5 Aug 2011

We need to stop bailing out countries and fix the tax system instead

Stock markets are collapsing. £50 billion was wiped off the London Stock Market in one day, and we are told that governments have to put together another round of funding to provide more support for the Greek, Portuguese and Irish economies, shortly to be followed no doubt by packages for the Italian and Spanish economies. And how long before France and the UK become the next target of the speculators...

Reading the press you would think that there is absolutely no option apart from borrowing (or more likely printing) yet more money to get out of this mess and paying for everything with massive across the board cuts.  Citizens are being told that they will have to pick up the tab in the form of higher taxes, massive cuts in services, job losses, pensions and so on.

No. This is wrong. The money is there. It's being used to do £4 trillion a day in currency speculation. It's being used to speculate on commodity markets. It's being used for all manner of totally pointless activities that have only one function - siphon money out of the system and put it in the pockets of the financial elite.

As I argued yesterday, we need to introduce a Financial Transaction Tax now. It's been voted for by the European Parliament. It has the approval of Merkel and Sarkozy. What are we waiting for?

The table shows data for the 17 countries in the Eurozone that I got from the huge data set provided by the IMF in april 2011. It provides information about Gross Government Debt, Revenue and Expenditure together with GDP for 2010 - all listed in billions of euros. Total debt for the Eurozone countries is now €7.7  trillion. That certainly sounds like a lot of debt. But, if you compare the figures with the values for financial transactions that I extracted from the BIS tables (for 2009 unfortunately), you can see that the numbers are totally dwarfed. In Belgium transactions exceeded GDP by 713:1. In Germany the ratio is 224:1. And even in countries like France, Italy and the Netherlands, the ratio of transactions to GDP exceeds 100:1.

Unfortunately, the BIS doesn't compile data for the other countries, and so we will have to guess. But, it seems highly likely that the average ration of 261:1 might provide a reasonable first guess for the value across the whole region. (Isn't it scandelous that no-one seems to have any real numbers for financial transactions?)

This means that we can estimate that total financial transactions within the Eurozone could be of the order of €2860 trillion. This number actually appears quite plausible given that the BIS total for the USA is $3800 trillion. The value for the Eurozone is roughly 500 times total government revenue from all the existing tax mechanisms (income tax, VAT, taxes on profits, social security and health contributions etc etc), meaning that they could all be abolished with an FTT of around 0.2%.

But in the present context, what is even more interesting  is that the total Eurozone government debt of €7.7 trillion could be paid off very rapidly by a modest FTT. Governments simply have to decide whether they want to impose an FTT of about 0.28% which would pay it all off in 1 year, or maybe spread the repayment back over 5 years with a rate of only about 0.06%.

Who could possibly object to solving all the Eurozone crisis, and getting rid of all current taxes by imposing a very modest 0.3% Financial Transaction Tax?

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