How to get the European FTT tax introduced

Given the rabid response of Conservative MPs in the recent Parliamentary debate on Europe, and the fact that George Osborne has made it clear that he intends to veto the introduction of Barroso's 0.1% Financial Transaction Tax, you can be forgiven for thinking that there is little hope of progress. But I've been doing my sums, and I reckon that there is a way for Europe to get the FTT plan through, even in the notoriously eurosceptic UK. Here's the plan.

Currently, the EU has a budget of 141 billion euros. This is paid for partly by contributions from VAT (although it turns out that this is actually very minor) and mostly by payments that are made by the different governments on the basis of each countries GDP. The mechanism is pretty opaque, and has been the subject of endless wrangling because of the reimbursement negotiated by Thatcher.

How about the EU saying that they will scrap all the existing payment mechanisms and introduce a new scheme based on the 0.1% FTT that they propose for all 27 European countries. Each country would impose the same minimum 0.1% FTT on all financial transactions, but they would only pay the EU their fair share of the 141 billion euros EU budget on the basis of GDP.  They would be allowed to keep the rest of the money raised. I've compiled the numbers in the following table.

As you can see, Germany should pay 28.8% of the 141 billion, France 22.2%, the UK 19.5% and so on down to Malta which would pay 0.05% of the total. This sounds very fair to me.

Now let's look at the amount that countries would be able to keep for themselves. Unfortunately, the Bank for International Settlements only provides numbers for a small number of EU countries, so I can only produce numbers for those, but I have provided numbers for some of the big players - namely Germany, France, the UK, Italy, the Netherlands and Belgium. (Incidentally, I find it astonishing that all EU countries are not obliged to provide the numbers - this is clearly one of the first things that the EU should do).

Anyway, you can see from the table that with the levels of transactions in the countries for which we have numbers, only a tiny fraction of the revenue raised by the 0.1% FTT would be sent to the EU. All the countries would get to keep at least 91% of the money. France is actually the the least well off of the 6. But Belgium would keep nearly 99% of the money, and in the UK, the number is a whopping 98.4%. Surely, the UK government would have to be insane to veto such an easy way to get extra revenue.

Specifically, assuming that transactions in the UK are up at around 1,200 trillion euros a year (which is a reasonable estimate based on the fact that the numbers from the BIS for 2010 are still incomplete), the UK could potentially reap as much as 1,180 billion euros worth of revenue.

Of course, as my son Jonathan would say, the levels of transactions could well drop a lot and this makes it difficult, indeed impossible, to make accurate predictions. And indeed, most of the transactions undoubtedly reflect speculation that is almost certainly very sensitive to the introduction of a Financial Transaction Tax. However, this sort of activity could be seriously reduced without have any adverse effect on the real economy. Nevertheless, I think we can safely assume that imposing a very modest 0.1% FTT will not cause transactions to drop by 99%. In other words, the mechanism is virtually guaranteed to work.

By doing it this way, the FTT could be initially introduced just to replace the current mechanism for financing the EU. There is a serious possibility that the UK (and others) could generate very large amounts of revenue that could be used for paying off national debt, or abolishing taxes. But the fact is that any outcome would be beneficial. And of course, the FTT mechanism would have been introduced... and that's the aim of the game.

Once in place, and once the real numbers are available, countries could increase the FTT above 0.1% (which should be the minimum) to allow the conventional tax systems to be abolished, pay off debt, and relauch the economy. Easy!

Two ways of solving the Euro crisis

We are continuously hearing that taxpayers will need to bail out the banks in the event of a Greek default. But is that really true?

Consider a bank that has lent 10 billion euros to the Greek government. The critical question is to know what percentage of that money was "real" money - money that was deposited in the bank by savers - and what percentage was produced out of thin air by the miracle of fractional reserve banking. It seems incredible, but when a bank receives a million euros in deposits by savers, it is allowed to lend up to 30 times that much to anyone who is prepared to sign an I.O.U.  For example, if  the Greek government signs a loan agreement for 10 billion euros with Bank X, it is perfectly possible that only 3% of that money is actually money that was deposited at the bank. The other 9.7 billion euros was quite possibly created out of thin air by a wave of a magic wand. See the positive money website if you don't believe it.

It seems to me that under these conditions, there are two perfectly acceptable ways of resolving the problem.

Solution 1 is for Greece to say that they will repay the 0.3 billion that was actually deposited in the bank (with interest) but refuse to pay the other 9.7 billion that the bank never had. Since the bank doesn't owe that money to anyone, this would have no impact on anyone except the bank. They would just have less money to hand out in bonuses and dividends. So what? For almost every normal person, that would be wonderful news. We wouldn't have to put up will the sight of all those bankers receiving their obscene bonuses at the end of the year.

Solution 2 is that that bank goes bust. This would indeed be very bad news to anyone who had deposited any money in that bank - including ordinary citizens who may have their life savings in there. In that case, I think it would be very important for governments to step in and reimburse the savers who lost their money. I am sure that every normal person would agree to have taxpayers money used for this noble purpose. 

The point is that neither solution should require the hundreds of billions that European leaders are trying to put together to bolster a bank bailout fund. When we are told that the EU will need to find at least 100 billion euros to protect european banks, then I would say that we can safely divide that number by at least 10 and quite possibly 30. Is 3-5 billion too much to find to save the euro? Not in my books it isn't.

The other very intersting feature of this approach is that it will require banks to distinguish between the money that was created out of thin air, and the real deposits that people assumed were safe when they put their savings in the bank. And if the banks can't tell the difference, then they deserve to go to the wall.

Getting 18 trillion back into the system

Yesterday, someone commenting on the Guardian Website noted that the amount of money currently in tax havens was around 18 trillion, about one third of global GDP.  Clearly, if that money could be brought back into the economy, there would be no shortage of money for financing growth and no need for taxpayers to bail out the banks yet again.

But how can this be achieved? As long as there is one taxhaven left, multinationals and banks will no doubt use it to avoid paying taxes.  Yes, if there was global agreeement, it would just be possible to impose a world-wide ban on tax havens. But, realistically, this is not going to happen.

But the "Thorpe" plan offers a way (!). The trick is to use the potential of a modest 0.1% FTT to replace the conventional tax mechanisms - and in particular corporation tax, income tax, VAT and so on. The UK government could offer to abolish all these taxes, but only in return for agreement that all financial transactions have to go through regulated (and taxed) channels. And this should  include financial transfers with tax havens.

Suppose that these regulatory mechanisms were in place. It would be possible to put a zero rate on transfers back into the real economy for money currently in tax havens, and impose a punitive rate - for example, 10 times the standard rate of 0.1% for any transfers going outside the area covered by the FTT. If at the same time, taxes on company profits were eliminated, it would become financially sensible for the multinationals who are currently hoarding money in tax havens to bring the money back into the real economy. The money could, for example, be used to provide extra resources to the banking sector. And all this without needed to increase public sector debt.

Makes good sense to me.

The "Thorpe" Plan

OK, I agree that the "Thorpe" plan sounds pretentious. I would be very happy to call it something else, if someone else was proposing the same thing. Lots of people are now pushing for the introduction of a Financial Transaction or Robin-Hood Tax. The problem is that while it is just seen as a way to punish the financial sector, the lobbyists have the power to block progress, especially via their friends in the UK government. Here, the key is to trade the abolition of virtually all the main sources of taxation for agreement to impose regulations on financial transactions. It seems to me that not only would such a scheme be seen as highly beneficial to virtually all citizens, it would also appear very attractive to  the business sector. This is what would put those in financial sector who have been (successfully) campaigning for total deregulation of the markets in an untenable position. So, here it is. Comments welcome.

