4 Oct 2011

How to prevent a UK veto of a European FTT

In the week since the EU announced its plans to introduce a European Financial Transaction Tax of 0.1% (and 0.01% on derivative trading), it's become clear that the UK government is likely to veto the plan. This is partly because they are essentially doing what the City tells them to do. But it is also because there is clear (and partly justified) opposition to the idea that the money raised should go only to the EU. Clearly, the percentage of European financial transactions that go through the City of London is very high. I've heard some politicians claiming 80%, although I don't know where they get their numbers from since there are massive gaps in the reporting. The Bank for International Settlements only provides data for 7 of the 27 EU countries and, as I noted last weekend, the data for the London Stock Exchange has been "Not Available" since 2006 at least. The other source of information used by the EU, namely the Federation of European Securities Exchanges, has no data for the London Stock Exchange at all for 2010 and 2011.

Anyway, forget trying to get the true figure for the UK. The problem now is to convince the British that it is in their direct interest to go along with the European Union plans.

I have a suggestion. We should keep the 0.1% value for the EU-based FTT, but in each country, only half the revenue raised should be sent to Europe, the other half should stay in the country. That way, the system is a level playing field - no country can have a rate lower than the standard 0.1% rate, but each country would be able to benefit directly from the tax. This would be particularly important in the UK. According to my estimates based on the BIS numbers, financial transactions in the UK are somewhere between 1 and 2 thousand trillion pounds.  Imposing a 0.1% tax on this would have effects that would be certainly difficult to predict with accuracy, but would clearly lay somewhere along a continuum. At one end of that continuum is the unlikely possibility that financial transactions would continue at the (ridiculously) high levels seen at the moment. In that case, the tax could generate between 1 and 2 trillion pounds. At the other extreme, the tax would lead to a complete collapse of speculative trading, either because the traders stop trading, or because they move to some island somewhere that has no tax at all (this is what the lobbyists in the City claim will happen). Note that any of these scenarios can be considered desirable for the vast majority of citizens. Obviously, if speculative trading does collapse, there will still be the real economy to generate FTT based revenues, so the amount raised will still be very considerable.

The EU economists came up with a number of €57 billion for the amount of revenue that would be generated, but it's frankly very difficult to see how the number could be so low. For the UK alone, it is likely to be hundreds of billions. With my suggestion, half of the money raised would go directly to the EU (and could be used for any of a large number of worthy projects, including stimulating the European economy). But the UK would be able to keep the other half. On its own, this could be well be sufficient to abolish the other main sources of taxation, which only generate about £530 billion anyway.

Note that while the 0.1% FTT should be a minimum value, countries should be free to increase the tax locally to generate additional national revenue. And I propose that any increase above the minimum European level should go entirely to the national government. Thus, if the UK were to set the value at 0.2%, they would get to keep 75% of the revenue. And if they were to apply the same 0.5% rate that they have been using since 1986 to tax share trading via Stamp Duty (and which can hardly be said to have crippled share trading on the London Stock Exchange), they would be able to keep 90% of the revenue - and only 10% would go to Europe.

Imagine that - 90% of 0.5% of 1000 trillion is one hell of a lot of money. It's £4.5 trillion - twice the UK national debt (currently standing at £2.3 trillion if bank bailouts are included). Surely, this has to make sense, even to the most fervent Eurosceptics. The UK government's position is that they would only accept the introduction of an FTT if it was truly global. Given that there is no way to force every single island on the planet to accept the idea, this is effectively saying no, never. But even if the tax was only applied in the EU, the UK would benefit enormously. And if it including all the G20 nations, then 97% of all trade would be covered.

Let's do it now!

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