8 May 2014

11 reasons to scrap the current tax system and replace it with a single, universal financial transaction tax - plus a few more

In my TEDx talk last saturday, which will hopefully become viewable in a couple of weeks, I made a strong case for dumping our current tax system, and replacing the whole lot with a single, universal financial transaction tax. The key idea is that Central Banks such as the European Central Bank should impose a tiny tax on all electronic transactions involving their currency - wherever they occur in the world.  The ECB would fix the rate for the Euro, the Bank of England for sterling, the Fed for the US dollar and so forth. Central banks would be responsible for collecting the tax in their geographical region, and would simply transfer the sums to the appropriate partner.

To take one example, we can have another look at the numbers from LCH.Clearnet's SwapClear website. I already showed the numbers for the 30th April and the 2nd of May in my last post. Here I show the figures for the 7th of May - where you can see that the daily totals are even higher than last week with a total of $3.63 trillion in transactions for a single day, of which €1.35 trillion were in Euros. But you can also see the weekly totals, and the totals for the Year to Date (YTD).

You can see the detailed numbers for 17 different currencies. It would be absolutely trivial for the Central Banks of each of those 17 currencies to set an FTT rate on a day by day basis. Thus, if the ECB imposed a rate of 0.1%, they would have been able to recover €1.35 billion from LCH.Clearnet in a single day. With the same rate, the US Treasury would have recovered over $1 billion, the Bank of England £356 million, the Bank of Japan 4.1 billion yen, and so forth. Each of the 17 Central Banks would be able to recover something.

Of course, if a Central Bank was keen to encourage traders to speculate with their currency, they would be free to fix the tax rate at 0.00000%. It's up to them.

And of course, this is just LCH.Clearnet's SwapClear operation. There are plenty more actors like that.  I look forward to finding the true numbers for the Options Clearing Corportion, which handled over 4 billion transactions in 2013, generating more than $1.2 trillion in premiums. If those transactions are similar to the ones handled by NYSE Euronext, we could be talking about numbers in the range $12 to $16 quadrillion per year  (that's $12,000,000,000,000,000). I would be extremely interested to learn what percentage of that is done in Euros.

Towards the end of my TEDx presentation, I gave a list of 11 very obvious advantages of implementing taxation in this way, rather than the current totally outdated and inefficient tax mechanisms - based essentially on taxes on income, profits and sales. Here are my top 11 reasons.

1) It would be totally fair. We would apply exactly the same rate to all electronic transactions - including my salary payments, and my outgoing expenses every month via direct debits, credit card payments, cheques etc. No-one is being targetting in particular. Everyone would be in effect paying a tiny amount to be allowed to use the currency. No exceptions.

2) It would be totally painless. For anyone involved in making a transaction, there is absolutely nothing to do. The only way you would even know that you have been paying a tax would be by looking closely at your bank statement. It would say at the bottom of the incoming payments column a total of (say) €2000 salary, and a few euros of tax. Similarly, the debit column might total €2000 (if you spent all your earnings), and again a few euros of tax.

3) It would be extremely simple. There would be no tax returns to fill. No VAT declarations for Companies. It would free up an army of accountants who currently are employed to perform these totally non-productive and pointless activities.

4) It would be extremely cheap to run.  For governments, the cost of running the system would be almost zero. It would literally be just a few lines of code in the software that handles the transactions. The code would simply have to multiply the value of each transaction by the current tax rate imposed by the relevant Central Bank, subtract that from the amount transfered, and credit the Central Bank's account by the same amount.

5) Changes in revenue would be instantaneous. Under the current outdated system, when a government changes the rate of income tax (for example), the effects are often only felt much later - possibly even the next year. And in addition, it is difficult or even impossible to predict the change in revenue that will occur. When François Hollande attempts to increase the top-rate income tax level to 75%, the amount that could be expected is impossible to calculate.  In contrast, with the continuously variable FTT mechanism, a change in tax rate will affect the amount of revenue straight away. If the government had a sudden need for extra revenu (because of a natural catastrophy for example) it could increase the rate by enough to cover the extra costs, without ever needing to borrow from the financial markets.