The "Thorpe" Plan 

The overall aim should be to replace all the current taxation methods with a single flat-rate Financial Transaction Tax. The only taxes that should be kept are those that serve specific social functions - such as taxes on tobacco and fuel. This can be down using the following measures.

• Impose a Europe-wide FTT at the 0.1% rate proposed by the EU that would replace the current VAT revenues to Europe.
• For countries with very large financial sectors, the amount paid to the EU should be capped so that the amount transfered to Europe is proportional to each countries GDP. 
• The extra revenue should be kept by the individual countries for (a) reducing or eliminating the exisiting taxes, (b) paying off national debt, and (c) launching investment programs in key areas such as energy, transport, education and research.
• Each government should negotiate with the financial sector and business with the following proposal. The government would abolish taxes on company profits (such as corporation tax), income tax, VAT  and employer contributions in return for agreement on a number of key areas.

1. All financial transactions would have to go via authorized and regulated mechanisms that are subject to the FTT
2. A ban on a wide range of socially undesirable financial instruments such as Credit Default Swaps, CDOs, Short Selling etc..
3. The abolition of the Fractional Reserve Banking system that allows  banks to create money. Only the elected government should have the right to create money.

Quantitative Easing for Dummies

The Bank of England has announced that it will inject £75 billion into the economy using Quantitative Easing. Some would describe this as printing money. Others describe it as handing even more money to the banks with no strings attached. You can download a pamphlet from the Bank of England's website where they attempt to explain what it involves. They've even done a nice little propaganda film to convince people that it is a wonderful idea. Here's a figure that makes it all clear

It all seems wonderful. When the Bank of England hands over the £75 billion, they say that they will avoid giving the money to the Banks directly. Instead they will will buy gilts from places like pension funds, insurance companies, and other "firms". I imagine that this include hedge funds.  The pamphlet then says "The sellers of the assets have more money so may go out and spend it. That will help to boost growth. Or they may buy other assets instead, such as shares or company bonds. That will push
up the prices of those assets, making the people who own them, either directly or through their pension funds, better off. So they may go out and spend more"

Lots of conditionals there. They "may" go out and spend more. As the figure shows, there is absolutely nothing that constrains those who have been handed the money to use it usefully. They are perfectly at liberty to send the money to a tax-haven in the Cayman Islands. Or they can use it to speculate on the foreign exchange markets. Or buy Credit Default Swaps. Or CDOs. In fact they can do precisely what they like. I think we can safely assume that they will just do what they always do - maximum their profits. There was no analysis of what happened to the previous £200 billion of quantitative easing in 2009-2010. There doesn't look like there will be anything more serious this time round.

Many people are been asking the obvious question - why not just  hand 1200 pounds to every man woman and child in the UK? Why not indeed.

Global Financial Transactions at 9.5 petadollars

The Bank for International Settlements recently published their Statistics on payment, clearing and settlement systems in the 23 CPSS countries for 2006-2010, although the data is still preliminary. I downloaded the comparative tables and compiled all the data from the 5 tables that provide numbers for the value of transactions that have been processed.  Transactions peaked in 2008 at $9,513,494,000,000,000 . Call that 9.5 million billion dollars if you like but I think that we really need to be using petadollars for these sorts of sums.

 
The financial crisis led to a drop to a mere 7.7 petadollars in 2009. The total for 2010 of 7.3 petadollars are still provisional, and in fact is bound to be a lot higher when the final numbers are published in December. In particular, the values for the UK lack the data for LCH.Clearnet.Ltd which reported 1.58 petadollars in 2008 and nearly 1 petadollar in 2009. I think that we can presume that we can add at least another petadollar of trading for 2010. We could well be around 8.5 petadollars when then full numbers are in.

The fact is that these numbers are massively underestimated. Many of the entries in the tables have had "Not available"  ("nav") for the entire period since 2006. Among the culprits you can find the London Stock Exchange, the American Stock Exchange, and many trading institutions in Australia, India, Saudi Arabia and Sweden.

And what about the other countries that don't report anything? For example the other 20 countries in the European Union that don't bother to provide data? Why doesn't the European Union oblige every country to provide the numbers? And why is the London Stock Exchange, and the City of London given the right to do as much Under-the-Counter trading as they want with no controls? And what about trading in Credit Default Swaps, CDOs, ETFs etc etc? Has anyone got the foggiest clue about what the true levels of activity are?

When people try to claim that the financial markets are lacking liquidity, I frankly have serious problems in believing them. The money is there. You cannot do something like 6 petadollars of trading per year without liquidity.

Note that applying the 0.1% FTT proposed by the EU last week could produce truly eye-watering amounts of revenue . Either that, or it would drastically reduce speculation on the financial markets. Both options are fine with me.

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!

BIS Data for France and the other Eurozone countries

I've finally got round to adding something to my French language webpage. I've done the same sort of analysis of the latest BIS data for 2010 that I did for the UK, but using the French data. The total that I obtain (268 trillion euros) is certainly a lot lower than for the UK - they have a lot less of the frenetic financial trading that characterises the city of London -  but it's still very respectable. You can find all the gory details here.

Note that a 0.1% tax on 268 trillion euros would generate nearly three times as much revenue as all the current sources of income used by the French government. This again demonstrates that FTTs really can be used to replace conventional taxes, even in countries that do not have the bloated financial sector that characterises the UK.

I've also extracted the numbers for the four other Eurozone countries that figure in the BIS dataset, and all five countries are shown in the table below.

The total transactions for France, Germany, Belgium, Italy and the Netherlands come to €1572 trillion. I note that a 0.1% FTT applied to that would generate nearly 16 trillion euros - more that 27 times more than the €57 billion estimated by the EU, despite the fact that we have only taken into account 5 of the 17 eurozone countries. I presume that this difference comes from the elasticity parameters that the EUs economists used for their calculations. This is their way of estimating how much reduction in trading would be produced by the introduction of the tax. But I imagine that they will be forced to accept that it is pure guesswork. They also used a smaller value of 0.01% for taxing derivative trading, but this will not make much difference here because only a small fraction of the transactions in these countries - less than about 7%.

The main conclusion of all this is that there is a desperate need to impose complete reporting throughout the European Union so that realistic proposals can be made. This is precisely what the EU wants to do, but George Osborne apparently intends to block. Given the urgency, I would personally propose that the tax should be introduced as soon as possible, and the rate adjusted to generate the required levels of revenue.

B.I.S Data for 2010

The Bank for International Settlements has just published its preliminary data for financial transactions in 23 countries for 2010. The countries are the same as in 2009 - Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Korea, Mexico, Netherland, Russia, Saudi Arabia, Singapore, South Africa, Sweden, Switzerland, Turkey, the United Kingdom and the United States. You can download the full report as a pdf file, comparative data as an Excel file, or the specific details country by country as an Excel file. It's a real shame that they don't provide numbers for at least all the Eurozone countries. It's not surprising that the EU can only guess that the Financial Transaction Tax that they propose will generate around 57 billion euros. They based their numbers on - wait for it - the BIS data and the data from the FESE that I mentioned a couple of days ago.

