20 Mar 2011

Time to push for Plan B

I've just written a document that I hope to be able to get published in a newspaper like the Guardian. It's called "Here is Plan B". I'm including it here in the hope that I might get some feedback that will help improve the argumentation. Please feel free to comment!

Here is Plan B

According to the latest figures from the Office for National Statistics, the UK's National Debt now stands at £867 billion - £2,244 billion if you include the cost of the bank bailouts. The coalition government claims that the only way to get the country out of this mess is by imposing drastic cuts across the board, and the results are for all to see. Education, research, health, pensions, public sector pay, libraries, social services, and even policing and defence are all being hit with a ferocity that beggars belief. We are constantly being told that there is no alternative, that there is no plan B.

Yes there is. Introducing a flat rate Financial Transaction Tax (FTT) on all financial transactions, even at modest levels well below 1%, would generate such colossal amounts of revenue that the national debt could be wiped out within months and public spending programs restored. Even more remarkably, the revenues would be so high that it would be perfectly feasible to drastically reduce or even abolish the main current forms of taxation, namely income tax, national insurance contributions, VAT and corporation tax, providing a massive and much needed boost to the economy.

This may seem incredible, but it is true. While it is impossible to compile the complete figures (the financial sector has got used to being allowed to get away with levels of secrecy that are quite unjustified), the Bank for International Settlements (BIS) provides hard numbers for a range of transactions. For example, in December 2010, BIS published data  for financial activity in the 21 countries covered by the Committee on Payment and Settlement Systems for 2009. The report shows that in the UK, the value of Credit transfers, Direct Debits, Card payments and Cheques in the UK totalled £70.4 trillion. And payments processed by selected interbank fund transfer systems such as CHAPS (Clearing House Automated Payment System) and BACS (Banker's Automated Clearing Services) were over £64 trillion. But the really big numbers come from the value of contracts and transactions cleared by LCH.Clearnet Ltd (£588.8 trillion) and delivery instructions handled by the CREST system (£178.2 trillion). Together, these numbers add up to over £900 trillion. In case you're wondering, a trillion is a one with twelve zeros after it - meaning that we are talking about £900 000 000 000 000 in a single year - a figure more than 1700 times total tax revenue, currently £530 billion per  year , and roughly 670 times UK GDP, currently £1.35 trillion.

Note that this £900 trillion number is probably way below the current values because it refers to trading in the year following the meltdown in the financial markets in 2008. The BIS totals for the UK in 2007 and 2008 were both well over £1000 trillion, and with the recent boom in the financial markets (demonstrated by the recent announcements of massive profits within the banking sector) it seems inevitable that the next set of numbers will be sky-rocketing again.

Amazingly, even these eye-watering numbers must clearly be massive underestimates. For example, the BIS figures don't even include trading on the London Stock Exchange (which, for your information, totalled over £1.3 trillion last year) – the numbers have been "nav" (not available) since 2005. Nor do they include the value of securities and derivatives trading handled by the Virt-x system (which has recently been taken over by the Swiss Exchange system). But even more significantly, the figures provided by the BIS fail to include the vast amounts of trading that involve what they call "other financial institutions" – these include "financial institutions not classified as reporting dealers, such as non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others". It is difficult to get firm numbers for these transactions, but every three years, the BIS compiles a report based on more complete figures obtained during just one month. The Bank of England provided information for the month of April 2010 that was included in the latest BIS triennial report published last December. According to the Bank of England's data, "net average daily turnover during April 2010 in the UK foreign exchange market was $1,854 billion per day". Assuming roughly 250 trading days per year, this implies that the UK is responsible for something like £285 trillion in foreign exchange trading per year (some 37% of the global total, according to the BIS report). The other figure provided by the Bank of England for activity during April 2010 concerned the global interest rate OTC (over the counter) derivatives market, which was running at $1,235 billion a day. This adds up to a further £190 trillion per year – a whopping 46% of the global total.

And even these mind-boggling figures are quite possibly only scratching the surface. Firstly, even the Bank of England's website noted that only 47 UK institutions participated in the UK survey, down from 93 in 2004 and 62 in 2007, "as only firms that participate in the inter-dealer market and/or have a large active derivative business with customers were asked to complete the 2010 survey. Small institutions were not asked to participate in order to reducing their reporting burden". Who is to say what levels of activity are being hidden here?

Secondly, what about all the speculation on the commodities markets, trading that has almost certainly contributed directly to the massive increases and instability in food prices and raw material costs over recent years? What are the numbers here? Of course, the financial industry is in no rush to provide these figures. And there is little doubt that much of the trading is hidden by the maze of both off-shore and on-shore tax-havens that the financial industry has succeeded in creating in places like the Channel Islands and the Caymans – well out of sight of nosy regulatory authorities like the BIS.

