IT is amazing how many intelligent people believe in free lunches. The latest instance of this bizarre intellectual affliction can be found in yesterday’s vote by MEPs in Brussels to slap a Tobin tax on financial transactions in the EU. The vote fortunately has no legal power, but European parliamentarians believe their scheme would raise €200bn (£172bn) a year. Weirdly, they don’t think that grabbing such a huge chunk of cash – roughly speaking, it would wipe out all profits at investment banks and wealth managers – would have any effect on jobs, pension fund returns or anything else. Even though there would no longer be any money to be made from trading in the EU, everybody would stay put, continuing to buy and sell as before, albeit for free, and ensuring that all of the tax money were actually raised – such altruistic people, these traders.
The MEPs believe the tax would collect £20bn from UK trades, roughly as much as the total global profits of London’s largest banks – though of course it would be paid for by thousands of financial firms and their investors, including pension funds and insurance firms, whose returns from their hedge fund investments would be decimated. But as the Open Europe think-tank points out, the real cost would be even greater. The World Federation of Exchanges puts the total value of financial transactions in the UK at £600 trillion a year. On the economically illiterate assumptions used by the MEPs, a Tobin tax would thus raise between £60bn (at a rate of 0.01 per cent) and £300bn (at 0.05 per cent). Taxing just derivative, equity and bond trades would yield £40bn-£180bn. Compare that to UK corporation tax revenues of £43bn and income tax of £150bn and you realise that MEPs are plotting the biggest tax hike in British history, one that would destroy the economy at the stroke of a pen – and equally astonishingly, would transfer these resources from the UK to Brussels. Unbelievable – literally. Such sums could not possibly be raised in this way. Transactions would cease to be conducted in the EU. Tens of thousands of jobs would be lost overnight and the City of London would be destroyed. The tax would raise a couple of billion at most.
Sweden is the only country that has ever imposed a unilateral Tobin tax; the experiment was an unmitigated disaster in the 1980s and was reversed. Instead of raising 1.5bn kroner on bonds alone, as predicted, the tax collected 50m kroner a year. The cost of government borrowing went up, as investors demanded greater compensation to hold a security on which taxes had just been hiked, eroding the miniscule revenues collected. The number of transactions in shares collapsed, eroding capital gains tax receipts (stock prices also fell as a result of the tax, further cutting gains as well as making it harder for firms to raise capital for expansion and jobs). Over half of all equity trading moved to London. During the first week of the Tobin tax on bonds, trading slumped 85 per cent, even though the levy on five-year bonds was only 0.03 per cent. Futures trading collapsed 98 per cent and options trading stopped altogether.
Even were it imposed globally, a Tobin tax would still slash transaction volumes, make markets less liquid, increase the cost of raising finance for all firms and punish companies that operate in more than one currency. The British government must stand its ground and block this nonsense.
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