When the European Union doesn't have complete figures for all the countries in the Eurozone, can it be any wonder that nobody can come up with sensible numbers. And to think that Osborne is trying to prevent EU level requirements on reporting.

Anyway, I've extracted what I consider to be the most critical information from the UK data in the full report.

First, here's Table 8 -" Indicators of the use of payment instruments and terminals by non-banks". It shows that last year in the UK, there were over £65 trillion in credit transfers, £948 billion in Direct Debits, £455 billion in Credit Card Payments, and £1,095 billion of Cheque payments. This makes a total of £67.5 trillion of "non-bank" transactions. This is certainly down a lot from the peak of £107.4 trillion in 2007, but it's still a hell of a lot of money. A 1% charge on that would generate enough revenue to abolish all the other forms of taxes in the UK - Income tax, VAT, Corporation tax, Stamp Duty etc which only raise about £538 billion. These transactions are not likely to move anywhere else.

Table 11, which reports "Payments processed by selected interbank funds transfer systems", tells us that the CHAPS system handled £56.7 trillion of credit transfers, and that the BACS system handled a further £4 trillion.

Table 18, which should provide numbers for the Values of executed trades for the London Stock Exchange and the Virt-x system just says "nav" (Not available) for every year since 2006.  Funny that, the City doesn't seem to be providing the numbers? How can that be?

In Table 21 ("Values of contracts and transactions cleared") informs us that LCH.Clearnet Ltd hasn't provided the number for sterling contracts (it was £588.8 trillion in 2009), but we do learn that contracts and transactions in Euros went up to €19.5 trillion in 2010 from €12.6 trillion in 2009. If the Sterling exchanges have gone up by a similar amount, LCH.Clearnet might well have handled something close to £1000 trillion.

Finally, Table 26 ("Value of delivery instructions processed"), tells us that the CREST system handled £143.5 trillion, somewhat down on 2009, but substantially higher than for 2006-8.

By adding up the different numbers, I would estimate that financial transactions in the UK that are reported to the BIS are likely to be at least as large as in 2009, when they totalled £911 trillion, and could easily top £1000 trillion. Applying the 0.1% FTT proposed by the European Union, and immediately rejected by the UK government could raise as much as £1 trillion - enough to pay off roughly half of the UK's national debt in a single year.

The truly mind-boggling fact is that these numbers don't include anything for the London Stock Exchange. They don't include the £300 trillion a year in Foreign Exchange going through the City of London, and the £190 trillion of OTC Derivatives trading. And who has the foggiest clue about how much trading in more obscure financial instruments such as Credit Default Swaps (CDSs), Collateralized Debt Obligations (CDOs), Exchange Traded Funds (ETFs) etc etc etc.  There is apparently no requirement to report these values.

A couple of days ago, I added up the numbers for trading on the FESE website for 2003-2011. What I failed to notice at the time is that two major Exchanges that are supposed to be included in the dataset didn't provide the numbers for 2010 and 2011. One was Italiana Borsa. And the other one? Yep - you guessed right: it was our friends at the London Stock Exchange yet again.

Conclusions? 1) The UK appears to be the world leader in Under-The-Counter Trading, and 2) the UK public has to realise that there really is a Plan B.  It simply requires that the UK government aligns with the rest of Europe and imposes a modest tax on financial transactions.

Osborne defends Under The Counter Trading

There are two reports in today's Guardian that are clearly linked. First, there is a report from the Bureau of Investigative Journalism showing how the City of London and the Financial sector bribe the Government by providing half the donations to the Conversative party since the elections last year.

Thene there is a piece about how the UK chancellor will be flying to Luxembourg later this week to block attempts by the EU to require reporting of OTC (Over the Counter) Derivatives trading. This is totally scandelous. Here's the comment that I added:

I find this amazing. Why is it so important to keep OTC Derivatives trading hidden from view? Currently, the only moment that we get to peek at what the City is up to is once every three years, where the Bank for International Settlements manages to get the Bank of England to round up some figures. According to their data, OTC Derivatives in April 2010 were around $1,235 billion a day. Assuming 250 trading days per year, this means that the City is doing something like £190 trillion a year of this - 46% of the global total according to the BIS.

But even these eye watering numbers are quite possibly only scratching the surface. Firstly, even the Bank of England's website noted that only 47 UK institutions participated in the UK survey, down from 93 in 2004 and 62 in 2007, "as only firms that participate in the inter-dealer market and/or have a large active derivative business with customers were asked to complete the 2010 survey. Small institutions were not asked to participate in order to reducing their reporting burden". Who is to say what levels of activity are being hidden here?

George Osborne is going to fly to Luxembourg to prevent this trading being reported. Presumably, he would also be in favour of abolishing the BIS Triannual Report too, which I imagine is an intolerable restriction on the City's ability to do precisely whatever they want with no controls.

It's obvious why he does this. Just look at who is paying the government. But the whole thing is incredibly stupid, especially when coupled with Osborne's announcement that he intends to veto moves to introduce an FTT at the European level. If the EU was to levy a 0.01% tax on derivative's trading, it would be so simple for the UK to add an extra 0.1% and generate levels of government revenue that could easily write off the entire UK public debt within a year or two. Osborne simply cannot claim that their is no Plan B.

And more importantly, refusing to allow regulations to require that derivative trading to be fully reported is positively criminal. Why do they call it Over the Counter (OTC) when it is so clearly Under the Counter?

 I quite like that one... we should definitely be calling it Under The Counter trading.

Financial Transactions in Europe - the Data

I just had a look at some of the documents accompanying the launch of the EUs proposed FTT. One of the documents describes the data they used to estimate the amount of revenue that the tax would generate - it's Annexe 12. In it they mention a source of data that I hadn't found before. It's the Federation of European Securities Exchanges which provides tons of data about financial activity in Europe. Of course, I downloaded the data from their website for all the years since 2003 and then just added up all the numbers in the different tables - something that apparently nobody bothers to do. For 2011, I just took the numbers for the first 8 months of the year (till august) and multiplied by 1.5 to get a prediction. The numbers are totally mindblowing. Here there are (just click on the figure to download a close up version) :

Trading Data compiled from the Federation of European Securities Exchanges for 2003-2011

Yes, those numbers really are in Millions of Euros. And yes, the total for 2011 looks set to reach €638 trillion. (€638 000 000 000 000). The markets haven't quite reached the peak of 2008 when the total reached nearly €650 trillion,  but it's looking pretty healthy. Certainly a lot more healthy than the rest of the economy.

Yes, I think that there is some potential for taxation revenues in there. Let's do it.

Things are starting to move

With Barroso's speech yesterday presenting plans for a European FTT, the debate is finally out in the open. Robert Peston has a piece on the BBC website, and there are no less than three in the Guardian. There's one from Bill Nighy called "A Robin Hood tax could turn the banks from villains to heroes", as well as others by Jill Treanor and Larry Elliot.

I've been frantically adding comments such as this one

The City and the UK government are no doubt going to try and veto the introduction of an FTT in Europe because it is European and they oppose any more taxes going to Europe.

