9 May 2014

6 criticisms of my proposal to scrap the current tax system - none of which is valid

In the last part of my TEDx talk last saturday on "Towards a (almost) tax free world", I looked at the 6 main criticisms that I have come across since proposing the idea back in 2010. Let me say from the outset that none is valid.

Just to recap on the idea - the proposal is to scrap all the existing tax mechanisms (income tax, sales taxes (VAT in Europe), business taxes (corporation tax), and social security  and health contributions) and replace them all with a single universal transaction tax that would be applied to absolutely all electronic transactions made in a particular currency. Each Central Bank would fix the tax rate for their currency, and the tax would apply wherever in the world the transactions were occuring.

So, what are the criticisms that I have heard?

1) If it's such a good idea, it would already have been done. 

No. The fact is that implementing such a universal tax has only become realistic relatively recently. Traditionally, virtually all transactions were done using bits of paper - not electronically. It would have been totally unwieldy to tax each paper transaction when it occured.  s Interestingly, it is clear that all the current tax mechanisms, requiring quarterly or yearly reporting date from the time when everything was done using paper.  Arranging things so that you only had to declare your income, profits and sales once per year was clearly just a way to keep the admin down to reasonable levels. But now, there is no need to keep these 19th century taxation tools in place. We are in the 21st century now. And virtually all transactions are electronic.

2) The traders would move elsewhere.

This is the standard response when anybody mentions Financial Transaction Taxes. How many times have I heard the old story about Sweden attempting to tax transactions, only to find that 90% of the trades moved to London.  But with my scheme, the transactions are taxed on the basis of the currency being used - not where they are located. The ECB would be able to tax all of the transacations denominated in Euros - including the €1.35 trillion in euro-denominated trades done by LCH.Clearnet's SwapClear system the day before yesterday. And if the traders all moved to some island in the Carribean, that would change nothing. If they trade in euros, they pay... or they go to prison.

Of course, if some Central Bank (such as the Bank of England) decided not to implement the system, traders could still trade in that currencywhereever they like. But you would have to be mad not to want to join in the international mechanism.

3) All financial transactions would cease and there would be nothing left to tax.

It's clear that when the UK is doing over £2 quadrillion a year in transactions (that's a 2 with 15 zeros) and even the much larger Eurozone is managing 2 quadrillion in euros, a lot of this trading is likely to be pure speculation. The High Frequency Trading systems can extract a profit even when the margins are truly minuscule - even at 0.001%. Just move a billion dollars back and forth hundreds of times a second, and you can generate enough money to pay for quite a few Maseratis for the traders. And it's clear that when the algorithms wiitten by the Whizz Kids have to include an FTT of 0.1% on each transcation, a lot of that activity will slow down and much will disappear. The first point is that, of course, no-one would really mind because all that frantic trading doesn't actually do anything useful. It's just feeding that enormous tapeworm that is clogging up the economy's digestive system.

But the other point is that, even if 98% of the transactions did completely dry up, people in the real economy would still be making transactions. Even if the transactions did drop to just 2% of their current value, and we were forced to increase the FTT rate to 5%, everyone would still be massively better off than under the current system, where we all pay 20% VAT on just about everything, and where our incomes and profits are also taxed at anything between 20 and 50%.

When I go to the UK or the USA and pay using my Credit Card, I get charged between 2% and 2.99% as an international fee. This is a pure transaction tax that is a charge for multiplying the cost in pounds or dollars by the current exchange rate. Does that stop me buying things in the UK and the US? Of course not. If I want to go to a restaurant, or stay in a hotel when I'm on a trip, I will pay the banks' financial transaction tax - because I don't have a choice. The only difference with my proposed tax is that the money would go to the state, rather than to the commercial banking system. 

No, the fact that you might have to increase the tax level cannot be used as an argument for keeping the current, totally dysfunctional tax system.

4) People will switch to other types of payments.

I'm told that as soon as there is a tax on making electronic transactions in Euros, people will switch to using alternatives. They might choose to use cash. They might use bitcoins. They might use some alternative local currency. They might use a local exchange system. For me, none of these is a problem.

