There’s no place for a financial transaction tax
Germany has approved new powers for the EU’s main bailout fund. This move will certainly buy time. The big question is whether the Euro will survive in its current form and what the European leaders need to do to ensure confidence returns to our financial markets. That is the backdrop for discussions over plans for a new financial transactions tax. “It is time for the financial sector to make a contribution back to society” said the President of the European Commission, Mr Barroso to a braying crowd of European sycophants. 0.1% of a financial transaction is the proposed tax. Doesn’t sound like a lot. However it is. It would raise £57 billion Euros a year and 70% or more of the tax revenues would be generated in London.
This kind of rhetoric from politicians who take absolutely no blame for the part they played in the financial mess (and continue to play as a result of their intransigence over Greece) as we are all struggling does miss some important points.
If a bank makes a profit, they pay corporate tax. They employ thousands of people and will therefore pay National Insurance. On those salaries and bonuses further National Insurance and income tax will be paid. Firms pay rent and business rates, VAT and a range of other taxes on the goods and services they purchase. To say they don’t already contribute is a non-starter for me.
But, say the politicians, we bailed out the banks and therefore they must pay. It’s a powerful argument that resonates with people up and down the country. In fact it resonates around the Western World as we look at the horrific deficits our governments have built up over the past few years. Again, however, this kind of tax does immense damage. And guess who will pay? You.
WHAT?! How did I get to that conclusion? OK. So the banks will notionally pay the tax but whom are they transacting for? Very often it’s large companies or pension funds. If it’s large companies then they will indirectly be footing this bill and their profits will go down. They will in turn look at their costs and either salaries will remain depressed, prices may rise or dividends be cut. Pension funds undertake countless trades in stocks, shares, bonds and financial instruments. If you take money out of trading rather than profits, you increase the cost of capital and erode that capital. The pension deficits we already have will simply get worse and your pension will be reduced in value.
I have read the most astonishing array of rubbish written by some economists, commentators and other “interested” parties. Don’t believe that this kind of tax won’t have a significant and negative impact on the UK’s economy. Because it will. Financial services companies are some of the most footloose industries in the world. They came to London because of our regulatory structure. Piece by piece we are eroding the reasons for companies to locate here. Furthermore the notion that manufacturing industry is held back because of our dominant financial services activity is bogus. We lost our manufacturing base long before the Thatcher era. We lost it when we forgot how to invent. When wages for relatively low skilled work went sky high. When quality was something that paired up with street and arrived in a tin and not in a car we manufactured.
Our government must hold firm. I know it’s tempting to look to banks and bankers as the bad guys. That it’s a popular vote winner. It would be the wrong thing to do. Perhaps we should look at where this idea came from. In the UK Lord Adair Turner suggested it. The man who described much of what banks do as “socially useless”. Perhaps he should have looked at the failings within his own organisation, the FSA before criticising others.
I could stop here. However in these situations, it’s easy to criticise a plan and provide no solutions. However that’s not the way I was schooled in business. If you are going to criticise, as I was told on my first official day of work, always bring a solution. Best advice I was ever given.
There’s no doubt that the tax rules not only in the UK but internationally are loose. There’s too much red tape and confusion. There’s also too much leakage from the system. In addition to that we need a taxation system that encourages businesses and individuals to want to invest in Britain, to live and work here too.
We also need to reappraise the tax system and what it’s there to do. Tax on capital isn’t a great way to raise revenue in the longer term. Income and profit is where we should concentrate our efforts. And so a range of tax changes are required:
i) Scrap the 50 Pence tax rate
ii) Scrap stamp duty (or bring it down to 1%)
iii) Reduce VAT on home building works to 5%
iv) Update the Capital Gains Tax allowances. Bring down income tax to the same rates of tax on earned and unearned income
v) Make pensions completely free of tax and reverse the changes made in 1997 by Gordon Brown to tax dividends
vi) Bring in mortgage relief for everyone with a mortgage for the first (say) £250,000
vii) Encourage saving and investment with more tax free allowances
If the rules are simplified and the rates harmonised, there will be less need for complex structuring. Not only would tax take increase but avoidance and evasion would fall too. Non-domiciled people would have less reason to be overseas and we’d capture a higher level of market activity.
Similarly if Europe is hell bent on introducing this tax. Let them. Let’s make sure we don’t. London must remain an international financial centre for the benefit of everyone in, what our Prime Minister would like us to call, GREAT Britain.