This is shortsighted. Allowing a small EU-wide FTT to be introduced would allow the basic mechanism to be put in place. This would involve adding a few lines of code to the programs that do High Frequency Trading in the City to divert a tiny fraction of the $4 trillion a day in Foreign Exchange to the EU. It would also require bringing all the shadow trading into the light where it can be seen. It is simply impossible to justify the fact that we only get to hear about the true level of foreign exchange trading once every three years in the BIS triannual survey.

But once that mechanism is in place, there is nothing to stop governments, including the UK, using the FTT mechanism to replace all the other forms of taxation - including income tax, VAT, corporation tax, national insurance contributions etc. This would turn the UK into a tax haven for everything except financial transactions. Transactions in the UK are running at well over 900 trillion pounds a year, a figure more than 1700 times total tax revenue, currently 530 billion pounds per year . Even more interesting is to compare these numbers with the UK national debt that currently stands at 2.2 trillion pounds (if bank bailouts are included, which of course they should). Paying that off over 5 years would need around 500 billion pounds a year. That's less that 0.05% of the 900 trillion pounds in transactions.

Don't let the lobbyists get away with the argument that FTTs are only for raising revenue and paying off debt in Europe - it's the solution for the UK too. Indeed, since the UK is indeed the center for speculation, the British public should be pushing very hard to use such taxes for their own advantage.

For the details of the EUs propositions, there are now a whole pile of documents that have been put online.  There's a citizens' summary, an impact assessment and its summary, as well as an FAQ. Enjoy!

A New Way to solve the Debt Problem!

I think I may just have come up with an idea that could solve the debt problem. I've already mentioned the positivemoney web site that explains how banks have been given the right to produce "money" out of thin air thanks to the wonders of Fractional Reserve Banking. This is the totally mind blowing idea that when a bank receives say £1000 as a deposit, they are able to lend anything up to 30 times that amount of money. They just need to keep a small amount present in a central bank such as the Bank of England to allow day-to-day transactions to be performed.

It seems completely crazy - and it is. It means that if a bank can get someone (an individual, a company or a country) to sign up for debt, they can create money from nothing. It's hardly surprising that they make huge profits. If they can get people to "borrow" money on their credit cards and pay back interest at 20% or more, even when the bank didn't actually have the money to lend in the first place, you can see why personal debt in the UK is now something like 3 times total GDP and why bankers bonuses are so obscene. They literally have a licence to print money.

So, what's the solution that I would like to propose? Well, right now, Greece is crippled with debts and being forced into imposing draconian measures to cut spending just to pay the interest on the loans that it has taken out. There have been suggestions of a possible rescue plan in which the Greek government would be allowed to cancel about 50% of its debts, and the other EU nations would step in with yet another bailout.

How about another alternative? Why doesn't the Greek government say that it will only repay money that it owes to banks and other financial institutions that those banks actually had to lend in the first place - and not money that was created out of thin air in the form of debt. I understand that (for example) French banks have "lent" billions to Greece over the last decade or so. Now, obviously, if a bank had a billion in deposits that they lent on to the Greek government, then this money needs to be repaid - it's the money that French savers have deposited in the bank. But what about the other 30 billion that the bank created out of thin air? Why does that need to be repaid?

Suppose then that a bank lent 31 billion euros to the Greek Government, but that they could only justify 1 billion of that on the basis of actual deposits. In that case, it seems to me that it is reasonable that the Greek government should only be forced to pay back the 1 billion. This could lead to a really interesting situation where the banks would have to demonstrate what proportion of the money they lent corresponded to real deposits, and how much resulted from money creation. I would say that if they can't prove that they had the money originally, then tough. They would have to forget about it. It would be an interesting test to see whether the bank's accounting systems actually keeps track of this sort of activity. What percentage of the money lent to Greece corresponds to real money? Maybe the amount is not 50%, but a much smalller proportion. Hey, it might only be 3%. It will certainly be interesting to find out.

Given that the vast majority of people have no idea that banks can lend money that they do not have, I think there could be a real legal argument here of deceit. After all, it is obviously the case that  if I was to sell you something that I did not possess, then this would be illegal. Why is the situation different with money that the banks lend us?

Unless I'm mistaken, starting such a process in which we force banks to admit to the money creation trick could literally solve the entire debt problem. We would only owe money to banks if they actually had the money to lend us in the first place. So, we could start with Greece (for which a solution needs to be found very rapidly if the entire Eurozone is not to collapse), but obviously, if the technique works, then all governments could write off a substantial proportion of their debts.

It almost sounds too good to be true... But maybe it would work. Comments please!

More support for FTTs....

I was pleased to see that there was a leader article in the Independent on Sunday today that gave the introduction of an FTT a thumbs up. And there have been a number of commentaries on the fact that Bill Gates has apparently produced a report recommending an FTT that will be submitted for the G20 summit. According to a Reuters report

The Gates report supports the thorny issue of a financial transaction tax as a way of raising "substantial resources" for developing countries. It suggests even a small tax of 10 basis points on equities and 2 basis points on bonds would raise about $48 billion among G20 member states, or $9 billion if only adopted by larger European countries.

 And a report on the Bloomberg News website  reports the following :

The European Commission will soon propose a financial- transaction tax that targets a broad range of trades with low rates, a European Union official said.

The tax plan will be unveiled by Oct. 5 and will target the EU’s 2014-2020 budget cycle, said the official, who didn’t want to be identified because the proposal isn’t public yet. Algirdas Semeta, the EU taxation commissioner, is scheduled to discuss the topic on Oct. 6 with the European Parliament’s economic affairs committee.

The tax would cover financial transactions involving stocks, bonds, derivatives, structured products and other types of trades. The tax needs a broad scope so that financial activity won’t move from one product to another to evade the levy, the official said.

 Are things beginning to move??

Corporations can't pay tax - they're not people!!

There's a guy called Tim Worstall who recently posted a piece on the Forbes website (that has a link from the BBC's news site!)  who makes the remarkable claim that "Corporations do not pay taxes: They can't, they're not people". Specifically, he states

all those who say that “companies should pay more tax” are simply being ignorant. Companies do not pay tax, cannot pay tax, and thus to call for them to pay more is just displaying that ignorance.

Truly amazing. Here's what he says about Financial Transaction Taxes.

It’s also extremely important to note this point when we consider new taxes. For example, the Financial Transactions Tax (or the Tobin Tax, Robin Hood Tax, all the same thing really) which is being bandied about at the moment. As I explained in City AM today, the rhetoric is that the banks must pay for the damage they caused. But banks are corporations, corporations do not pay tax thus the FTT will do absolutely nothing at all to make banks pay for anything.

Thus the major problem with the FTT: it’s based upon ignorance. It won’t be banks that pay it. It will be us, the average consumer, stung on every minor and major transaction in the economy. Further, the amount we’re stung will be higher than the amount raised in tax. Whether those who are proposing it are ignorant of all this is unknown: it could be that they are sufficiently cynical to know but think that we are ignorant enough to not.
As to calling it the Robin Hood Tax, perhaps we should remind them of the original Robin of Loxley. He made his bones resisting those collecting unjustly levied taxes, not imposing them.

It’s simply nonsense based upon ignorance. Either the ignorance of those proposing it or perhaps worse, their playing upon our presumed ignorance of the fact (yes, fact) that companies do not pay taxes, ever. Not one single cent or penny has ever been paid in tax by a company and no system of taxation will ever be able to make them do so. So to call for higher corporate taxation is simply nonsensical.

