This morning’s City AM contained some admirably sound thinking on the European Commission’s proposal for a Europe-wide Financial Transaction Tax, which would involve imposing a minimum tax of 0.1 percent on bond trades and 0.01 percent on derivative trades.
First, Allister Heath in his daily editor’s letter:
There is of course no way that such sums [£40bn–£300bn] would ever be raised. Transactions would simply cease to happen. Tens of thousands of jobs would be lost overnight and the City of London would be destroyed. The tax would raise a couple of billion at most, while increasing volatility by forcing traders to concentrate on larger, less frequent trades.
Those deluded souls who believe they have discovered a new way of solving the world’s problems by taxing financial transactions will have achieved nothing other than crippling the economy. Why can’t the coalition simply come out and say this?
A transactions tax would be easily circumvented by firms simply moving their trades out of the EU. This would, of course, hit the UK hardest because London is by far the largest financial market in the EU. Transactions would be pushed out to competitor jurisdictions, like New York, Singapore and Hong Kong, damaging the UK’s long-term competitiveness as a leading centre for financial services companies.
This is no idle threat – when an FTT was implemented in Sweden in the 1980s, share prices fell quickly and substantially, and half of all Swedish equity trading moved to London. The volume of bond trades fell by 85 per cent and futures trades by 98 per cent. As a result, the Swedish government eliminated the tax, trading volumes resumed, and Sweden is now one of the most vociferous opponents of the tax.
The UK’s financial services industry accounts for around 10 per cent of total economic output, 11 per cent of the UK’s total income tax, and 15 per cent of corporation tax. Additional tax is also collected from more than 1m people who work in the industry through employer national insurance.
So – what we’ve got here is a plan for a tax that would cause severe damage to the most significant sector of our economy, which would not raise much money, and which would fail to reduce volatility. Sounds like a great idea, right?