Let's take the possibility that people might massively switch to using cash. If people really started using cash too much, it would be enough to impose an extra fee for drawing out cash from a cash dispenser. But in any case, we could easily move towards a truly cash free system if we wanted. Only last week, it became possible to make payments in the UK using your mobile phone using the Paym (for Pay 'em) system. The system already works for 9 different UK banks (Bank of Scotland, Barclays, Lloyds, Santander, HSBC, TSB, Danske Bank and the Cumberland Building Society). Other banks i and building societies have committed to join Paym later in 2014, these include: Clydesdale Bank, first direct, Isle of Man Bank, NatWest, RBS International trading as NatWest, The Royal Bank of Scotland, Ulster Bank and Yorkshire Bank. Nationwide Building Society has confirmed its intention to join in early 2015, while Metro Bank is finalising plans to join.

If people start using other alternative currencies then again, this is not a problem. Indeed, if those alternative money systems were based on debt-free money creation, then that too is something that should be actively encouraged.

And finally, if people simply opt for direct exchange of services (I'll do 3 hours of babysitting if you do 3 hours of gardening for me), then that too is something that is to be encouraged. 

And in any case, none of these alternatives will be a problem as long as the Euro based transactions are still continuing - which they will.

5) A flat rate transaction tax would not be progressive.

Some people I know object that the automatic flat rate FFT does not vary depending upon the person who is being taxed. They actually like the idea of being able to impose a very high tax rate (50% or even 75%) on people earning very high incomes. They see the tax system as a good way to redistribute money from the rich to the poor.

While understandable, I think the arguments are very weak. The fact is that very rich people will always be able to find schemes that allow them to avoid paying their fair share. The richest woman in France, Mme Bettancourt, pays remarkably little tax because her income from the Oreal empire gets paid into various trusts that are held in taxhavens. She only brings into France what she needs to make payments.

No, if you want to redistribute from the wealthy to the poor, it is far better to use a simple, efficient and fair tax collection mechanism (such as the flat rate FTT) and then redistribute the money widely. For example, I would be in favour of introducing a universal and unconditional basic income for all citizens. It would be difficult (impossible?) to come up with a more efficient way to redistribute wealth across society.

The bottom line is that it is simply not a good idea to use income tax as a way to redistribute wealth.

6) It would be blocked by lobbies.

This is perhaps the biggest problem of all. Indeed it was the only problem raised by the four people from the Toulouse School of Economics when I presented my proposal to them back in march 2012. It is clear that there are some extremely powerful interests who will be motivated to do everything in their power to keep the current system in place.

One of the most important of these lobbies are the multinational corporations. Under the current system, multinationals have an enormous advantage relative to smaller nationally based companies. If you have a bookshop, it is very difficult to compete with the likes of Amazon, because Amazon can avoid paying taxes by using a wide range of "tax optimisation" strategies. It's no wonder that they can undercut a local bookseller (or CD seller etc).  Likewise, if you open a coffee shop you will have to pay your taxes. But the Starbucks outlet next door can avoid those taxes.

The other massive lobbying groups are the ones based in the City of London and on Wall Street. These people will be ferociously opposed to any introduction of an FTT, not so much because the idea of paying 0.01% or 0.1% tax on transactions is so terrible, but rather because as soon as the tax is introduced they would be required to declare all the transactions they do. This would remove one of the largest advantages offered by the City of London to people and businesses with large amounts of money - the ability to use the network of tax havens in places like the Channel Islands, the Cayman Islands, the British Virgin Islands and so on to conceal the financial transactions.

In my humble opinion, that is the real reason why George Osborne has been desperately trying to block the introduction of an FTT in 11 Eurozone countries. I was, of course, delighted that the UK government's attempts to attack the legal justification for such a tax was rejected by the European courts last week. As soon as it becomes clear that it is actually quite easy to raise money this way, it will be difficult to resist calls to introduce the tax everywhere. And that would mean that the City and Wall Street would have to be open about who is doing the trading.

But the fact is that, at least for the time being, we live in a democracy. Citizens vote - not corporations (except, interestingly, in the City of London!). And so, if 99% of voters realize that the current tax system can be completely scrapped and replaced by something far more efficient, simple, and fair, then there should be nothing to stop it happening.

All that we now need is for a few political parties to realize that this sort of tax reform is a vote winner, and to put this sort of proposal into their programs. It's unfortunate that it is certainly too late to get this to be an issue for the European Parliament elections in two weeks time. But, I'm hopeful for the future - especially if, as I very much hope, my TEDx presentation goes viral when it finally becomes available.

Watch this space!

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