24 May 2015

Let's compare an FTT with existing taxes

As more and more people are talking about the utility of introducing a modest Financial Transaction Tax, there have been more and more "studies" claiming to show that even a 0.1% tax would make the economy ground to a standstill.

Tim Worstall (with whom I've sparred on a number of occasions), has  published  a whole string of opinion pieces on the Forbes website arguing why the sky will fall in if ever there was an FTT- here and here and here, for example.

In February 2014 the City of London produced a report claiming that introducing an FTT in Germany would decrease GDP by 5.8%, and Italy it would produce a decrease of 13.0%.

Well, for me these so-called studies are clearly not providing a balanced case. Sure, any tax will have negative consequences for some sectors, so there is no big scoop in pointing out that there will be costs.

But there is a simple argument. If you agree that governments need to use taxation to raise revenue to pay for public services, then you need to look at what the effects of those taxes are. What behaviour does a particular tax discourage? What behavours does each tax encourage.

Recently, I gave the percentage of UK revenue coming from different taxes. So let's take them each in turn and ask what they each encourage and discourage.
  1. Income Tax -  £163.2 billion or 31.8%
    1. Discourages people from working hard
    2. Encourages people to find ways of avoiding it by using tax-havens and other tax-optimisation mechanisms
  2.  VAT -  £111.2 billion or 21.6%
    1. Discourages people from buying goods and services - hence putting a severe brake on the economy
    2. Encourages people to find ways of avoiding it by failing to declare payments and using a range of scams to reclaim VAT even when the payments were not made 
  3. National Insurance Contributions  - £109.2 billion or 21.3%
    • Discourages employers from taking on staff
    • Encourages employers to pay people illegally, or employ illegal immigrants instead of residents.
  4. Corporation Tax -  £42.3 billion or 8.2%
    • Discourages companies from making a profit
    • Encourages companies to declare their profits elsewhere, thus depriving the UK of tax revenue (eg. Amazon, Starbucks, Google etc).
  5. Fuel Duties -  £27.2 billion or 5.3%
    • Discourages people from burning petroleum products
    • Encourages ecologically responsible behavior
  6. Stamp Duty Land Tax  -  £10.7 billion or 2.1%
    • Discourages people from buying property thus reducing the mobility of the population
    • Encourages people to rent rather than buy property 
  7. Wines, Beer, Spirit & Cider Duties - £10.5 billion  or 2.0%
    • Discourages people from drinking too much, reducing the cost to the health system
    • Encourages people drink responsibly
  8. Tobacco Duties   -  £9.6 billion or 1.9% 
    • Discourages people smoking, thus reducing costs for health care
    • Encourages people to look after their health
  9. Capital Gains Tax   -  £5.8 billion or 1.1%
    • Discourages people from declaring profits and reducing flexibility in the economy
    • Encourages people to find ways of avoiding using tax optimisation systems involving tax havens, trusts etc.
  10. Inheritance Tax - £3.8 billion or 0.7% 
    • Discourages people from dying (!)
    • Encourages people to find ways of avoiding the tax using tax havens and other schemes
All the other taxes together only generate  £20 billion of revenue for the government (3.9%).

I think this list makes it clear that of the 10 main sources of tax revenue, the vast majority are simply destructive, since they discourage "good" behaviour, and encourage "bad" ones. The only exceptions are fuel duties, taxes on alcohol and tobacco.

There are two taxes that are currently not used at all, and that I believe any intelligent politician should take very seriously.

The first is the idea of taxing financial transactions. At the sorts of low levels that I believe would be sufficient (well under 1%), such taxes would have almost no impact on the behaviour of the vast majority of people and businesses. We are all perfectly used to paying an extra 3% for using credit cards (even if it's the merchants that have to pay up), so there is no way that 0.1% is going to make a difference. And the vast majority of business transactions would go through exactly as they do now. Only those who make their money via speculation would even notice.

The cost of implementation (one line of code in the software handling the transactions) would be nothing compared to the cost of collecting income tax, VAT, national insurance contributions, and corporation tax. And since it would be essentially impossible to avoid (without breaking the law), there would be no problems with evasion.

Yes, the financial markets would be encouraged to reduce the number of steps involved in any transaction, because anyone using a system where a whole series of intermediaries each takes a tiny sliver would be beaten by one where the transaction was made in one step. But that would surely increase the efficiency of the financial service industry, not the contrary.

Some people will perhaps try to argue that we really do need zillions of transactions to get the right price for financial products. But what percentage of the $10.7 trillion in FX trading that CLS boasts about having handled on one day last year (17 December) was actually necesssary to find the "correct" relative prices of each currency? Why not accept the fact that all that pushing and shoving back and forwards is just done because it allows people with very large amounts of money to move around to siphon money out of the system? We  have just seen that the big banks have just been fined billions for rigging the FX markets? A 0.1% FTT on those transactions would immediately end such criminal behaviour, with no need for any regulation.

The second missing element is a land tax, levied on the basis of the land surface owned by a person or business. Clearly, such a tax would discourage people and businesses from hogging land, and encourage large land owners to sell off they land. This is surely a good idea if we want a more equal society.

P.S. Note added Monday 25th May. For those who are interested, there is a fascinating and stimulating set of exchanges between me and Tim Worstall, probably one of the world's most prolific critics of FTTs. Some of it is in the commentary on this post. But there's a lot of other exchanges in response to Tim's piece on Forbes called "Memo to Elizabeth Warren: This is how you tax banks, not the Financial Transaction Tax".

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