6) It would mean an end to all tax loopholes. Since everyone would be paying exactly the same rate for all electronic transactions, there would be no possibility of allowing tax loopholes. Currently, the income tax system and the system for taxing company profits both have so many loopholes that the whole system is completely unwieldy - and only people and companies rich enough to employ specialist tax advisors can be sure that they are using those tax loopholes optimally. Most people will simply end up paying more than necessary.

7) It would mean an end to lobbying for tax breaks. Since there would no exceptions to the tax, there would be no point in lobbying politicians for tax break for particular sectors. Under the proposed system, any lobby wanting special treatment would be forced to plead for direct taxpayer payments. It is much much harder to convince people to spend government money on a particular area than it is to argue for a tax reduction - because everyone hates taxes.

8) It would mean an end to tax havens.  Why would anyone decide to keep their money in a tax haven like the Cayman Islands if they can repatriate their money to the place where they live and spend it virtually tax free? They would just have to pay the 0.1% fee for making the transfer. After that they would be able to use the money as they wish. In this respect it is interesting to note that many multinationals like Apple have billions of dollars of profits stashed away in tax havens to avoid having to pay tax. That money could be brought back into the real economy, instead of being used for speculation.

9) It would mean an end to tax evasion. The rich and powerful are well placed to avoid paying taxes under the current system. But if the tax was simply applied to all electronic transactions, it would be virtually impossible to avoid. And anyone caught trying to transfer money (e.g. euros) using a system that attempted to avoid making the statutory payments to the Central Bank would risk going straight to jail.

10) It would encourage local production.  If I have some trees in my garden, I can chop them down and use the wood to make furniture that I could sell at a local market. In such a case there would be a single transaction, taxed at (say) 0.1%. Compare that with the costs of manufacturing the furniture on the other side of the world. In that case, there would be a whole string of payments to be made - for transport, fuel, distribution costs etc. Unlike VAT, for which there is the same 20% tax to be paid irrespective of the number of steps in the supply chain, the FTT mechanism will automatically favour more efficient, local production.

11) Everyone would be better off. Compared with the current system where we all have to pay sales taxes such as VAT at 20% and income tax at 20% or more, the proposed system would result in a drastic reduction in taxation for everyone. Even if we ended having to impose a tax of 3-4% rather than 0.1%, we would all still be much better off.  That would be true for the poorest people who currently pay no income tax, but are still hit by VAT, but also for the heads of industry and even the High-Frequency Traders.

In my TEDx talk, I said that this list of 11 advantages was incomplete, and that there were several more. I invited the audience to try and find a few more. So, here are some other ones that I didn't manage to include.

12) The tax would take the money from the most wealthy parts of the economy. Under the current system, the tax burden is heavily concentrated on individuals who are not necessarilly very wealthy. While it might be thought that this could be fixed by increasing tax rates applied to wealthy individuals, a far more efficient approach is to tax the money when it moves - whether it is an individual or a computer involved in making financial tranactions. Without specifically targetting the rich, they will nevertheless contribute more. Even if a billionaire doesn't spend any money personally (Warren Buffet is well known for being very frugal), his money could be being moved around a lot if it is invested in funds that use high frequency trading.

13) The tax would encourage investment rather than speculation. If a wealthy individual decides to invest money in a new enterprise, it will just be taxed at the standard rate of 0.1% (or whatever) when the investment is made. However, if the same person were to try and make money by speculating on the foreign exchange markets (for example), they would end up paying considerably more tax. The net result would be that it would encourage people to invest and take a share in new businesses, rather than using money for largely pointless speculation.

 14) It would allow Central Banks to directly control the amount of money in circulation. Currently, Central Banks like the ECB and the Bank of England have absolutely no way of directly controlling the amount of money in circulation. They can only encourage commercial banks to increase or decrease lending (read - money creation) by varying the interest rate at which they lend to the banks. But if there is too much liquidity in the the markets, the banks don't even need Central Bank money at all. The introduction of a Central Bank controlled FTT mechanism would allow the Central Bank to remove excess money from the system. They money that is recovered can be redistributed into the economy via payments to governments or direct payments to citizens, or simply removed if there is too much of it.

I think that there are almost certainly other good arguments. But that's probably enough for today!

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