30 Jan 2011

Here is plan B

David Cameron and George Osborne have just come back from Davos where they have been trying desperately to say that their plan to solve the UKs financial problems by cutting cutting and cutting has a chance of working. But many people clearly disagree. Where is plan B?

Here it is. The UK has a 0.5% stamp duty on share transactions. Normally, with £1322 billion worth of shares traded between december 2009 and november 2010 (see my figures based on the data from the London Stock Exchange), this should generate about £6.5 billion in revenue (the amount in 2008 was apparently £4.17 billion).

So, why does this sort of stamp duty (that is to say, a financial transaction tax) only apply to trading in shares? Is there some logic in saying that shares can be taxed, but not foreign currency exchanges or interest rate dealing? Suppose that the government just extended the 0.5% rate to the other areas. With $1854 billion per day in foreign exchange turnover, and $1235 billion a day in interest rate OTC derivatives alone (see the Bank of England figures here), this should generate up to $3.8 trillion over a year.

Yes, the bankers will  complain. But how can banks complain about a 0.5% transaction fee for changing money, when the same banks charge me 39% for exchanging dollars into euros?

Yes, the bankers may well move the computers that they use for trading with faster and faster algorithms somewhere else. Why should people in the UK worry about that?

Indeed, the UK would be doing everyone a favour if they put a bit of grit in the well-oiled machines that the banks are currently using to siphon money out of the system.

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