But why not use a tax on financial transactions to fund much needed public spending? The latest figures from the Bank for International Settlements provides considerable detail about the precise numbers concerning the UK.
In the following table, I provide the numbers for every year since 2012.
The bottom line is that in 2018, the UK handled very nearly $2 quadrillion in transactions, up nearly 16% on 2017. If you want the full details, check out the Google Sheet that I used to do the calculations
I should note that, unfortunately, since revamping its website, the BIS no longer offers the choice of downloading the numbers in either USD or the local currency - pounds sterling in this case. But by using the exchange rate at the end of 2018, we can nevertheless say that in 2018, financial transactions in the UK exceeded £1.55 quadrillion.
Imagine the impact of applying a 0.05% transaction tax on that. Since total public revenue for the UK in 2018 was £762 billion, a 0.05% FTT could potentially provide enough revenue to scrap every other source of revenue! Imagine that - no income tax, no national insurance, no VAT, and no corporation tax. You could end up with a system where the only other taxes that you would need to keep would be the ones that discourage socially inappropriate behavior, including taxes on alcohol, tobacco, petrol and so forth.
Some 60% of those transactions are accounted for by a single operator - LCH.Clearnet Ltd. And there are also some other large players like EuroClear UK & Ireland, ICE (Intercontinental Exchange)
that handle hundreds of trillions worth of transactions each. You might therefore be tempted to target the financial transaction tax specifically on the big players.
But my proposition would not be to single out the big players explicitly. Instead, I would propose that the government should impose the same minimal transaction tax on all transactions - including transactions made by individual citizens. Thus the same tax would also apply to the $1.77 trillion in direct debits, the $590 billion in cheques, the $798 billion in debit card payments, the $230 billion of credit card payments and so forth.
Of couse, it is clear that few people would object to an additional 0.05% tax that would apply to direct debits, cheque payments and credit card payments. After all, we are all perfectly used to the banking system charging 2-4% for using credit cards (even though it is less visible because it is paid by the merchant), and getting clobbered with up to 2.75% extra when we use a card aborad is seen as normal. Many of us don't even flinch when we get charged 2-3% for withdrawing cash from an ATM.
I am well aware that the traders will argue that the system would not work because even an 0.05% tax would mean that the vast bulk of the transactions would move elsewhere. A shift to continental Europe could well occur, especially in the context of Brexit. However, there is an interesting option that could avoid this problem at least partially. My proposal would be that the UK could impose the financial transaction tax on all transactions denominated in sterling - wherever they occur in the world. This is actually something that already occurs in the case of Stamp Duty that the UK Government applies to all trading in shares of UK-registered companies - whereever they occur. This tax, which together with land tax receipts, raised £12.9 billion in fiscal year 2017/18 is actually a very efficient form of taxation that allows the UK to earn billions in income from overseas.
The Labour party's election manifesto includes proposals to extend stamp duty as a way of providing a form of financial transaction tax. Effectively, their 2017 election manifesto had already proposed to extend stamp duty/stamp duty reserve tax (SDRT) to "corporate bonds and equity and credit derivatives transactions" and to amend the "intermediary exemption on share transactions". In September 2019, a new report from a group called "Intelligence Capital" provided further details of the proposals. They make very specific tax rates for the three main markets, with differing rates for financial and non-financial firms, as follows:
- foreign exchange spot and derivatives – 0.02%, 0.06%
- interest rate derivatives – 0.01%, 0.03%
- commodity spot and derivatives – 0.04%, 0.12%
Why not simply apply the tax to everything handled by UK based operators? Yes, there will be pressure from those players who will claim that everything will move elsewhere. But if the UK was to make that move, it would make it much easier to get a global FTT imposed.
The fact is that if we are going to fix problems like climate change, then we are going to have to think globally anyway. According to a recent report from Morgan Stanley's analysts, stopping global warming will require $50 trillion of investment between now at 2050. That's around $1.7 trillion a year. Now that may seem like a huge amount. But firstly, don't forget that under Mario Draghi's presidency, the European Central Bank effectively created €2.57 trillion in around 3 years. That could have paid for the first couple of years of investment needed to tackle climate change. Unfortunately, Mario Draghi decided to use the funds to boost the financial markets instead.
Second, if we use the BIS's figures for Global Financial Transactions in 2018 ($14.9 quadrillion), it follows that the $1.7 trillion a year could be generated by a global tax of less than 0.02%.
The UK should go first. The rest of the world could follow.