3 Aug 2011

Solving the debt crisis in 5 years with an automatically varying FTT

It's now nearly a year since I came up with the idea of replacing virtually all the current tax mechanisms (income tax, taxes on company profits, sales taxes, state health and pension contributions...) with a single fixed rate Financial Transaction Tax.

One recurring problem concerns the question of determining the rate to apply. While many people are now supporting  low rates such as 0.05% as a way to limit speculation and finance specific programs, I have been proposing potentially higher rates - enough to allow all the other tax mechanisms to be removed.

Actually, the rates needed may not be very high. For example, given that financial transactions in the UK economy are at least £900 trillion a year, and total UK government revenue is  currently £540 billion, an FTT of just 0.06% would be enough to abolish all the existing forms of revenue. In the USA, financial transactions are at least $3800 trillion a year, and given total government revenue of $4.6 trillion, this means that the break-even point would occur with a rate of just 0.12%. Even in France, where financial transactions are relatively modest compared with the financial giants that are the UK and USA, the latest numbers from the BIS suggest transactions running at around €250 trillion a year. With government revenue of €819 billion, an FTT of 0.33% would fit the bill.

This all looks very promising. But of course, some would argue that as soon as an FTT is implemented, the speculators would go elsewhere and the source of revenue would dry up. How can this be handled?

Here's a possible solution. Impose an FTT rate that is continuously updated to maintain government revenues at the desired value. If speculation starts to wain (something that would in my humble opinion be a very good thing), the FTT rate would automatically go up to compensate. Would the typical man in the street in the UK be terribly upset if the transaction tax went from 0.06% up to the 0.33% value in France? Of course not. Relative to the current situation where he is paying 20% VAT after already paying income tax, council taxes and so forth, he will always be better off. Indeed the only ones who might complain would be the hedge funds and traders.

I would propose going even further. As we all know, public debt in the USA has just reached $14.3 trillion dollars. Even if the Tea Party lunatics had their way and all government spending was banned and all taxes eliminated, there would still be an outstanding debt of $14.3 trillion.  With current market interest rates (which may well increase if the USA's triple AAA status is downgraded), the US taxpayer would still be forced to pay out something like $1 trillion a year just in interest payments.  The solution? Set the FTT value such that the entire $14.3 trillion is paid off over say a five year period.  This would require about $5 trillion a year over the five year period which would require a further 0.13% FTT in addition to the 0.12% to replace the government's current revenues. A total of 0.25%, and the USA could be out of debt in five years without having to cut back on welfare, healthcare and all the rest. Hey, and Obama wouldn't even have to increase income tax on the super rich - he would be able to abolish income tax!

Let's try the idea out in the UK where the national debt is currently running at £2.2 trillion (if bank bailouts are included, which of course they should). Paying that off over 5 years would need around £500 billion a year. That's less that 0.05% of the £900 trillion in transactions. So, again you could pay off the entire national debt and cover all the government's expenses and abolish all the main forms of taxation with an FTT of little over 0.1%. Sounds sensible to me.

Finally, for France, where the national debt currently stands at around €1.6 trillion, this could be paid off over five years with around €300 billion a year, which could be achieved with just an extra 0.1% over the 0.33% needed to remplace the current sources of income.That's well under 0.5%, which is the rate of Stamp Duty in the UK, the amount that you have to pay the government every time you buy shares. That hasn't prevented the London Stock Exchange being a major centre for share trading - nor would it prevent people doing business in France.

But, finally, the beauty of the scheme lies in the fact that by having an automatically varying rate, the levels of revenue would remain static even as speculation dies away (or moves elsewhere). Since changing the FTT rate is effectively as simple as changing a single number, this would be trivial to implement.

It all seems so simple, clean and fair. Everyone is treated exactly the same, and all parts of the economy will contribute to getting things back on course. If you see any fallacies in my argumentation, please let me know. For the moment, I don't see any.

I invite any candidate in next year's Presidential election in France to put this in their program. I would predict that anyone who did would have a good chance of winning.

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