Can there be any doubt that, every year, financial transactions within the UK are thousands of times higher than the total national debt, and thousands of times larger than all the revenue generated by all existing taxes? The implication is clear. Even a very modest 0.1% financial transaction tax would allow the debt to be wiped out in just a year, and could allow all existing taxes to be either abolished or at least drastically reduced. So, why doesn't the UK government impose such a measure?

One reason may be that much of the Conservative party's funding comes from precisely the people who are responsible for the hyperactivity in the financial markets, and no doubt they have a vested interest in keeping the system as it is. After all, it is probably this intense activity on the foreign exchange and derivatives markets that allow the banks to maintain profits and bonuses at such astronomical levels. Is it conceivable that the government might not be acting in the best interests of the British public, but rather defending the interests of the City?

No doubt the City will protest that any tax on transactions will cripple the economy, and that any attempt to impose even the tiniest tax on the thousands of trillions of pounds of transactions in the UK Financial sector would simply result in the traders moving elsewhere. But the UK has been imposing a 0.5% transaction tax on share trading since 1986, a tax that generates several billions in revenue per year. Is there any evidence that this has crippled the London Stock Exchange? If the London Stock Exchange can continue to function with a 0.5% tax, why should other transactions be exempt? Is the financial activity that depends on currency speculation or the global interest rate derivatives market somehow more "useful" than other areas of financial activity? Is it, for example, more useful to the economy than consumer spending, currently being hammered by both income tax and VAT at 20%? There can be no moral justification for having one rule for people living in the real world, and another for the speculators.

The government's position appears to be that while some sort of financial transaction tax could be an option, any such move would have to be implemented at a global level. And yet, when on the 8th of March, there was a vote in the European Parliament on a proposition to introduce Financial Transaction Taxes throughout the European community, two thirds of the British MEPs (including all the Conservative MEPs and nearly all the Liberal MEPs) voted against. Fortunately, support from other countries and in particular France and Germany was high (indeed both Nicolas Sarkozy and Angela Merkel are in favour), and as a result, the proposition was carried by 360 votes to 299. But I would not be surprised if many in the UK are unaware of this, because coverage in the British press was almost non-existent. Even the Guardian hardly even mentioned it.

Conservative MEP Vicky Ford can be seen on a BBC news report saying that a financial transaction tax would be like the 50p that you get charged for using a cash dispenser. In a sense, it's true. But unlike those fees, which go to the banks, the 50p FTT charge would go to pay off the national debt. We are all used to paying 2-3% more to be able to use a credit card. Surely, we would all be more than happy to accept a 1% charge if we knew that it was going to a good cause. More importantly, while each citizen would be paying a modest percentage each time they make a financial transaction, the traders and speculators would be paying the same percentage each time they make a transaction too. And since they are making millions more transactions that ordinary citizens, they would end up paying proportionately far more. That sounds fair to me.

There is a real chance that the UK government will attempt to block European moves to introduce Financial Transaction Taxes. And yet, a radical reform of taxation based on a flat rate FTT of say 1% would not only allow the UK to eliminate national debt "at a stroke". It would allow virtually all the current taxation schemes to be replaced by a single tax, that would be fair, cheap to implement, extremely difficult to avoid, and would ensure that those who contribute most will be those that are best able to afford it. Furthermore, the possibility of effectively abolishing both income tax and taxes on profits must surely be something that should appeal to any one interested in getting the UK economy back on track. Imagine how attractive the UK would be for industrial investment if it were a country where taxes on income and profits were zero.

Who could possibly oppose the idea of paying just 1% to the government when your salary arrives on your bank account, and a further 1% when you spend the money? Virtually everyone would be better off, including those who are currently paying no income tax at all, because VAT could be reduced dramatically or even abolished. The business sector will also be in favour, because they would be able to keep all their profits, and use the money to pay their employees bonuses, pay dividends to share-holders and invest for the future. Indeed, by eliminating taxation on profits, it would be possible to make tax havens effectively irrelevant. Why hide money in the Caymans if you can use it in the UK with only a minor transaction tax to pay? Only one group would be complaining – those in the financial sector who are currently siphoning money out of the system by speculation. Should the coalition government be allowed to protect these people while forcing the public to pick up the tab for the bank bailout? It is time for plan B.


