It’s time to breakdown the tired old arguments that our Chancellor seems to be churning out against a Robin Hood Tax recently. The Coalition government (Lib Dems as well as Conservatives) has decided to side with the 1% against the millions globally who are calling for a financial transactions tax (FTT) to raise money to tackle poverty at home and abroad.
Osborne’s strategy is to ignore the positives and exaggerate negative impacts of the tax. In doing so, he is creating a dense fog of bad economics and misinformation designed to scare away potential supporters.
Let’s deal with the bad economics first. At last week’s meeting of European finance ministers, Osborne insisted that the tax would be paid by pensioners. This couldn’t be further from the truth. The suggested rate of FTT is tiny, at an average of 0.05% or 50p in every £1,000, precisely to avoid damaging important longer term investments like pensions, where a usual strategy is to build a strong portfolio which grows in value. A tiny transaction tax tax paid at the time assets are bought would be an inconsequential cost over the lifetime of the investment.
Instead, an FTT would target high frequency trading, increasingly carried out by computer-generated algorithms (some 70% of trading now carried out on the New York Stock Exchange is by computers.) This sort of trading has been described as ‘socially useless’ by Adair Turner, Chair of the Financial Services Authority.
Osborne also claims that not a single bank would pay the FTT. But if this is true, why are they lobbying so hard against it? Granted, that when banks act as intermediaries they would not pay the tax, but banks often act on their own behalf which means that along with hedge funds and high net worth individuals, the tax burden would fall on them. The IMF has said the incidence of an FTT would in all likelihood be highly progressive – being paid by the richest in society, rather than by the likes of you and I.
Now for the misinformation: the Chancellor argues that a 0.05% tax on banks and hedge funds would be bad for jobs and growth. He uses the European Commission’s impact assessment to claim it would lead to a 1.76% drop in long-term growth across the EU, when in fact the document concludes that a drop of 0.53% is much more likely. Furthermore, this would be spread over 20 years making the impact minimal.
Also, crucially, the EC’s assessment makes no calculation of the positive impact the revenue from an FTT could have, which would be considerable. While potential job losses would be on city trading floors, beneficiaries would be teachers, nurses and other public servants.
The biggest threat to long term growth, is an out of control financial sector. Indirectly, UK economic input fell by 27% or $49 billion as a result of the systemic crisis precipitated in 2007. Casino banking may add numbers to GDP but it is of little value to the real economy and ordinary people’s lives. An FTT could help rebalance finance in favour of the real economy.
Earlier this year the government increased VAT – the transaction tax we all pay in the real economy – by 2.5% to 20%, VAT has been shown repeatedly to curtail growth and hit the poor hardest. Some may find this extraordinary but whilst the VAT increase affects all of us, financial sector transactions remain VAT exempt. A point not lost on the IMF, who flagged it up in a report to the G20.
The Chancellor’s position that the banks would flee the country or that FTTs need to be global to work is disingenuous. The single biggest piece of evidence for this is the UK Stamp Duty on shares. Implemented unilaterally and modernised into its present form by a Conservative government in the 1980s, this FTT now raises more than £3 billion for the Exchequer each year without any significant loss of business from the UK.
It is ironic that the UK, a world leader on aid, is blocking a wider agreement for a Robin Hood Tax that would help other countries meet their obligations to the world’s poorest.
Ultimately, George Osborne’s position on the Robin Hood Tax comes down to politics.
For 18 months the government has tried to have it both ways, courting public opinion by supporting a global tax in the hope it would never happen. But the very real prospect of a European tax has forced them to choose.
By opting for the wishes of the 1% in the City ahead of the needs of the rest of us, he risks public anger and a place on the wrong side of history.