Fortunately, the Forbes site allows comments. So I did. Here's what I said.

Dear Mr Worstall,

You are totally wrong on this. Banks and other Corporations operating in the Financial Sector can and should be paying taxes on financial transactions. And they would have great difficulty in justifying handing on the costs to the public.

According to the Bank of England's report to the BIS concerning the scale of foreign exchange transactions for the Triannual report for April 2010 :

"Net average daily turnover during April 2010 in the UK foreign exchange market was $1,854 billion per day," Assuming 250 trading days per year, let's call that $464 trillion a year or around 300 trillion pounds. That's £300 000 000 000 000 . The UK is directly responsible for 37% of the world total. This activity has absolutely no useful function and could be taxed with no serious impact on the real economy.

Specifically, introducing a 0.05% Financial Transaction Tax, as proposed by many groups including the Robin Hood Tax people, Europeans for Financial Reform, plus a very large number of economists, would have one of two effects (or a combination).

Either (1) it would raise 0.05% of 300 trillion - namely £15 billion of revenue for the govenment which could be used to stimulate the real economy, or (2) it would slow down or maybe even completely prevent speculative trading on the foreign exchange markets. Both are highly desirable. And neither of these could be passed on to ordinary tax payers. Sorry you are quite simply wrong. Yes, Banks and hedge funds really can pay for their trading - just like the rest of us who have to pay "taxes" to banks for doing simple things like currency echange.

See here for an example of banks charging me a 21.5% transaction tax to convert euros into another currency. Why do I get charged an FTT of 21.5% when banks pay 0.0000000000%

People like you who try to imply that a tax on currency speculation would be passed on to us because "Corporations can't pay taxes, because they are not people" is, in my humble opinion, either a demonstration of remarkable ignorance on your part, or part of the coordinated lobbying by the city of London to block any attempts to introduce what is an extremely sensible move for absolutely everyone except the tiny minority of traders who are siphoning money out of the system using massive and pointless speculation on foreign exchange markets. I suspect that it's the latter.

Quantitative Easing - Just say No

Vincent Cable, the UK governments Business Minister, is pushing for another round of quantitative easing - printing money to put it another way. I think this is seriously misguided. Richard Murphy has a report on Green Quantitative Easing on the Tax Research UK blog site that explains how the previous round of Quantitative Easing (£200 billion between March 2009 and February 2010) increased profits for the banks, but had almost no useful effect on the economy.

The problem is that when Central Banks use Quantitative Easing to inject money into the economy, the money goes to the banks and there is nothing to specify what the banks use the money for. As a result, the banks will (quite rationally) use the funds to make profits in the most effective way possible. With the economy in such a depressed condition, investing in business is not attractive. Instead, the banks have realised that they can make much more profit by speculating on the commodities markets, with the result that inflation in the UK (food, clothing, energy etc) has increase to 4.5-5% - way above the value in other countries. This is obviously a disaster for the general public who are trying to make ends meet under conditions where either their pay is severely restricted, or they may well have lost their jobs. And if you are a pensioner trying to live on your investments, forget it - interests rates are at an all time low.

No, quantitative easing is absolutely not the answer. The answer is, wait for it.... imposing a Financial Transaction Tax that could replace all the current taxes and remove public sector debt within a couple of years. Is anyone listening out there?

One other new item caught my eye today.There was a report on the BBC news claiming that "Currency exchange is too costly", according to a consumer group.  I had noticed!

HIgh-Frequency Trading - The rise of the machines

The people at the Robin Hood Tax network have recently posted an article about the dangers of High Frequency Trading (HFT), that got a mention in a Guardian piece on the 23rd August. The article warns about the dangers of a system where as much 77% of trading in the UK is done by computer algorithms that can buy and sell at speeds that are completely beyond the control of humans. It was HFT that led to the so-called "Flash Crash" on May 6th 2010 where the Dow Jones went down several hundred points in a matter of minutes.

The report notes that HFT is not used for normal share trading in the UK, probably because there is a 0.5% stamp duty to be paid - Europe's best example of a financial transaction tax. They note that

"a significant proportion of the turnover in UK equity markets is made up of trading related to derivatives called ‘contracts-for-difference’(CFD). These are exempt from stamp duty and are thought to contribute to high and rising level of HFT in UK markets.In fact CFD trading is already so widespread in the UK that if all the CFD-related turnover (€1.3 trillion (£1.1 trillion)) were directed through stamp duty eligible trades, it would generate as much as €6.5 billion (£6 billion) in revenue."

All of this argues very strongly for introducing an FTT simply on the grounds that High-Frequency Trading needs to be kept under control. The Robin Hood Tax report also noted that the problem is set to increase with the rapid rise in the number of Exchange Traded Funds (ETFs) that were apparently behind the abilty of a "Rogue trader" to lose something like $2 billion for his employer UBS. The warning came too late for UBS, but the entire system needs to be protected from this insanity.

Why a continuously variable FTT makes really good sense

One of the big advantages of a Financial Transaction Tax is that it the rate can be continously modified - just like exchange rates. In this respect it is quite unlike the vast majority of taxes that are currently used to generate revenue. For example, when a government decides to drop the top-rate 50p tax band (as apparently the UK government would like to do), the effects will only be seen at least one year later. Changes in taxes on company profits such as corportation tax are also delayed. Indeed, given the motivation that such taxes provide for finding ways of "optimising" tax by using off-shore trusts and so forth, it becomes almost impossible to predict how much revenue will be generated in the future.

FTTs are very different. If a government, or a transnational organisation such as the EU, decides that it wants to raise a given amount to pay off national debt, finance infrastructure, replace existing taxes etc, it is perfectly possible to say that the rate of the FTT will be adjusted on a day to day basis to guarantee the level of revenue.

This would provide an incredibly potent stabilising force to the system because it would become impossible for the markets to threaten governments and force them into submission on issues such as regulation.

Actually, there is another interesting side effect of this. Imagine that you are one of the big players that is currently responsible for a substantial percentage of the $4 trillion per day in foreign exchange that is currently destabilising the system. In the UK, imposing an FTT of around 0.2% on the £300 trillion of foreign exchange would allow all the existing taxes to be abolished. And increasing the rate to 0.5% (which is the rate applied to share trading by the City of London) would allow the entire national debt to be paid off in just a year or two. But you might argue that as soon as any such FTT is introduced the bankers will just move their foreign exchange activities elsewhere. However, suppose that the tax applies to all transactions, and that the rate is continously varied to guarantee government revenue. This means that any banks that move foreign exchange operations elsewhere would immediately pay the cost on their other operations. Thus, if you are one of the big banks, and you know that you will have to pay in the end, there would be much less incentive to try and avoid paying your share by moving operations elsewhere.

For members of the general public, the changes in rate would be insignificant. Given that VAT and income tax can be abolished, increasing the FTT rate from 0.2% to 0.5% or even 1% or more is hardly a problem.

Finally, even if a minority of traders would oppose any restriction on their ability to siphon money out of the system, real entrepreneurs could only welcome such a move.

Is anyone listening out there? I really do think that we have a solution here, but it is going to take a lot of work to get the message across.

