How the recent tax avoidance scandal shows that the softly softly approach won’t work, and we need a financial transaction tax.
Ed Miliband repeatedly challenged David Cameron at Prime Minister’s Questions recently to close a tax loophole that allows hedge funds and others to dodge the stamp duty they should pay on share transactions. Last week in parliament a report was launched by former senior banker Avinash Persaud which shows that by tightening such rules we can raise a potential additional £2bn year. In both cases the Conservatives have looked the other way. Perhaps it’s something to do with the Conservative party receiving a large wedge of their funding from the financial sector?
It fits a pattern. The government has bitterly fought European legislation designed to keep financial services in check; the ringfencing of investment and retail banking has been delayed until 2018, a decade too late; and no individuals have been convicted for their part in the crisis. The list goes on: an anaemic bank levy has raised little revenue; financial sector corporation tax receipts are dwindling and financial sector remuneration is so out of sync with the rest of the economy it took senior bankers just the first week of January to earn what the average Briton will take home for all of 2015.
Timidity towards the Stamp Duty (itself a very modest proposal) is thrown into even starker contrast when we consider what is happening across the channel. Eleven European countries, that in total make up around 70 per cent of European GDP, are going further – they’ve committed to a broader Financial Transaction Tax. Our stamp duty, which is set at a rate of 0.5 per cent, is paid every time a UK share is traded. As France’s President Hollande indicated earlier in the year, the European proposal will apply to shares, but crucially it will also apply to the colossal market of financial chicanery known as derivatives. Whilst the details are still to be hammered out this is likely to raise in excess of £10bn a year for participating countries.
This is not a policy preserve of the left – Germany is one of its biggest champions. Like us, they too have unfurled a wide-ranging austerity programme, yet with a quid pro quo: if the public are paying the price of the economic crisis they did little to cause, the financial sector must also pay its share.
Of course, some financial sector players are squealing in horror – but they would protest about a tax they’ll have to pay wouldn’t they? Indeed, we should be more concerned if they were silent. The truth about FTTs is more prosaic than critics suggest. Many moderate variations of the tax have already been successfully implemented around the globe. Most have been implemented unilaterally without unduly impacting on markets, putting paid to the idea they must be global to work. The UK’s stamp duty provides the blueprint – it captures share trades wherever in the world they take place, since without it, legal title will not be transferred to the new owner. This is so effective, 40 per cent of its revenue comes from overseas counter-parties.
Closing the stamp duty loopholes could raise us £2bn a year in extra revenue – this offers a real chance for Labour to put itself on the side of the majority of the electorate and not on the side of a small cabal in the Square Mile. But the real prize comes in extending the stamp duty to a fully-fledged FTT that covers derivatives and other financial asset classes, as they are doing on the European mainland. Labour shouldn’t get bogged down in old arguments about waiting for the United States to join the proposal – not now it’s happening on our doorstep. We should act.
As I set out in my new book, the FTT isn’t a panacea, and must sit alongside other measures such as reforms to inheritance tax and a higher rate of VAT on luxury goods. What it is though, is a moderate, credible and proven revenue raiser that will also curb some of the sector’s most odious practices such as high-frequency trading that deliver little social value.
It’s time we learnt the lessons of history: a softly softly approach to the financial sector does not work.