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Why Financial Transactions Taxes Don’t Work

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That whole Robin Hood Tax thing has gone rather quiet in the past couple of years at least in the forefront of the public arguments. It’s still out there though, still floating around the wish list of the economically illiterate.

The idea is, as we all recall, that the financial markets do a lot of trading back and forth. There’s so much trading that if we just put a teensie bit on each trade – 0.01% say – then we’d raise billions upon billions to do lovely things with.

There are all sorts of problems with this, drying up liquidity in financial markets doesn’t seem like a good idea. Getting rid of the HFT traffic would mean spreads widen and thus every trade – including those by your pension – will become more expensive. And so on. But the biggest is that it wouldn;t actually raise any money.

The European Union showed this by calculating out the effect that GDP would be smaller as a result. Multiply the average tax rate of GDP (35% for us, 45% or so for France etc) by the fall in GDP and we see the loss of revenue. That loss being greater than the predicted revenue from the FTT. That is, 0.01% on financial transactions is above the Laffer Curve peak for this type of tax.

It’s possible to be a little less accurate but still revelatory by using these numbers:

Finance firms contributed a record £75.6bn in tax to the Treasury in the last fiscal year, underlining the sector’s importance to the economy and the exchequer.

Insurers, banks, pension funds and other finance firms play an outsized role in the British economy, accounting for about 3pc of the workforce – over a million jobs – but contributing one in every 10 pounds paid in employment taxes.

That’s the tax from the industry, not the taxes paid by the firms – NI is incident upon the workers’ wages for example.

But think on it for a moment. The estimations of the revenue from the FTT were £30 billion or so. The claimed desire is to shrink finance back down to the appropriate size – appropriate in the minds of those who know nothing about finance or economics of course – as against that of the economy.

So, the aim is to shrink the largest tax paying sector of the economy. We really do have to offset the loss in those taxes against the claimed revenue from the new tax. If finance halves in size then we lose all of that claimed new FTT revenue, don’t we? And that’s before we even start to think of the macroeconomic effects of the new tax.

FTTs simply do not work in raising income for the Treasury. Thus they cannot be sold by using the glorious baubles we can buy with the new revenue.

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