industry will react. We know the answer — they will complain and look for ways to avoid it. I think it gets complicated and I will post a few thoughts tomorrow.
Clive
In summary my suggestion is ‘keep it simple’
No differentiation for what money is moved for
Simply tax the quantum
Anything else would be virtually impossible to administer
And people who can give their children £1,000 a month are by definition well off
Simple is good…. but I was trying to tease out the possibility of using the tax to modify behaviour (different rates for bread and cake, higher rates for larger consumers of energy etc.). Maybe that is trying to load too much on to the idea.
My hypothetical example of money going from parent to child was a (poor) attempt to explore how “linked” people/accounts might be treated and whether the purpose should influence the tax rate. I accept that peering into the purpose of transactions is impossible…. so a “flat rate” makes sense.
Nevertheless, I do think there are issues related to transfers between linked accounts is a tricky area. “Back in the day” you might have been able to say “if you don’t want to be taxed when you transfer to your spouse then get a joint account”. In the modern world it gets more difficult and I suspect the definition of “family” would have to be quite broadly defined and might be quite fluid.
Also, many would object to being (double) taxed. Transferring lunch money to my kids’ accounts, pocket money/allowances to teenagers to teach them to budget and make decisions for themselves and (possibly) young adults getting support as they make their way to independence.
I suspect the solution is simplicity – all transfers are taxed except between spouses/civil partners and children under 16….. with the corollary that the levy should have a high zero rate threshold to ensure that unless you are transferring large sums to already wealthy people then there is no “double taxation”. (I would not mind being taxed on money going to kids…. but if they were taxed again the temptation would be to pay their bills directly and that would be a bad idea. Of course, if they were already wealthy then it is a different story and double taxation would be fine).
I think it makes sense…. but that is the easy bit. Companies and financial transactions are tougher….. more thought needed and the weather is too good to waste.
I agree with your logic here
I would define children in FTE and spouses as in the family
The aim is to have a zero rate band
And then very low rates to start – but with serious progressivity (by band)
Interesting – havent done enough reading to try to set the suggestion in context of all the various FTT’s suggested and/or implemented.
Am sure Richard could do that…
This from India – maybe relevant ?
https://www.moneylife.in/article/swap-income-tax-gst-for-a-banking-transactions-tax-to-trigger-growth-with-justice/60164.html
I have a day job too, remember
And it is pretty demanding right now
Looking at the financial industry I think there are real difficulties. The issue is not that UK banks will not comply with the law — they will. Rather it is that the law does not fit with modern markets.
Take FX markets. Currently, daily turnover is about USD 6 trillion (!). GBP is involved in about 13% of these trades or let’s say GBP 500bn a day. That is about 25% of ANNUAL GDP traded each DAY!!
If I sell GBP to buy EUR then it is fairly straight forward — my GBP account will be debited when the trade settles and tax taken.
What if I trade for forward settle? What if I later buy GBP for forward settle so that the trades net out? What do I pay and when? What if I trade a non-deliverable forward (NDF) — these are very common in emerging market currencies where local restrictions exist? In this case my trade will not result in ANY movement of GBP. What if I trade forward and post collateral (to reduce counterparty credit exposure as is typical these days)? Would the movement of collateral back and forth (as mark-to-market P+L changes) be taxed? If so it might incentivise a more lax approach to counterparty risk. How do you deal with FX swaps which might look like FX trades but are, in reality, financing trades? I could go on (and on and on).
My point is that for “retail” this levy might be simple but for banks it gets very complicated. Of course, one could say “tax the lot!”…. and expect all this activity to stop. FX traders would be laid off and get proper jobs in the real economy doing something more useful. But is that really what would happen? I doubt it; FX traders would just stop trading GBP or do it all through NDFs.
I suspect that reducing the level of resources employed in finance is best done through regulation and “macro” taxation rather than a “micro” transaction tax.
I see no reason why the micro rates FTT have proposed cannot be used for this sector
I would still keep the Spahn option
Your thoughts on that?
Sorry – my last sentence is an error. It should read….
I suspect that reducing the level of resources employed in finance is best done through regulation and “macro” taxation rather than a “micro” tax on money movement.
I see the logic of a TRANSACTION tax. It would only have to be at a tiny rate to discourage the vast majority of trading. It would reduce liquidity in the market but I am not sure that this would be a disaster. The argument against is that trade just moves offshore and there would be no reduction in speculation or currency volatility.
If you tax FINANCIAL FLOWS (the key point of your proposal) then you find that the trading activity will continue but there will be very few actual flows to tax. You might end up taxing genuine commercial/investment transactions but all the speculative trades would elude you.
The standard way “neo-liberals” would manage the exchange rate (if they cared to manage it at all) would be through interest rates… with dire consequences for the real economy. The better way that many countries operate is to control credit to foreign entities and prohibit forward FX transactions. If you can’t borrow or trade forward then you can speculate against a currency. Of course, the speculation just moves to the NDF market but that is OK and operates in some sense like the the Spahn “two tier” system. In normal times it operates as economically equivalent to normal forwards (for legitimate hedging etc.) but if speculation builds the NDF and spot rates diverge and imply an ever greater financing cost of the short position but without raising onshore rates for the real economy.
The point is that it requires intervention and regulation by the Central Bank to run the system and currently the UK is ideologically opposed (as well as being in the pocket of the financial sector).
Clive I really appreciate that
I will reflect on it