I was pleased to see that First Minister Carwyn Jones has backed the idea of a tax on financial transactions. The Tories, of course, immediately responded by opposing it. The cynic might suggest a relationship between that and their main source of funding, but the arguments actually advanced are worth considering.
They are absolutely right, of course, to suggest that a tax in only some of the world’s markets would damage the industry in those markets, and probably drive some of the business elsewhere. The question, though, is whether that’s a good thing or a bad thing. They assume that it’s bad – I’m far from convinced. Anything which reduces the volume of speculative trading and gambling seems to me to be a good thing rather than a bad one. And sending the worst offenders elsewhere to do their business doesn’t exactly worry me a great deal either.
It’s also true that a reduction in speculative activity in the City would hit tax revenues. The Tories refer to the large contribution made by financial services to the Exchequer. As ever, however, things aren’t quite as black and white as that. It has been claimed that financial services accounts for around 8% of the UK economy, but contributes 25% of corporate taxation to the Treasury. As far as it goes, that’s true. But because the sector employs so few people relative to the turnovers involved, the total taxation from the sector – adding together both company taxes and personal taxes paid by employees – comes to more like 7% of the total, marginally less than its ‘fair share’, purely on GDP comparisons, and significantly less than one might expect looking at the overall profitability of the sector.
So, in relation to the proportion of GDP which financial services represent, they actually pay less tax in total than other equivalent sectors; one of the reasons that they are good at making profits for their owners is that they’re also good at minimising tax payments.
And anyway, is the fact that an activity which is inherently undesirable generates a lot of tax a good reason for wanting the activity to continue? I’m not convinced. Over and above that, there’s the opportunity cost. How much better off might we all be if all those clever people devising ever more complicated ways of making pennies at the margin in large enough volumes to be worthwhile applied their skills to more socially beneficial activities?
As for the line about not acting in Europe until the whole world is ready to act – that’s a recipe for no-one doing anything ever. It’s not that dissimilar to the anti-wind farm argument that the UK can make no difference because we only produce 2% of the world’s emissions. The longest journey starts with the smallest step; and if we believe that a financial transactions tax is the right thing to do, it doesn’t become the wrong thing just because not everyone is yet convinced.