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THE ROBIN HOOD TAX MYTH-BUSTING GUIDE Reality Vs THE ROBIN HOOD TAX MYTH-BUSTING GUIDE Reality vs. Fiction www.robinhoodtax.org.uk Europe’s biggest economies plan to implement a Financial Transaction Tax (FTT) by the end of 2012. Left and right-of-centre Governments are uniting behind a proposal that will help ensure the banking sector pays its fair share to repair the damage caused by the financial crisis. Yet the UK continues to reject the idea, choosing to favour the privileged interests of the financial sector above the clear desire of the British public for the financial sector to make a bigger tax contribution.1 The Government have called on a dodgy dossier of bad economics and half truths in its attempt to justify opposition to the FTT. Here we dispel the ten main myths: Myth 1: fact, the UK is the only one of Europe’s biggest The FTT is a nice idea, but a economies not pushing this. pipe dream The FTT is not as radical as its opponents like The Financial Transaction Tax (FTT) is a small to make out. Many far larger transaction costs tax on transactions involving the four main asset already exist - trading commissions, spreads, classes: equities, bonds, foreign exchange and clearing, settlement, exchange of fees and their derivatives. The European Commission has administration costs for example. An FTT would proposed a tax rate of 0.1% on equities and bonds only be a fraction – 10% – of the overall costs.4 and 0.01% on derivatives (excluding currency) FTTs are already commonplace and have 2 which would generate ¤57 billion a year. been introduced permanently or temporarily Nine EU countries3 are pushing for this to be over many decades in over 40 countries implemented this year via the ‘enhanced co- (see map) including the UK where we have operation’ procedure. These countries make a very successful FTT on share transactions up 67% of EU GDP (90% of Eurozone GDP). In (commonly known as the Stamp Duty). Financial Transactions around the world Existing FTTs raising less than $1 billlion Existing FTTs raising more than $1 billlion Myth 2: Myth 4: The FTT is a Brussels Tax An FTT would cost thousands It is wrong to describe the European FTT of jobs as a Brussels tax. Like all taxes, it would be One of the more outlandish assertions of our collected nationally meaning it is up to each opponents is that an FTT would cost thousands individual country to decide how to spend the of jobs. This was extrapolated from the (now money. Both France and Germany, the biggest discredited) claim that an FTT will impact supporters of a European FTT, are against using negatively on growth. The truth is there would the revenue for the EU budget. be a relatively small number of job losses from the investment banking sector, particularly in Myth 3: the specialist field of High Frequency Trading; An FTT would damage economic we say this is no bad thing. growth Extremely high remuneration attracts some of In claiming an FTT would be bad for growth, the brightest graduates into finance, instead of to the Government and others are highly industry, commerce, research or innovation. An disingenuous to ignore the positive affect FTT would help curb the profitability of some of billions in additional revenue could have the sector’s most reckless trading, lowering the on the economy through, for example, job- incentive to work in the sector and helping to creation, infrastructure investment and poverty rebalance the UK back towards the real economy. reduction. Critics also ignore the long-term benefits of improving market stability through Myth 5: reducing high-frequency ‘noise’ trading. FTTs need to be global to work A comprehensive study that takes this into The evidence is that FTTs do not need to account has shown that in the UK a broad- be global to work. Over 40 countries and based FTT (as proposed by the European regions – home to some of the world’s largest Commission) would raise £8.4 billion a year and financial centres (see map) – have unilaterally boost GDP by 0.25% - the equivalent of 75,000 implemented FTTs on different asset classes. new jobs.5 These include Hong Kong, UK, South Africa and Japan. The European Commission’s own most up-to- date modelling corroborates this.6 Earlier EC Let’s take the example of the UK’s current FTT models that predicted an FTT would impact on share transactions (Stamp Duty) - the key negatively on GDP (initially -1.76%, then -0.2%7) design feature is that no matter where in the should be discounted since they do not include world a transaction in these shares takes place the positive benefits of an FTT. - London, New York or the Cayman Islands - the tax can still be collected. This