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.

Monday, November 14, 2011

Those exciting 70s...

In reaction to Smokin' Joe Frazier's death, Gideon Rachman muses that the 70s (with, inter alia, the boxing greats, and the apotheosis of Welsh rugby) may have been the greatest sporting decade of all.

Well, I'm probably a bit biased by my great preference for cricket above all else, but seriously? The 1970s? In the aftermath of England's superb Ashes series last year, the Times (not linked because I read it on my iPhone, and thus don't get pagelinks) interviewed Peter Lever, grumpy but useful quick bowler in Ray Illingworth's successful Ashes tour of 1970/71 and asked him how he would assemble a composite team from the two victorious sides. Lever noted, incidentally, that he wouldn't be considering either Pietersen or Trott for selection because "this is supposed to be an England team" (Basil d'Oliveria famously being from Basingstoke).

The point I wanted to make, however, was that Lever didn't think that his England's opening combination should be broken up, and suggested batting Alistair Cook at 3 to accommodate them. Which would have left a top 3 of Geoff Boycott, John Edrich and Alistair Cook. If those three were batting in your garden, you'd get up to close the curtains.

Um, Yasmin?

A slightly weird piece this from Yasmin Alibhai Brown. Effectively, it complains about the role charisma plays in democracy, and compares Berlusconi to Boris (and, bizarrely, to Ayatollah Khomenie, who might be a touch uncomfortable in that company).

But what to make of this?

Increasingly, winning elections is for those who grasp populism and are able to deploy it to their advantage.

Breaking news from 5th century Athens!

Some of us are grim and humourless enough to believe the adulation of colourful figures corrupts democracy.

Some of us have read enough history to know that democracy is all about colourful figures, albeit tempered by sufficient institutional strength to deliver checks and balances: Disraeli, Palmerston, Lloyd George, Churchill, Thatcher.

We are a fast-dying species. The winners will take it all.

This column was delivered to you from a sandwich board on Oxford Street.

Tuesday, November 01, 2011

The next election

Gideon Rachman has an interesting piece over at the FT about Obama's potential electoral woes:

Mr Obama could plausibly argue that a renewed crisis with its roots in Europe is hardly his fault. But such an argument would make him sound like he was weak, or searching for excuses. His Republican opponent could simply pose the old question – are you better off now, then you were four years ago? – and hoover up the votes of the majority of Americans who would reply, emphatically, No.

This raises two points that should be of interest and concern both to David Cameron and Ed Miliband. Cameron should bear in mind that, whatever advantage is bestowed on the Tories by Miliband's desperately weak leadership ratings, ultimately elections are more of a referendum on the incumbent than a choice between the contenders. Labour's weakness is a bonus for the Tories, but it isn't a clincher.

Miliband also has occasion to rue Cameron's luck. Obama won office just as the financial crisis crested - and will be standing for re-election while the aftermath still rumbles on. In the UK, the recession played itself out (in its first iteration at any rate) before the election, meaning that the hits to prosperity and income were largely suffered under the Labour Government. The Coalition, on the other hand, has presided over an uncertain recovery, rather than a full blown recession and can hope, by 2015, to be in full recovery. The question 'are you better off than in 2010' should be a much easier one for the electorate to answer positively in 2015 than 'are you better off than in 2008' will be in 2010.

Let the people speak!

In the end, the best summary of the Greek crisis was given by Evangelos Venizelos, the Greek finance minister:
I can no longer look at polls where the majority is against the agreement, the majority is against the program, but a majority is also in favor of staying in the euro.
Greece (and the Eurozone more generally) is poised between two deeply unpleasant choices: accepting the deal, which won't solve the debt crisis and will lead to more punishing and deeply unpopular austerity measures; or refusing the deal and starting on the path of default, decouple and devalue. Neither are pretty. Neither are remotely desirable. But one of them must be done.
What the referendum is, essentially, is a requirement that the Greek people act like adults and take a bit of responsibility for the future of their own country. I don't imagine that this will be terribly popular.