  1. So would this 0.5% FTT tax on UK foreign exchange be calculated as 0.5% of roughly $1,854 billion per day? I guess it is more likely you are suggesting 0.5% of the brokerage pips made upon entry and exit of each FX trade, right?

  2. Well I guess the Guardian might just publish this. It's got to be a good indication of a lame idea that only the politicians are in favour of it.

    The flaw in your proposal is that you assume everything stays the same after you impose this tax... I wonder how confident you - and all the other proponents of such a tax - would be if every other tax were removed - Vat, corporate tax, income tax, national insurance, capital gains, stamp duty, rates and all their exemptions and allowances, and replaced with the FTT you propose?

    UK government expenditure is running around 48% of GDP, of which 10%+ is borrowed, so a 2% tax won't have much impact. As to who's actually paying - well mostly it's you and me. The costs of your FTT will be passed on to the same consumers, who are paying the existing taxes. Surprise! - there are no free lunches.

    If you're right, it's a no-brainer. If you're wrong then the government's funding will disappear in a puff of smoke, along with a huge volume of transactions and presumably the associated activities and employment? Do you feel lucky?

  3. Jrussell88

    I can't follow your argument to say that the costs will always be passed on. Let's take the $4.8 trillion a day in foreign exchange handled by CLS Bank see http://simonthorpesideas.blogspot.com/2012/01/cls-48-trillion-day-in-2011.html . And let's tax that at 0.1% and assume that the Forex traders are not put off (for the sake of argument). That's $4.8 billion a day of revenue for te government  - about $1200 billion in a year.... enough to abolish all the other taxes. Now, you say that the Forex traders will be able to pass on the taxes to the rest of us. But how? I don't buy anything from Forex traders! How can they get me to pay anything?

    Of course, realisticly, the Forex traders will probably calm down and the revenues will drop. But I'm happy to have the FTT rate go up to compensate.

    As to the question of whether I'm feeling lucky I would say that it's really not a question of luck. It's a simple rational choice to prefer one way of getting tax revenue (via an automatic, painless method that has no loopholes and no way of cheating) to another (based on Income Tax, Corporation tax, VAT etc that are all hopelessly flawed).  Have you looked at http://www.thetransactiontax.org/  site? Pretty convincing I think...


  4. Whether the costs are passed on or not depends entirely on the sensitivities of the buyers and sellers to changes in the price. As it happens, the price for a significant volume of foreign exchange trades is zero, which is why the volumes are so high. 

    Secondly it's a misconception to assume that taxes are paid by the entities on which they are levied - for example corporate taxes. It's appealing to vote for corporate taxes because none of us are corporates therefore it doesn't cost us anything to mandate a higher levy on corporates. Except that the corporates have customers, staff and owners who actually bear the burden of the higher taxes. Since the corporates are wholly owned by people, those taxes hit real people - the owners, the staff or their customers depending on the balance of power. 

    The negative effect of a specific tax - selectively aimed at one group - is that it inhibits an activity which benefits the participants. One argument in favour of general taxes such as VAT is that it hits all activities equally, is less avoidable, and therefore distorts behaviour less. Unlike your FTT..The volume traders are banks - who do it because their customers are doing it - and their big customers are investment institutions - ultimately people's savings - pensions, funds and the like. And that is where the taxes will wind up, because these entities have less choice about whether or not they trade, therefore they will pay to trade. And if you are responsible for your pension or investments, the cost will come back to you. There isn't a fairy godmother who's going to pay this tax. Secondly 'assume that the Forex traders are not put off' is heroic. A great proportion of the volume is trading to and fro rather than end-users - double-counting and between market-makers. History is that volumes have risen hugely as spreads have dropped. Spreads were 12/10,000 over twenty years ago but volumes were small - now they are 0 to 1 or 2/10,000. You are proposing a tax of 10/10,000 i.e. a spread of 20/10,000. The FTT is set at maybe twenty times the price in the market. Not many people will pay 20 times the value of their activity in tax. So in a way you're right that you won't be paying it - nobody will because trading volumes will collapse along with your projected revenues. A better understanding of what the volume numbers mean might prevent such suggestions being bandied about in the public domain. And a basic sanity test of 'is it reasonable to suppose that 50% of the UK's GDP can be paid in tax by a sector whose output represents around 9% of GDP' (2008, Bank of England, probably a high-water mark) should dispel any doubts.You suggest raising the tax rate to compensate for falling yield - but the sums you need to generate cannot be raised from such a narrowly-focussed tax; the money isn't there and avoidance is easy - just stop trading financial instruments. The upshot will be that your FTT will raise some revenue by indirect means from a similar group of people who pay taxes anyway.