Will Hutton's "Them and Us"

I've just finished reading Will Hutton's excellent "Them and Us: Changing Britain - Why We Need a Fair Society". It's a densely argued and extensively researched book that covers a lot of ground (over 400 pages). I found myself agreeing with a great deal of what is said. In particular, he argues that, even if you are very pro-business, no-one can really argue that deregulation is what is needed. Even business people and entrepreneurs need to have the state to set rules to make the system work optimally.

He only mentions the possibility of a Financial Transaction Tax once - on page 214. That's a shame, because I really believe that using an FTT to generate revenue rather than conventional taxes on income and profits would be much fairer. Maybe I should try and contact him directly.

There was one particular idea that I found particularly inspired. Will Hutton points out that the current UK system where 7% of the population are schooled in independent fee-paying schools is one of the most obvious illustrations of unfairness. Pupils from independent schools, whose parents pay an average of £10,000 a year for day students and and £24,000 for boarders have a clear advantage when it comes to getting in to the top universities. So, on page 271, when talking about the financing of universities, Will Hutton says "If upper-middle-class parents are prepared to pay fees on this scale for their children between eleven and eighteen, they could certainly continue to do so for another three years.." And he goes on to say that "An even more radical idea is that students from state schools should be excused from paying altogether. After all, privately educated students have an unfair advantage, and a new fees regime could help correct it." Excellent!!

Even better - How about an FTT of 21.5%

I didn't think that it could get worse. Paying 10% to change euros into pounds and vice versa at Toulouse airport was already a lot - see my blog . Then I discovered that Travelex would charge over 14% to change euros into Croatian, Saudi or Egyptian currency.

But, Reisebank at Munich airport can offer even more impressive terms. I went to their exchange desk and asked to buy 1000 Croatian Kunas (HRK). According to one online exchange rate site, this should cost me €132.27. But of course, thanks to the miracle of the bank imposed transaction fees, it actually cost €162.82. Then when 3 minutes later and at the same kiosk, I changed the 1000 HRK back into euros, I only got €105.48. Amazing! Effectively, they had charged me a 19.5% transaction fee each way.

But it gets worse. At another Reisebank terminal, I purchased 500 Egyptian Pounds for €80.01. But a couple of minutes later when I changed them back into euros, I only got €49.19 back. That means that I effectively lost over 21.5% of my money on each transaction. The guy behind the desk didn't seem to appreciate the fact that I found the whole thing hysterically funny. Well, you have to laugh don't you?

If you can find even more impressive Financial Transaction Taxes than 21.5% then please let me know. It's actually a very amusing way to fill some spare time in airport terminals.

But the moral is, that the banks, who claim that they should be allowed to continue trading $4 trillion per day in foreign exchange without paying anything do not have a leg to stand on.

Nicolas Sarkozy is indeed pushing for introducing an FTT

On the 31st August, the French President Nicolas Sarkozy gave a speech to an assembly of French Ambassadors at the Elysée Palace. In the English translation of the speech, which you can find here, he says the following:

"Angela Merkel and I support the idea of a tax on financial transactions. Our objective is for Europe to set an example of what can be done, so that the others rally to this initiative in Cannes. During the next two months, Mesdames et Messieurs les Ambassadeurs, I want you to actively champion this idea in the countries where you are posted. France is in the vanguard of this fight. In fact, no one complains about paying a tax when shopping for household items or consumer goods. How is it that the only transactions that are never taxed are financial transactions? And who would dare say to the people of the world that the behavior of the world of finance, the financial world was so exemplary during the financial crisis that this little closed world absolutely should be protected from any attempt to tax financial transactions? Who would dare say that to the people of the world? Naturally, if we wait for everyone to agree, we will wait for a long time."

"Europe must set an example. Europe has ideas to defend. Europe must adopt this tax on financial transactions at the behest of Germany and France. Then we will establish a group of the most advanced, pioneering countries to join us in taxing financial transactions. Public opinion worldwide will be the judge. In countries that reject the principle of a tax on financial transactions, I eagerly await the discussions that will take place between the governments of those countries and their public opinions. I doubt that public opinion will massively support exemptions on taxes on financial transactions. Today there is an international public opinion and it must be able to make itself heard."

I'm hardly a fervent supporter of Nicolas Sarkozy, but for once I approve 100% of this position.

UK economy: think again, Mr Osborne, before it's too late

The editorial in today's Observer says that George Osborne has to admit that his strategy is doomed to failure. I took the opportunity to add a comment - something that I have been doing a lot recently. Indeed, if you are interested to see what I've been commenting on, you can look at all my comments on the Guardian/Obsever Comments page here. I've also added a link on the right of my blog.

So, as a sampler, here's what I posted today.

"I'm going to say it again. Read the first line of Bank of England's report for the BIS Triennial report, which can be found here. It states that "Net average daily turnover during April 2010 in the UK foreign exchange market was $1,854 billion per day," Assuming 250 trading days per year, let's call that $464 trillion a year or around 300 trillion pounds. That's 300 000 000 000 000 GDP. The UK is directly responsible for 37% of the world total. Congratulations.

The part of this which is actually necessary for business is almost certainly minuscule. The rest is pure speculation - and has absolutely no value whatsover. It's the result of employing the brightest and best mathematicians and scientists from our universities to come up with a fractionally better way of siphoning money out of the system and stuffing it into the pockets of traders and bankers. How tragic that they have nothing more useful to do.

I defy anyone reading this post to explain why 300 trillion pounds of foreign exchange does anything useful. Liquidity has nothing to do with it.

On the contrary, this ridiculous activity is not only totally pointless, it is actually extremely dangerous. It makes the foreign exchange markets completely unstable and allows the markets (or rather the mindless algorithms that are running on the supercompters in the City of London) to paralyse the ability of governments to implement the reforms that are so essential. Dare to even mention regulation of the financal markets, and the "markets" will make you pay.

The solution is blindingly obvious. It has been voted in by the European Parliament on the 8th of March. It is being actively pushed by Sarkozy and Merkel. But as long as George Osborne sticks to his policy of making everyone in the UK pay for the mess except those responsible, then nothing will happen.

Introducing a 0.05% Financial Transaction Tax, as proposed by many groups including the Robin Hood Tax people, Europeans for Financial Reform, plus a very large number of economists, would have one of two effects (or a combination).

Either (1) it would raise 0.05% of 300 trillion - namely 15 billion pounds of revenue for the govenment, or (2) it would slow down or maybe even completely prevent speculative trading on the foreign exchange markets. Both are highly desirable.

And if anyone from the banking sector tries to tell me that it is vital for currency transactions to be totally free of transaction charges, then they will have to explain to me why the banks charge me over 10% for changing euros into pounds or vice versa, and over 39% for cashing a cheque in dollars.

If the UK government persists in blocking such extremely sensible measures, they would not only be preventing the Eurozone countries from getting out of the current mess, they would be acting directly against the interests of the British tax payers.

It's time for the LibDems to pull the plug on George Osborne. Vincent Cable - wake up!"

Astroturfing

I just got my copy of Taki Oldman's documentary "(Astro) Turf Wars" that was recommended by George Monbiot's blog at the beginning of august.

It is superb. Every one capable of rational thought should watch it. It demonstrates how the so-called "Grass Roots" movements such as the Tea Party and the protests about Obama's health care reforms were in fact created by and for America's Corporate Elite - people like the Koch brothers - who effectively launched the Tea Party movement.

