Five myths about the financial transaction tax

Yesterday Nicolas Sarkozy announced that France would press ahead unilaterally with a Financial Transaction Tax. Advocates of a Robin Hood Tax were swift to celebrate, myself included.

Needless to say, skeptics were equally swift to denounce it as a terrible mistake. There is a shrill paranoia about the financial transaction tax. It is epitomised by George Osborne saying it was “a tax on people’s pensions” in his budget update speech. Last week David Cameron laid into it again, saying that it would cost 500,000 jobs and reduce GDP by 200 billion Euros. “To be even considering this” he told the Davos gathering, “is quite simply madness.”

So are they right, or have Osborne and Cameron been quaffing the banking lobbyists’ Kool-Aid?

Lets look at some of the myths circulating about the tax.

Myth 1: The financial transaction tax will cost me money
No, you wouldn’t be taxed for drawing money out of a cash machine or paying in a cheque, something I’ve heard as an argument against the tax. It wouldn’t apply to retail banking or personal money transfers.  It is squarely targeted at the commercial banks.

Why? Because when you and I go to the corner shop, we pay VAT on the items we buy, but the trade in derivatives isn’t taxed at all. VAT is levied at 20%. The transaction tax would be at 0.05%, but it still has the world’s richest corporations whining that they couldn’t possibly afford it. Don’t believe them.

Madness, Mr Cameron? I’ll tell you what’s mad. Through his future taxes, my little boy will pay for the banking bailouts for the whole of his working career, and he wasn’t even born at the time of the financial crisis. Meanwhile, the derivatives traders who brought the global economy to its knees carry on making their billions, contributing next to nothing to the cost of their own rescue.

Myth 2: The financial transaction tax will cost British jobs
The claim here is that if any country puts a FTT in place, business will simply move elsewhere to avoid the tax. That would certainly happen if the tax was set too high, but it would have to be really quite high to cancel out all the advantages of doing business in Europe – the talent pool, the infrastructure, the ease of doing business. Besides, if you moved to New York and wanted to deal with the EU, you’d still have to pay the tax. It applies to trades within Eurozone jurisdiction, wherever in the world the buyer happens to be.

There’s also plenty of precedent to show that threats of banker flight are overblown. When Labour announced a one-off 50% tax on bonuses for example, City analysts predicted a mass exodus. It never materialised. Tullett Prebon apparently gave every member of their 950 staff the right to leave London to avoid the bonus tax, and not a single one of them did.

Myth 3: A financial transaction tax will penalise pension funds
With Britain’s pension funds in such a fragile state, anything that stands in the way of them flourishing is going to be controversial. However, a transaction tax would have little impact on pension funds. Because they need steady, dependable income streams, pension funds tend to hold shares for the dividends, rather than buying and selling them for quick profits.

An FTT would fall most heavily on trading houses that make multiple, rapid trades, particularly computer-controlled ‘flash trading’. Since this is predatory and destabilising, slowing it down is a good thing.

Myth 4: The transaction tax will undermine growth
At a time of recession, surely anything that impacts growth is a seriously bad idea, right? I keep hearing that the FTT will knock 0.5% off Europe’s growth, and David Cameron has claimed that it will cost 200 billion Euros. This is a misrepresentation. EC modelling shows a possible deviation of -0.53%, but that’s spread over a very long time: “This means that in 2050, instead of GDP in Europe being 81.4% above today’s level, it would be 80.9% above that level.”

What’s more, the tax will generate pretty impressive revenues, and those funds aren’t going to be just stuffed into a mattress. They will be reinvested and used to stimulate growth. So perhaps the financial services sector will see fractionally slower growth, but if the funds raised are used wisely, other sectors would compensate for it. An FTT could be a useful way of rebalancing the economy and breaking the dependency on finance. If you calculate the benefits of spending the taxes raised, the impact of an FTT actually comes out positive in the regions of 0.2 to 0.4%.

Myth 5: A transaction tax would send our taxes to Europe
The tax would be collected nationally, so no – it would not be an EU tax on our business activity. In fact, when Sarkozy announced the new French FTT yesterday, he said it was to help reduce the deficit.

With a vast deficit of our own, that’s something we could consider ourselves. We already have a financial transaction tax in the form of Stamp Duty on shares, and it raises £3 billion a year. (Strangely enough, no politicians are campaigning for an end to Stamp Duty) Perhaps we should extend it to other forms of financial trading. It would certainly be a less painful way to reduce the deficit than many of the other policies we are currently pursuing.

