it is not that different from the stamp duty Britons already pay when dealing in houses or shares. And it could be very lucrative. One study suggests that a 0.05% tax on all financial-market transactions around the world would rake in well over £400bn. Those sums could be used to pay back money borrowed to bail out banks, and to help poor countries prepare themselves for climate change.
But the money has to come from somewhere, right? The £30bn that the TUC thinks is available must come from profits (= reinvestment, or dividends for pensions, or something) or be passed on to customers in some way.
You can’t escape that identity relationship: GDP is either going to go to governments, wages or capital. If the government closes its deficit, it has to hit someone, somewhere. As Dillow pointed out before, increasing the deficit probably supported profits. Decreasing it will certainly reduce them. If you rearrange his equation:
P = (C – W) + I + (G -T) + (X – M) – O.
(T – G) = (C – W) + I + (X – M) – O – P
then the only way you can harvest more tax T (given constant govt spending, G), is either to:
- increase net exports (X-M)
- Increase consumption relative to wages (ie increase C-W). Could be by forcing lower wages??
- Increase investment
- Take away rents (O) or Profits (P)
Caveat: accounting identity not causal relationship. But other things being equal a country with higher government surplus because of a higher tax ought to find the effects of this have hit, somehow, through the right hand side of the equation. Given that the tax is applied internationally, it can’t come from X-M for ALL countries (and see posts, passim, about our structural difficulties with increasing X). So something domestic has to provide the funds.
So, raising taxes reduces funds in the rest of the economy. The other factor to examine is: what behaviour does it discourage? In this case, it’s clear. 5bps of additional transaction cost (assuming for a moment that it is enforced perfectly) would throw out masses of short-term trading. When I was at IG, there were few products at an institutional level that charged much more than 5bps. Often, there would be brokers and introducers squabbling over 1bps (or 0.01%) – meaning that this would slaughter the profit margins for large swathes of city business. Short term trading would be blighted.
So what? I hear most of you say (including, I suspect, both Pauls . .. .) But the cost of the loss of this business is unlikely to fall just on obnoxious people wearing braces. For them as a whole, it is a zero-sum game. Instead, the cost will fall, semi-visibly, on people who don’t have the skill to trade markets with discrimination, and therefore rely on just turning up and saying “sell” or “buy” and being assured that so competitive is the market that they will get the same price as someone who spends all day working out when best to do it.
In other words, there will be a considerably greater chance that Joe Public will get ripped off. Or Joe Public’s pension fund. Somehow, that abstract accounting identity above will be made to balance by JP selling at 99.4p rather than 99.8p a few hundred billion times, or buying at 100.3p rather than 100.1p. It will be insidious, stealthy, and wrong, and he will have no idea it is happening to him.
Above all, it will not help prevent another crisis. That was caused by all sorts of things – but markets being too liquid and fast moving was not one of them. Unless you are one of the still-deluded that thinks short-selling was a cause of the crisis (in which case there’s a book been written for you).
Disturbingly, I find myself in agreement with Tim Worstall here. Even more disturbingly, Tim looks about 20 years older than I expected from someone who calls himself “Timmy”. He writes:
Sounds like a delicious plan, except that free lunches are rarely that exquisite. If we are to believe Willem Buiter (and there’s no real reason not to) then the City produces some 4% of UK GDP. That’s the City, remember, the wholesale markets, the fat cats and the pinstripe dealer boys, not your local bank branch or other financial services like car or life insurance. £30-£40bn is 2-2.5% of total UK GDP. Are they suggesting that a sector can have more than half of its entire value taxed away without that really changing very much at all?
His article also points out how it may kill the LIBOR market stone dead.