Whilst exploring Twitter yesterday, I came across an impassioned defence of plans for a European-wide Financial Transactions Tax (also known as the Tobin Tax) by the BBC’s Robert Peston. His argument, reporting the views of economist Avinash Persuad, seemed to centre on the fact that the London Stock Exchange was already very successful despite our very own Stamp Duty reserve tax, which is levied at the rate of 0.5% on transactions in UK shares.
In reality, the success of the London Stock Exchange occurs in spite of the Stamp Duty imposed. A report by Oxera a few years ago estimated that the imposition of the UK’s 0.5% stamp duty was costing the Treasury money. They claimed its abolition would increase UK GDP by 0.25-0.78% each year, every year, resulting in increases of Government tax revenues to the tune of £4 billion. In addition, they estimated that the one-time ‘shot in the arm’ for the stock markets would lift the FTSE markets by 7.2%.
Proponents of FTT argue that the imposition of the FTT would discourage short-term transactions in favour of longer ones, meaning a reduction in market speculation and less volatile markets. As the Adam Smith Institute’s report into a ‘Tobin tax’ rightly explains, these arguments tend to confuse reductions in trading volumes with reductions in price volatility. Evidence from Sweden, where a pure ‘Tobin tax’ was applied, suggests that firms would have no qualms about relisting elsewhere.
Even the European Commission found that the FTT would hit the economy and jobs, particularly as institutions would move away. It said the tax could reduce Europe's GDP by up to 1.76%, or €216bn, in its own report into the effects. It is therefore quite simply a folly to suggest that unilateral imposition of this tax within the European Union would not harm the competitiveness of financial service industries here.
With the City of London likely to account for 80% of the revenues of any EU-wide financial tax, the imposition of an FTT is clearly not in the UK’s national interest. In fact, Jose Manuel Barrosso claims the tax will raise £47 billion in revenue to help cash-strapped economies, meaning that the City of London would contribute somewhere in the region of £38 billion. It is also clear that both Frankfurt and Paris would be unlikely to accept the FTT applying to Eurozone area countries only – this would leave huge arbitrage opportunities and trade moving to London.
Luckily, the UK has a veto on the imposition of any such tax. Or so we thought. The CPS now understands that there are significant efforts within the European Commission to find ways to negate the use of this veto. The most obvious means is an attempt to re-define the FTT as a Value Added Tax, which would not require ratification by all EU members. Instead, all that would be needed is a qualified majority vote.
With President of the EU Commission Manuel Barroso, Angela Merkel and Nicolas Sarkozy all now actively campaigning for the FTT, the weight of opinion in Europe seems to be moving one way. A battle is looming over both vital economic interests and national sovereignty. The UK should be doing all it can to head this off now, before it is too late.