It's quite terrifying to see just how good these people are at manipulating normal patriotic American citizens to vote against allowing access to health care and tax cuts for the super rich. I'm reminded of the way the generally decent German public were led into supporting the Nazi's by the use of fiendishly sophisticated propaganda.

One particularly revealing moment in the film is where one of the coordinator's explains what he does to raise the impact of right wing positions and weaken liberal ones - just go to any review site and put 5 stars on everything right wing, and 1 star on things like Michael Moore's Sicko.

Looking at some of the comments on the Guardian's web site (and others), it seems clear that right wing trolls are very active.

Even better - How about an FTT of over 14%?

Just a quick follow up to my post yesterday where I showed that banks charge a financial transaction tax of over 10% when you change euros into pounds or vice versa. It can be even worse. I noted the Travelex buy and sell rates for the 18 different currencies that they were quoting, and calculated the ratio between the two.

For  the following national currencies, the ratio is "only" 26-27% : Australia, Canada, China, Denmark, Hong Kong, Japan, New Zealand, Norway, Singapore, Sweden, Switzerland, UK and USA

But, for reasons that remain obscure, if you were stupid enough to want to exchange money from the Czech Republic, Croatia and Egypt, you will get clobbered with a difference of between 30 and 32%.

However, the prize for the most outrageous transaction tax goes to anyone wanting to exchage money from either Saudi Arabia or South Africa - for which Travelex has a difference of over 39%. Thus, if I wanted to buy 100 Saudi Riyals, Travelex would charge me €227.30. But when I change the 1000 Riyals back into euros, I would only get €163.50 back. I would have lost over 28% of the value in just two exchanges - an FTT of 14% on each transaction. Magical!!

It's a good job that Travelex UK "is committed to matching the best possible overall price in the UK on your travel money purchase". It would be horrible to imagine that they were not being scrupulously fair and reasonable.

It's funny that banks don't seem to make a big thing about these ratios. Difficult to find them published anywhere - although you can find the rates used by NatWest here - theirs have a differential between buy and sell of only 14-15% for the major currencies, but they go up to 31% for money from Peru and Costa Rica.

10% FTTs for bank users, zero for the banks

I'm sure that the banks are seriously worried about the possibility that Sarkozy and Merkel might succeed in their aim of introducing a financial transaction tax. They will no doubt claim that any such tax would be catastrophic for the economy etc etc.

Well, what about the financial transaction taxes that they impose on the public? Yesterday, for fun, I went to Toulouse airport and did the following. I purchased £100 from two different places, and then immediately, used the money to buy back euros.  The result? In both cases, I lost more than 20% of my money with just two transactions - in other words, the effective FTT was over 10%.

Here's the first one, with Travelex.

I was charged €129.70 to buy £100, but only got €102.77 when I sold them back. It's simply the consequence of the difference between the "we sell" (vendons) rate of 0.7710 and the "we buy" (achetons) rate of 0.9730 - 26% higher. They trumpet the fact that they don't charge a commission. They don't need to. Note that this would be exactly the same rates if I had done the same thing with £1000 - it would have cost me €269.30.

Here's the other one - with Banque Populaire.

In this case, buying the £100 cost me €131.99 (including a €7.50 fee), but I only got €105.99 back when I changed back to euros.

How can banks possibly justify such transaction costs?  Remember that the banks do $4 trillion in foreign exchange every day - it doesn't cost them anything. It's one rule for the rich, another for the poor.

I get the impression the these "sell/buy" ratios have gone through the roof - wasn't it more like 5% a decade or so ago? Who said that banks could charge anything they can get away with?

Here's a suggestion. In addition to imposing a modest 0.05 to 0.5% financial tax, how about saying that banks have to pay 50% of any transaction fees they charge to the government? That would generate a fair bit of revenue to help get public debt down and reduce the need for massive across the board cuts.

Finally, these outrageous fees for changing money are the best possible argument for the Euro. I am continously delighted to be able to pay for things and draw out money in all 17 Eurozone countries without extra costs. Of course, the banks would love the Euro to be broken up - that way they would be able to charge 10% every time people want to move from one country to another. We must not let them do it.

Sarkozy and Merkel push for a Financial Transaction Tax

The news that Sarkozy and Merkel are pushing to get a Europe wide Transaction Tax implemented is the best news I've heard in ages. As I pointed out in a comment yesterday, financial transactions in just 5 of the the 17 Eurozone countries already total a minium of 1310 trillion euros per year. This is based on the numbers provided by the Bank for International Settlements for 2009. By adding up the various figures of each country, I obtained numbers for visible financial transactions of 250 trillion euros per year for Belgium, 249 trillion for France, 561 trillion for Germany, 173 trillion for Italy and 77 trillion for the Netherlands. These figures are certainly just the tip of the iceberg, because BIS doesn't list everything by any means. It would appear that no-one has the foggiest clue what the transactions are in the other Eurozone countries. Indeed, one of the other big advantages of the Sarkozy/Merkel proposition is that with a Eurozone someone might get round to compiling some real numbers.

But even this very conservative figure of 1310 trillion euros, is about 170 times the total Eurozone debt (currently standing at 7.8 trillion euros - figures from the IMF), meaning that a roughly a financial transaction tax of little more than 0.1% could pay off the entire Eurozone public debt in around 5 years. No more eurobonds, no more Greek, Spanish, Portuguese and Irish debt crises.

And if you think this looks impressive in the Eurozone countries, try the same thing in the UK, where financial transactions are at least 900 trillion pounds per year. The entire UK debt could be repaid in a few years with an FTT of less than 0.05%. 

Will Sarkozy and Merkel be able to get such a system adopted? It almost all depends on the UK government. The European Parliament has already voted strongly in favour, but I fear that the City will do everything in its power to block what seems to me to be a simple and fair solution to a great many problems.

We need to stop bailing out countries and fix the tax system instead

Stock markets are collapsing. £50 billion was wiped off the London Stock Market in one day, and we are told that governments have to put together another round of funding to provide more support for the Greek, Portuguese and Irish economies, shortly to be followed no doubt by packages for the Italian and Spanish economies. And how long before France and the UK become the next target of the speculators...

Reading the press you would think that there is absolutely no option apart from borrowing (or more likely printing) yet more money to get out of this mess and paying for everything with massive across the board cuts.  Citizens are being told that they will have to pick up the tab in the form of higher taxes, massive cuts in services, job losses, pensions and so on.

No. This is wrong. The money is there. It's being used to do £4 trillion a day in currency speculation. It's being used to speculate on commodity markets. It's being used for all manner of totally pointless activities that have only one function - siphon money out of the system and put it in the pockets of the financial elite.

As I argued yesterday, we need to introduce a Financial Transaction Tax now. It's been voted for by the European Parliament. It has the approval of Merkel and Sarkozy. What are we waiting for?

The table shows data for the 17 countries in the Eurozone that I got from the huge data set provided by the IMF in april 2011. It provides information about Gross Government Debt, Revenue and Expenditure together with GDP for 2010 - all listed in billions of euros. Total debt for the Eurozone countries is now €7.7  trillion. That certainly sounds like a lot of debt. But, if you compare the figures with the values for financial transactions that I extracted from the BIS tables (for 2009 unfortunately), you can see that the numbers are totally dwarfed. In Belgium transactions exceeded GDP by 713:1. In Germany the ratio is 224:1. And even in countries like France, Italy and the Netherlands, the ratio of transactions to GDP exceeds 100:1.