severely limits the It is also worth noting that the Government and opportunities for avoidance. other critics pay conspicuous attention to the impact of an FTT on growth whilst remaining If the UK’s example is followed, when an asset is mute on the hugely negative impacts of last traded the FTT has to be paid or the change of year’s increase in VAT or to cuts in public legal ownership will not be registered. In other spending for example. words, if you don’t pay the tax, you don’t end up owning the asset - a very high consequence of non-compliance. One reason the financial sector is lobbying so hard against the FTT is exactly because it is a hard tax to avoid. By setting the rate low, and making the costs of non-compliance high, the incentive to avoid paying the tax can be significantly reduced. The IMF has itself concluded that FTTs in general “do not automatically drive out financial activity to an unacceptable extent”. Myth 6: Myth 7: Ordinary people and pensioners The City of London stands to gain will end up paying by opting out of a European FTT The tax would impact on investment banking This argument is often used by those – such as and not retail or high street banking. 85%8 of the Government - who confuse the interests of trades that would be FTT-liable are carried the City of London with the interests of the UK out by banks and other financial institutions, as a whole. They hope that the imposition of a such as hedge funds, whose clients are often European FTT would lead to trades migrating high-net-worth individuals. Ordinary people do from Europe to the City. But provided the not, by and large, trade assets such as bonds or FTT is well designed, there is no impetus for derivatives. transactions to migrate since the geographical location of the trade is irrelevant – an FTT Competitive markets should mean FTT costs implemented by France, Germany and others are not passed on from investment banking to would still apply to European trades taking retail banking. Even if markets fail to do the job, place in London. legislation can ensure this does not happen. Equally, if an FTT was implemented by the UK, The FTT rates are set extremely low (the it would apply to transactions taking place European proposal ranges from 0.1%-0.01%) in Europe and elsewhere. So by blocking, the precisely to avoid having an impact on Government has cut off its nose to spite its face pensions, ordinary investors or savings. The and is achieving little more than turning down vast majority of pension funds pursue buy-and- billions in potential revenue. hold strategies, turning over their portfolio on average once every two years.9 A micro-tax applied at entry and exit from the market would Myth 8: be negligible compared with other costs and Sweden’s failed FTT proves they benefits.10 Compare this to High Frequency don’t work Trading (HFT) which can turn over its entire Opponents of the FTT often cite the negative portfolio in a day and would therefore pay experience of the Swedish transaction tax, but 1666 times more in transaction taxes than the this is much like holding up a picture of a bike average pension fund. with square wheels and saying all bikes are The disproportionate impact of an FTT on flawed. The existence of successful FTTs in HFT is likely to lead to a reduction in trading more than 40 countries proves that the Swedish volumes. Many economists believe this would experience is the exception and not the rule. be a good thing as many of these trades are The problems encountered boiled down to one “socially useless”11 and this area of the financial key design flaw: the tax was levied on trades markets has grown out of control in recent conducted by brokers registered in Sweden, years to the point where it accounts for 70% of meaning you could simply avoid it by using non- trades on the New York Stock Exchange.12 Swedish brokers. Critics who cite this example The IMF has itself studied who will end up fail to mention the UK FTT on Shares (Stamp paying transaction taxes and has concluded Duty), which instead falls on the purchase of that FTTs would in all likelihood be ‘highly shares in UK-registered companies wherever progressive’. This is in complete contrast to VAT, they are traded in the world, making avoidance which falls disproportionately on the poorest extremely difficult. people. This is one reason banks are lobbying so hard against an FTT. Myth 9: Myth 10: FTTs would reduce market liquidity Revenue from an FTT will not be Some argue that an FTT would increase the used to tackle poverty and climate cost of capital by adding to transaction costs, change reducing liquidity and hitting growth.
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