Why a Tobin tax would be a disaster

 
Allister Heath
VERY strange. That is the only way that the coalition’s half-hearted, let’s have our cake and eat it, position on the Tobin tax can be described. The Treasury is rightly opposed to the European Union’s plan – but it actually supports a Tobin tax in principle, as long as it is implemented globally and not just in the EU. Obviously, Europe going it alone would be especially disastrous as business would simply migrate elsewhere. Yet even were it imposed globally, a Tobin tax would still slash transaction volumes, make markets less liquid, increase the cost of raising finance and punish companies that operate in more than one currency (for more, see page 22).

The coalition’s mealy-mouthed approach means that it is able to privately promise its supporters in the City that it is on their side – while attempting to remain equally friendly with the influential left-wing pressure groups, charities, celebrities and media organisations that back such a tax. Not for it a principled stand; no wonder that there is a growing view that (with a few exceptions) the coalition doesn’t believe in anything apart from clinging to power.

The problem is that ideas matter. If the government refuses to make the intellectual and economic case against a Tobin tax, it will actually make its long-term implementation more likely. I know that many people genuinely believe that such a tax would be a good thing and would raise billions – the EU’s guess yesterday was €57bn a year – at little or no cost to the economy. Unfortunately, they are deeply and sadly misguided.

MEPs have argued in the past that the tax would collect £20bn from UK trades alone, an astonishingly large sum of money equivalent to almost half of all corporation tax receipts. That is of a similar order of magnitude as the entire global profits of UK-based universal banks – though it would be paid for by thousands of financial firms that operate here and their investors, including pension funds and insurance firms, whose returns from investments would be decimated. It is absurd to believe that what would probably be the biggest ever tax hike (much of it sent to Brussels) could quietly be imposed on the City without any consequences in terms of jobs.

Others believe the real cost would be even larger. The World Federation of Exchanges puts the total value of financial transactions in the UK at £600 trillion a year. Given that Tobin supporters believe taxed transactions would remain at identical levels (a silly suggestion, of course, but the crucial assumption that explains why pro-Tobin folk believe their tax will raise so much) this means that the tax could yield £40bn-£300bn, depending on the exact composition of trading (yesterday’s proposal was for a minimum tax rate on trading of bonds and shares of 0.1 per cent and 0.01 per cent for derivatives). There is of course no way that such sums would ever be raised. Transactions would simply cease to happen. 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, while increasing volatility by forcing traders to concentrate on larger, less frequent trades.

Those deluded souls who believe they have discovered a new way of solving the world’s problems by taxing financial transactions will have achieved nothing other than crippling the economy. Why can’t the coalition simply come out and say this?

allister.heath@cityam.com
Follow me on Twitter: @allisterheath