Most of the objections to the financial transaction tax have no basis in fact. It is true that the tax may dent profits in the City, but it’s supposed to. It’s meant to dis-incentivise the most unproductive, risky and short-term trading, and that’s no bad thing at all. It will also deliver large tax revenues, and generate a public benefit from economic activity that is otherwise parasitic.

This morning David Cameron was saying that the FTT would be “punishing a successful industry“, but a 0.0.5% tax is not a punishment, and neither is finance is a successful industry. The financial sector wrecked the economy, and remains unreformed. It will collapse again. The financial transaction tax is one of the simplest and fairest ways to rebuild public finances and bring stability to financial markets. If we turn it down, refuse to discipline the City and suffer another inevitable crash, we will find ourselves far poorer for it.

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10 Comments on “Five myths about the financial transaction tax”

  1. dude January 31, 2012 at 9:28 am #

    I’m interested to know if this transaction tax will pave the way for a single global currency or not. Ive heard it could. I wouldnt want this as it seems to be part of the new world order’s agenda of population control. Genuinely interested to know if it could open up a global currency. Cheers.

    • Jeremy January 31, 2012 at 10:27 am #

      No, I don’t see how it would pave the way for that. I don’t know a single campaign for a global currency. Perhaps there’s a place for one eventually, but it would need to be a complementary currency, not a replacement for the national or regional currencies we already have.

      And I don’t see how a global currency would help in population control, by the way.

      • dude February 6, 2012 at 4:32 pm #

        Hey thanks for replying. I think the fear of easier control from single global currency comes from the ease with which financial resources could be controlled if homogenised. The euro exists already; the amero is talked about in unifying north and central american currencies. Id heard of another currency for asia but cant remember its name.

        • Jeremy February 6, 2012 at 5:48 pm #

          Well, financial resources have already homogenised under the dollar. US Treasury Bills are the foundation of every country’s currency reserves, so it’s kind of happened already.

          I think a diversity of currencies is healthy – local, national, regional and global. Each one has its own advantages and disadvantages, and you can use different currencies to support different kinds of trade. A global currency would be good for global trade, and would be fairer on poorer countries that the dollar based system we have at the moment. An Africa-wide currency would be great for inter-Africa trade, which is a huge wasted opportunity at the moment. And I’m a big supporter of local currencies to encourage local business and keep money within the community. But it’s not an either-or thing, you have all of them at once to have a healthy money eco-system.

  2. Volin January 31, 2012 at 9:48 am #

    Jeremy

    Out of interest, What are the expected UK revenues from the transaction tax?

    Also, do you not think that banks will simply pass the cost on to the consumer/saver in the form of increased charges of reduced pension fund performance?

    • Jeremy January 31, 2012 at 10:36 am #

      There’s no specific figures, because there are no plans as yet and it all depends on what you tax and at what rate. Different proposals have different rewards. One idea for a Financial Activities Tax would raise around £4 billion. Other formulations could deliver as much as £20 billion.

  3. Stefan Thiesen February 4, 2012 at 3:40 pm #

    The transaction tax mainly will be regulatory tool intended to smoothen out the spikes resulting for example from automated (millisecond) trading entirely based upon algorithms and statistical trends instead of company data, products and projections. The entire purpose of stock investment originally was to provide capital to real world corporations, but often the development of a stock value nowadays only is very loosely correlated with the actual performance of a corporation. What originally was supposed to help a corporation now turned into an additional risk for corporations and entire national economies. There was a point when the financial industry – as part of the tertiary sector that provided useful services to society and companies – turned into something altogether different. Something entirely self serving. Feeling sorry for the out of control parts of the “finance sector” is similar to feeling sorry for the bacteria in the lungs of a patient with pneumonia who receives antibiotic treatment.

  4. Stefan Thiesen February 4, 2012 at 4:06 pm #

    I discovered a really interesting – and reavealing – piece of work by the German Professor of Economic Mathematics Dr. Jürgen Kremer. It is not easily accessible, but the work clearly shows that our entire growth economic is a deep mathematical absurdity, fundamentally flawed. And he does so with all the scientific prowess of a hard core mathematician. Enjoy: http://www.rheinahrcampus.de/fileadmin/prof_seiten/kremer/DynamicAnalysis.pdf

    • Jeremy February 6, 2012 at 5:54 pm #

      Thanks. That’s a level of mathematical complexity above my pay-grade, but it’s an interesting conclusion, that “our inter-
      est rates based …financial systems have a hidden distribution mechanism from the large majority of the society to the wealthy minority.”

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  1. France’s new financial transaction tax | Make Wealth History - August 1, 2012

    [...] Five myths about the financial transaction tax [...]

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