Unfortunately, the BIS doesn't compile data for the other countries, and so we will have to guess. But, it seems highly likely that the average ration of 261:1 might provide a reasonable first guess for the value across the whole region. (Isn't it scandelous that no-one seems to have any real numbers for financial transactions?)

This means that we can estimate that total financial transactions within the Eurozone could be of the order of €2860 trillion. This number actually appears quite plausible given that the BIS total for the USA is $3800 trillion. The value for the Eurozone is roughly 500 times total government revenue from all the existing tax mechanisms (income tax, VAT, taxes on profits, social security and health contributions etc etc), meaning that they could all be abolished with an FTT of around 0.2%.

But in the present context, what is even more interesting  is that the total Eurozone government debt of €7.7 trillion could be paid off very rapidly by a modest FTT. Governments simply have to decide whether they want to impose an FTT of about 0.28% which would pay it all off in 1 year, or maybe spread the repayment back over 5 years with a rate of only about 0.06%.

Who could possibly object to solving all the Eurozone crisis, and getting rid of all current taxes by imposing a very modest 0.3% Financial Transaction Tax?

Solving the debt crisis in 5 years with an automatically varying FTT

It's now nearly a year since I came up with the idea of replacing virtually all the current tax mechanisms (income tax, taxes on company profits, sales taxes, state health and pension contributions...) with a single fixed rate Financial Transaction Tax.

One recurring problem concerns the question of determining the rate to apply. While many people are now supporting  low rates such as 0.05% as a way to limit speculation and finance specific programs, I have been proposing potentially higher rates - enough to allow all the other tax mechanisms to be removed.

Actually, the rates needed may not be very high. For example, given that financial transactions in the UK economy are at least £900 trillion a year, and total UK government revenue is  currently £540 billion, an FTT of just 0.06% would be enough to abolish all the existing forms of revenue. In the USA, financial transactions are at least $3800 trillion a year, and given total government revenue of $4.6 trillion, this means that the break-even point would occur with a rate of just 0.12%. Even in France, where financial transactions are relatively modest compared with the financial giants that are the UK and USA, the latest numbers from the BIS suggest transactions running at around €250 trillion a year. With government revenue of €819 billion, an FTT of 0.33% would fit the bill.

This all looks very promising. But of course, some would argue that as soon as an FTT is implemented, the speculators would go elsewhere and the source of revenue would dry up. How can this be handled?

Here's a possible solution. Impose an FTT rate that is continuously updated to maintain government revenues at the desired value. If speculation starts to wain (something that would in my humble opinion be a very good thing), the FTT rate would automatically go up to compensate. Would the typical man in the street in the UK be terribly upset if the transaction tax went from 0.06% up to the 0.33% value in France? Of course not. Relative to the current situation where he is paying 20% VAT after already paying income tax, council taxes and so forth, he will always be better off. Indeed the only ones who might complain would be the hedge funds and traders.

I would propose going even further. As we all know, public debt in the USA has just reached $14.3 trillion dollars. Even if the Tea Party lunatics had their way and all government spending was banned and all taxes eliminated, there would still be an outstanding debt of $14.3 trillion.  With current market interest rates (which may well increase if the USA's triple AAA status is downgraded), the US taxpayer would still be forced to pay out something like $1 trillion a year just in interest payments.  The solution? Set the FTT value such that the entire $14.3 trillion is paid off over say a five year period.  This would require about $5 trillion a year over the five year period which would require a further 0.13% FTT in addition to the 0.12% to replace the government's current revenues. A total of 0.25%, and the USA could be out of debt in five years without having to cut back on welfare, healthcare and all the rest. Hey, and Obama wouldn't even have to increase income tax on the super rich - he would be able to abolish income tax!

Let's try the idea out in the UK where the national debt is currently running at £2.2 trillion (if bank bailouts are included, which of course they should). Paying that off over 5 years would need around £500 billion a year. That's less that 0.05% of the £900 trillion in transactions. So, again you could pay off the entire national debt and cover all the government's expenses and abolish all the main forms of taxation with an FTT of little over 0.1%. Sounds sensible to me.

Finally, for France, where the national debt currently stands at around €1.6 trillion, this could be paid off over five years with around €300 billion a year, which could be achieved with just an extra 0.1% over the 0.33% needed to remplace the current sources of income.That's well under 0.5%, which is the rate of Stamp Duty in the UK, the amount that you have to pay the government every time you buy shares. That hasn't prevented the London Stock Exchange being a major centre for share trading - nor would it prevent people doing business in France.

But, finally, the beauty of the scheme lies in the fact that by having an automatically varying rate, the levels of revenue would remain static even as speculation dies away (or moves elsewhere). Since changing the FTT rate is effectively as simple as changing a single number, this would be trivial to implement.

It all seems so simple, clean and fair. Everyone is treated exactly the same, and all parts of the economy will contribute to getting things back on course. If you see any fallacies in my argumentation, please let me know. For the moment, I don't see any.

I invite any candidate in next year's Presidential election in France to put this in their program. I would predict that anyone who did would have a good chance of winning.

How did the Tea Party do it?

How is it possible that the US has just agreed to trillions in spending cuts without any increase in taxation? George Monbiot's commentary in today's Guardian provides a chilling explanation.  He explains the origins of the Tea Party movement. You might be forgiven for thinking that the Tea Party fanatics, who seem to be  America's answer to the Taliban, were motivated by their revulsion by the massive bank bailouts. That is certainly what they would like to tell you. But, as Monbiot argues lucidly, this is actually nonsense. Here's the real origin of the Tea Party movement.

The movement started with Rick Santelli's call on CNBC for a tea party of city traders to dump securities in Lake Michigan, in protest at Obama's plan to "subsidise the losers". In other words, it was a demand for a financiers' mobilisation against the bailout of their victims: people losing their homes. On the same day, a group called Americans for Prosperity (AFP) set up a Tea Party Facebook page and started organising Tea Party events. The movement, whose programme is still lavishly supported by AFP, took off from there.
So who or what is Americans for Prosperity? It was founded and is funded by Charles and David Koch. They run what they call "the biggest company you've never heard of", and between them they are worth $43bn. Koch Industries is a massive oil, gas, minerals, timber and chemicals company. In the past 15 years the brothers have poured at least $85m into lobby groups arguing for lower taxes for the rich and weaker regulations for industry. The groups and politicians the Kochs fund also lobby to destroy collective bargaining, to stop laws reducing carbon emissions, to stymie healthcare reform and to hobble attempts to control the banks. During the 2010 election cycle, AFP spent $45m supporting its favoured candidates.
But the Kochs' greatest political triumph is the creation of the Tea Party movement. Taki Oldham's film (Astro)Turf Wars shows Tea Party organisers reporting back to David Koch at their 2009 Defending the Dream summit, explaining the events and protests they've started with AFP help. "Five years ago," he tells them, "my brother Charles and I provided the funds to start Americans for Prosperity. It's beyond my wildest dreams how AFP has grown into this enormous organisation."
AFP mobilised the anger of people who found their conditions of life declining, and channelled it into a campaign to make them worse. Tea Party campaigners take to the streets to demand less tax for billionaires and worse health, education and social insurance for themselves.

As I say... truly chilling. The power of the billionaire lobbyists seems without bounds.