The legacy of the financial crisis lives on, with banks still taking action to repair their balance sheets.
Stephen Beer is senior fund manager at the Central Finance Board of the Methodist Church. He writes in a personal capacity
The legacy of the financial crisis lives on, with banks still taking action to repair their balance sheets.
As a result more direct intervention in the financial sector has been planned in the European Union in the form of a financial transactions tax (FTT).
This looks certain to happen, but unlikely to be implemented in the UK. It should be. Labour is right to embrace it but should be bolder about implementing it, because the tax could chime well with Labour’s One Nation theme.
The banking sector is incorrigible. It cannot alone reform itself or repair its relationship with the rest of society. For example, just before his retirement, Bank of England governor Mervyn King reported that banks were lobbying government ministers against action by regulators. It is almost as if the financial crisis never happened; banks are still lobbying for lighter touch regulation.
There has been little remorse from the sector during a time when living standards have been falling and the country has been stuck in an economic depression for more than half a decade.
Moreover, as I have been arguing in the Christian Socialist Movement, if we are going to talk about remorse, we should also look for repentance. Repentance is more than saying sorry. It is about turning away from the old way of doing things and going in a new direction.
That is why reform is so important. Looking at the issue this way, we can see how an FTT might be part of the answer.
Two broad arguments are made for a financial transactions tax:
- To put a brake on excessive speculation
- As a Robin Hood tax, to redistribute revenue
In Europe there is much enthusiasm for the tax. Most EU countries voted in favour of eleven members implementing the tax on shares, bonds, and derivatives; a move supported by the European Parliament.
It may happen before the end of next year, would charge 0.1 per cent on share and bond trades and 0.01 per cent on derivative trades between financial firms, and could raise €34bn on one estimate. Some EU countries are already implementing a form of FTT.
There is, however, much resistance to a new FTT in the UK (in addition to the 0.5 per cent stamp duty on share purchases) from City and government. Partly, this represents resistance to a new tax and partly it represents the continuing power of City lobbying against reform. There are two substantial arguments.
The first good argument against the tax states that without an equivalent move in New York and elsewhere, a UK FTT would divert trading from London, so damaging our financial sector.
However, over thirty countries around the world have such a tax. There is even one in the US, with the SEC charging an extremely small tax on trades. In evidence to the BIS Select Committee recently, former Treasury minister Lord Myners suggested a solution to a wider ‘global problem’:
“We should not allow any bank in a developed country to establish a branch or a subsidiary in an offshore centre that does not comply with the OECD’s white list of financially compliant economies. You could do something similar in terms of transactions.”
In any event, City business is likely to be affected by the European FTT and if it stands alone will not receive the revenues; the worst of all worlds.
Behind the lobbying there are signs of a general acceptance in the global financial sector that it will face more FTTs; the issue is what form they might take and if they will have unintended consequences.
A small FTT would be only a slight addition to the various costs traders face. Indeed, again in evidence to the BIS Committee, the CEO of RailPen made the following case for the FTT:
“It could potentially take a lot of unnecessary trading out of the system. Who pays for the profits of traders? Ultimately it seems to me it is the end investors…Even if we end up paying a small tax on the trades that we do, if it stops us paying for a lot of profits on other peoples’ activities, then we are still better off, net-net.”
The second strong argument against the tax is that it would represent a ‘thin end of the wedge’. The tax rate might be small now, but over time governments would look to increase it in search of more revenue. That would damage the City’s profitability and competitive position.
There is something in this and it comes down to how much we can trust future governments. Therefore the tax should be set at a low rate to dampen but not damage trading and the proceeds hypothecated.
Rather than go into the general government pot, advocates of the tax need to agree how the money would be spent. We should use it to encourage the rebalancing of the economy to which everyone pays lip service. The tax should help increase the productive potential of our economy via a major boost in education spending, or through funding a national investment bank, as the IPPR suggests.
The narrative for Labour therefore should be about finance operating differently, with a small tax to help it do so while increasing the potential of the whole country, of One Nation.
Stephen’s pamphlet, The Credibility Deficit – how to rebuild Labour’s economic reputation, is available for download now.
To reach hundreds of thousands of new readers and to make the biggest impact we can in the next general election, we need to grow our donor base substantially.
That's why in 2024, we are seeking to generate 150 additional regular donors to support Left Foot Forward's work.
We still need another 124 people to donate to hit the target. You can help. Donate today.
6 Responses to “Labour should be bolder in its support for a Financial Transactions Tax”
Jackdaws
For people who want to know more, please read the paper prepared for – and presented to – the Committee on Economic and
Monetary Affairs of the European Parliament on 6th February 2012 by Stephany Griffith-Jones and Avinash Persaud: http://stephanygj.net/papers/FTT.pdf You can also watch the presentation by the above authors at the European Parliament: http://www.europarl.europa.eu/ep-live/en/committees/video?event=20120206-1500-COMMITTEE-ECON
Mr Spock
Much as I like the idea of the Robin Hood tax, its a drop in the ocean. Honestly how much difference will it really make? What is really needed is some really bold action as well as this tax. Clamp down aggressively on the interest rates that credit cards and mortgage companies and store cards and loan companies charge forcing them much nearer to base rate by taxing 99.9 percent of interest charges that are higher than 2% above base rate. Force utilities to reduce their prices by aggresiveley taxing their charges (the higher they are the more of the charge the taxman gets). Drop VAT to a fairer level and replace council tax with a local supplement to income tax and the mansion tax. And instead of using QE to buy bonds off banks use it to buy peoples loans and credit card debts and mortgages and pay them off. as well as using QE on building council houses and on public transport projects (spending the money at home not in germany)
JC
If it’s going to be so successful, all we have to do is watch the rest of the EU generating all this tax money. Our government will want some of that.
Evan Price
I hope that we agree that tax should be effective … rather then simply demonstrative.
We have had a land transaction tax (known as Stamp Duty Land Tax and misdescribed as Stamp Duty) for some time now … and there is absolutely no evidence whatever that it had any ameliorating effect on the property price boom that we went through (and in London continue to go through) over the recent past.
As a consequence, where is your evidence that an FTT would have any effect to ‘put a break on excessive speculation’? Even the latest rises in SDLT have only had effect at the margins – that is at the prices at which the higher rates apply. Unless there is evidence it would have this effect, the only purpose of the tax would be redistribution … and that would depend on it raising more than it costs. My suspicion is that the estimates of revenues raised are very substantial indeed and the costs, particularly in terms of reduced and reducing effect on GDP, are such that this proposal is simply daft.
The truth is that this is one of those proposals that sound great right up until the point when you try to introduce it. For examples of other such ideas, have a look at the papers that were produced when Dennis Healy wanted to introduce a range of wealth taxes in the UK – capital gains tax was the only one of the proposed new taxes that was in fact introduced as the costs exceeded the benefits of all of the other proposals.
The proposed FTT is, along with the proposed and misnamed mansion tax, a stupid proposal that will end up being paid by people it was not intended to affect – and the principle payer will be our pension funds! Oh great, just at the time when our pensions look to be about as inadequately funded as ever, we have a proposal to increase the tax on the transactions they undertake as part of their investments strategy. And, by the way, if you exclude pension funds, the money you would raise would diminish into obscurity.
Sir Trev Skint MP
” instead of using QE to buy bonds off banks use it to buy peoples loans and credit card debts and mortgages and pay them off. as well as using QE on building council houses and on public transport projects ” – Surely that will encourage people to default on their mortgages and credit cards??? – Also do you know how many jobs will be lost in those industries you want to tax at 99.9%???
Only the looney left can dream up those bizarre ideas!