Thursday, November 17, 2011

Contra the FTT

We none of us like being told what to do by Germans. Volker Kauder's comments that it was outrageous that the UK should oppose an EU-wide tax on financial transactions because "it was defending its own interests" do, however, merit a little more analysis than the easy references to jackboots and what happened last time the UK defended its national interests against Germany - not least because as Dan Hannan says, the WW2 tropes are hackneyed, unfair and unhelpful.

First of all, lets look at what the FTT actually is. For one thing, and despite it being called it everywhere from the FT to the Guardian, it's not a Tobin Tax.

Very simply, James Tobin came up with an idea to prevent currency speculation from forcing countries off fixed exchange rates. A tax put on every currency transaction would act to prevent most such transactions and reduce, so he believed, volatility in exchange rates. 'Throwing sand in the wheels of our excessively efficient international money markets'. In order for this tax to work, obviously, it would have to be universally applied - otherwise the transactions would simply move to no-tax jurisdictions.

The proposed EU Financial Transaction Tax, on the other hand, is quite explicitly promoted as being a revenue raiser although, as George Osborne said, the putative revenues appear to have been spent four times over already. It would also specifically exclude currency transactions (the sole focus of the original Tobin tax) and instead attach to most other financial transactions, albeit slightly loosely defined.

So, that little bit of definition out of the way, lets see why the FTT is such a bad idea. Firstly lets look at it on its own avowed merits - as a revenue raiser. There are two problems here, one static and one dynamic. Static first: the UK already has a limited financial transactions tax - SDRT (or equity stamp duty, as distinguised from SDLT, which applies to sales of land). This raises some £4bn annually for the Exchequer and would be replaced by the FTT. So, how much money would the FTT raise? Central European Commission estimates stand at about EUR10bn - and these are supposed to be remitted to the EU. So the UK would lose a guaranteed £4bn revenue in exchange for a possible EUR1bn return from the EU. That's not a terrific deal.

Next, dynamically. The central EC forecast for the impact of the FTT on EU GDP (whenever we talk economics, we get cluttered with acronyms. Apologies) is a contraction of 1.76%. Obviously, a contraction of this size is going to impact in reduced general tax revenues and in increased social security payments - even at the higher end of revenue forecasts, this would be enough to counterbalance any increase in tax revenues from the FTT. In the words of Clifford Chance, "the FTT is therefore perhaps the first tax in history which is being proposed in the knowledge it will reduce tax revenues."

The FTT is a bad thing purely on its own terms. But that's not all. It's a bad thing for other reasons as well. A tax designed to hit financial transactions will obviously be felt most of all where the highest volume of transactions are located - and there are no prizes for guessing where that is. Now, for the French and the Germans, it is less a bug than a feature that the FTT would spell ruin and desolation for much of the UK financial sector. But when you appreciate that an estimated 80% of the revenue from the FTT is going to be taken from the UK, you start to realise quite why Boris is so animated about this. While banks are relatively static animals (except at the margins, obviously), hedge funds and smaller financial firms are anything but. An FTT restricted to the EU would undoubtedly see almost all of these leave London for other jurisdictions -Switzerland in the first instance, but New York, Hong Kong and Singapore too.

So it wouldn't raise revenue, and would be a severe setback for the UK's principal comparative advantage. You can see why the Government are opposed. And fortunately we don't have to worry too much about it. An EU-wide FTT would be, quite clearly, a new form of indirect taxation. And new forms of indirect taxation require unanimity across all EU Member States to introduce. Even if the UK were alone in opposition (which we're not) there would be no chance of its introduction. No sneaky backdoor routes look possible either.

It is, though, a pretty good shortcut - people who call for the introduction of the FTT are either opportunist politicians who know it can't happen, or haven't really thought about what it's for. Or both, obviously.

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