Europe

Reject the Financial Transaction Tax

Many people are angry at banks and other financial institutions and feel that these organisations are largely to blame for the current economic climate that has led to drastic cuts being made by the government. According to supporters of the Robin Hood Tax campaign,  rather than cutting public services, “banks, hedge funds and the rest of the financial sector should pay their fair share to clear up the mess they helped create.” The idea is to “take from the richest in society and give to those who need it.”

The way that the campaign would like to do that is to impose a Financial Transaction Tax (FTT) of 0.05% on financial transactions such as stocks, bonds, foreign exchange transactions and derivatives. The idea of such a tax is being discussed by MEPs. This small percentage may not seem much, but to the cost of many financial transactions it would be an astronomical increase. Government bonds might trade with a bid-offer spread of 0.01% and the administrative costs over that of processing a large trade are often de minimis. Consequently, a 0.05% tax would mean that transaction costs increase by a multiple.

Let us say that a trader at a bank in Dubai wished to purchase €100 million of German government bonds. At the moment they can call a bank in London and execute the transaction free of any tax implications.  In the event of a 0.05% taxation rate was charged, this would equate to a taxation charge of €50,000. Would this mean that the UK government received €50,000 more in tax revenue? The answer is no. What would happen is that instead of telephoning a bank in London to make the transaction, the trader at the Dubai based bank would telephone a bank, for example, in Zurich and execute the transaction free of any tax charge. The telephones would stop ringing on the dealing desks in London and redundancy notices would be issued in the City in abundance.

If one does not wish to believe my dire prediction, one can consider what happened when a FTT was introduced in Sweden in the 1980s:

During the first week of the tax, the volume of bond trading fell by 85%, … [t]he volume of futures trading fell by 98% and the options trading market disappeared.

The Robin Hood tax campaign pretends that this will not occur:

FTTs can be designed so that they are very difficult to avoid.  The best example of this is the UK, where we have a stamp duty of 0.5% on all share transactions.  The UK’s major competitors do not have this and there certainly is no global agreement, yet it is a successful FTT that raises around £5 billion pounds each year. It is designed so it can’t be avoided and London remains one of the biggest stock markets in the world.

Those that have written this up have forgotten about Contracts for Differences (CFDs) which are used by many precisely to avoid paying stamp duty.

The campaign website also states:

There are many reasons banks would not leave the UK, not least that they need a big enough government that they know will bail them out if things go wrong.  There are not many governments with the ability or willingness to provide this implicit guarantee, certainly not the Cayman Islands or even Switzerland.

Many of the large trading institutions are not strictly banks but brokerage houses and a substantial proportion have ultimate parent companies located overseas. The UK government did not bail out Lehman Brothers or Bear Stearns who both had London offices when they collapsed in the financial crisis of 2008.

The campaign website further states:

Time zones are critical for financial transactions, with London being ideally situated between Asian and US markets.  This means that banks and other financial institutions cannot all move to New York as a major financial centre will still be needed in Europe.  Germany, the main competitor in the European time zone is already committed to implementing an FTT.

This is not necessarily true. Given the amount of money at stake, it would make sense for the dealing rooms in Singapore and Hong Kong to stay open later and traders in New York to get to their desks early to cover the European time zones. Even if something is needed in Europe, it only takes one jurisdiction not to implement the tax and that country could become the new financial hub for Europe. If the EU goes it alone and implements an FTT, then one has to concur with UKIP leader Nigel Farage who said that it would be “kamikaze economics.”

London is one of the world’s most important financial centres. Other cities would love the chance to replace it as the most important financial hub in the European time zone. In the event that the European Parliament vote to support an FTT and the UK implements such a taxation, traders in Geneva, Zurich or other non EU cities will dance the hokey-kokey or an equivalent celebratory dance. London would be finished and another city would take our crown.

Disclaimer

This article is written by the author in a personal capacity and the views expressed, which are his personal views, do not necessarily equate to the views of any organisations with which he is associated.

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