By RICHARD CARR | Published: APRIL 30, 2014
Osborne’s legal challenge was always going to fail, writes Richard Carr
This morning the European Court of Justice has announced that the UK has failed in its legal challenge to prevent 11 EU Member States – including France, Germany, Italy and Spain – introducing a Financial Transaction Tax across shares, bonds and derivatives.
The Treasury may be back for another bite in the coming months; but this was a bizarre challenge to begin with.
George Osborne’s case was largely built on the notion that taxing financial assets across national borders would undermine the European free market. The slight spanner in the works is that the UK already does this, with its own stamp duty on shares. So unless the Treasury is willing to pass up the £1bn raised each year from British owned shares traded across the globe this was always problematic.
VAT also offers another precedent of transnational co-operation on tax between member states. It was a bit of a nonsense – and remains as such.
It also jars with the type of historic broad sympathy towards the FTT I cover in my new book One Nation Britain. In his People’s Budget of 1909, David Lloyd George proposed to tax financial intermediaries and a range of derivative products. In 1936 Keynes famously called for a ‘substantial’ levy on all financial transactions. In 1938 Harold Macmillan did not quite advocate a tax, but he did assert that large swathes of the stock market were performing ‘no useful social function’ – presaging Adair Turner’s ‘socially useless’ verdict on certain City activities by 70 odd years.
The history matters. Though all current analytical roads on the FTT tend to lead to Osborne, it could also be argued that Lloyd George was more advanced than present day Labour policy. The party is certainly oddly placed on the tax right now.
Defenders of Labour’s reticence on the FTT claim that financial markets have changed, that markets would leave the UK were we to tax them, and that transaction taxes are just a levy on pensioners who would inevitably be clobbered by such a naïve tax. If these sound like Osborne it is because Labour remains, to all intents and purposes, scarcely distinct from the government on this issue.
Certainly, no-one could deny that financial markets are an ever evolving beast. Yet this should not be an excuse for inaction, but rather for doing more. It is worth dealing with a few myths in this regard.
Firstly, most obviously, these taxes exist already. The City’s cry that they cannot work is disproven by the fact that they do. Forty countries have levied various forms of them. Brazil currently raises £10bn a year through taxes on various assets, and the US funds its stock exchange regulator by a $1bn levy on shares. It is incredible how well the financial sector’s Derren Brown act works on this – people continue to parrot the argument that they cannot be done.
If badly designed (as in 1980s Sweden) they will not work as best they might, but these lessons have long been absorbed across the globe. Unilateral implementation has already happened, we’re now just debating what form it takes.
Secondly, were the UK to follow the EU-11 FTT model, it would involve implementing a tax cut for the purchasers of shares. Certainly it could be argued that the present UK stamp duty is set too high – that is a perfectly reasonable position.
So, good – Labour should promise to deliver a tax cut for responsible investors paid for by levies on derivatives, largely the preserve of the speculator. A five-fold drop in the stamp duty on shares to 0.1 per cent paid for by a 0.01 per cent or even 0.005 per cent levy on derivatives would certainly be a net earner – for HMRC and ordinary long-term investor alike.
Surely a useful part of a more responsible capitalism – a line forwarded by the IPPR last year.
And yet, like The Simpsons’ Helen Lovejoy, the City often cynically cries ‘won’t someone please think of the pensioners’ who allegedly would all be in absolute penury were our stamp duty to be rolled out to include modest further transaction taxes.
Slight problem on the evidence front here again however – of the three countries who saw the most pension fund growth over the unstable 2005-2010 period, one was Australia which levies a mini-FTT rather similar to our stamp duty, whilst the first and third biggest gains were seen in Brazil and Taiwan which not only levy FTTs, but the most broad based FTTs on earth. Removing some of the speculative chaff from the markets helps pensioners’ wheat to grow – that is the global experience.
But this is not even the most pernicious falsehood. In a sense, our financial markets are even more dangerous than press coverage suggests. Bashing bankers’ bonuses and deriding the jackpot profits of the big banks is all well and good – certainly both are obscene. But they mask the real problem. The government is able to put a bank levy sized plaster on the wound, and claim they are doing their best. Labour might make that plaster slightly bigger, and can crow about that.
Yet neither deal with the problem. $1.3tn worth of interest-rate derivatives are traded in the UK each day – more than our government spends in a year. Over half this global market (according to the BIS) is carried out by small and nimble hedge funds, special purpose vehicles and such like. These funds are too small to be hit by the bank levy, but big enough to construct a house of cards that may again come crashing down.
By all means tax the bigger banks to make up for their clear and repeated massaging of corporation tax payments, but unless activities like derivatives trading begin to be taxed the next bubble will grow and grow. On present trends we will be at double the 2007 interest rate derivative trade volumes as soon as 2019. This market makes house prices look like a damp squib. We must act now, or it will be too late. The next crash will be even worse.
Past politicians knew this. Harold Macmillan urged society ‘to seek the means by which its welfare might be defended,’ whilst interventionist liberals like Keynes and Lloyd George looked to effect a concrete tax to make this so. Some present politicians know it too – almost fifty councils have called for an FTT in the past year, whilst Peter Hain and Lord Myners have publicly backed it. It is supported by voters in all parties.
Nobody is calling for the wholesale destruction of the City, just a tax system that aligns to contemporary circumstance. The FTT is about ironing out anachronisms in our tax system, not waiving the red flag.
And thus whilst Osborne’s legal challenge at the ECJ was always going to fail, Labour should look beyond the usual sound bites of opposition and towards the constructive work of government. After 2008, society – and Labour – should be seeking the means by which the collective good can be defended. A FTT must be part of this story.
Richard Carr is a lecturer at the Labour History Research Unit at Anglia Ruskin University