Taxing speculation

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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.

Not all jobs are worth saving

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This specific story is a couple of weeks old now, but the question of a tax on financial transactions is one which will be around for a while.  The Sunday Times referred to it again yesterday, but that’s hidden behind their paywall.

The UK Chancellor has already said that the UK will veto the tax unless it is agreed worldwide rather then in Europe alone, although those EU countries keen to see such a tax imposed are already trying to work out how they can find a workaround for any UK veto – perhaps by restricting the tax to the Eurozone.

The UK’s objection is based primarily on the potential job losses which might follow such a tax, amid concern that the activities will simply be relocated elsewhere.  And, if the effect of such a tax were to be solely the relocation of the activities taxed, then such a concern is perhaps understandable; but what do we mean by ‘relocation’?

The FT story said that such a tax would “wipe out or displace up to 90 per cent of derivatives transactions”; and there are two parts to that statement.  That mirrors the fact that those seeking the imposition of such a tax have two objectives, and for me the second, that of discouraging excessive risky behaviour, is the more important. 

As the EU’s impact assessment puts it, the term ‘relocation’ in this context “reflects both the move of activities elsewhere outside of the taxing jurisdiction and the disappearance of some types of activities … Such disappearance could be seen as positive if the activities targeted are considered as harmful”.

Certainly, it is true that some of the jobs would be relocated elsewhere, but many of them would simply disappear if, as the study predicts, “the volume of EU derivatives trades will plummet by 70 to 90 per cent”.  That looks like a good result to me, not the disaster as which those involved paint it.  These trades are part of what causes volatility and instability as speculators and gamblers play the markets; they add nothing to the movement and allocation of real capital.

It comes back to a subject I’ve touched on in other contexts in the past.  There are some forms of economic activity which, overall, do more harm than good, and supporting them because they provide jobs is a short-sighted view.  Those of us who want to rebalance the economy away from damaging activities have to accept that there will be job losses in the process – the challenge is to plan for the alternative future, not to protect the status quo.