UK must lead by example and abolish stamp duty on shares
WHEN in doubt, blame traders. After all, it’s easier to attack “anglo-saxon” speculators than to actually try and sort out massive government over-spending, a corporatist and uncompetitive economy, an imploding welfare state and a dodgy currency. So it should have come as no surprise that the latest assault on the City was led by Anni Podimata, a Greek socialist European Parliamentarian and a member of one of the parties that helped destroy Greece. MEPs yesterday voted to impose a pan-EU financial transactions tax, a move which the UK government has pledged to block.
The idea of a Tobin tax is based on the flawed view that trading – or speculation – is a bad thing. The reverse is true. Individuals buying and selling to make a profit (with or without the use of high-frequency programmes) help the process of price discovery, make markets work better, enhance liquidity, ensure resources are priced correctly and help oil the cogs of the economy. Exchanges must of course put in place robust systems to avoid “flash crashes” – but that is no argument in favour of taxes. Things only go truly wrong when there is a bubble – but these are usually caused by central banking errors and traders are the ones who help to deflate them again. Rather than making the economy more stable, most empirical studies find that transactions taxes actually increase the volatility of prices by reducing the depth of markets, at least in the short term.
The biggest losers from a transaction tax would be investors and savers, including pensioners. As a recent IMF paper put it, the burden would “fall on owners of traded securities, at the time the tax was introduced, as the value of stocks, bonds and derivatives” fell. By making it more expensive for companies to raise finance, a Tobin tax would depress investment and thus growth. As the IMF says: “In the long run, capital owners would therefore not bear the burden; it would fall on workers, who as a result of the smaller capital stock would be less productive and receive lower wages.” Once again, socialist politicians who believe they are helping the poor will actually hurt them.
Proponents of the tax are wrong to believe that it would have helped prevent the crisis. Its root cause was that banks were exposed to unreliable loans based on bubble-level property prices. Many collateralised debt obligations were held for long periods, not constantly traded; a Tobin tax would have done nothing to prevent their popularity. The Eurozone’s crisis has nothing to do with traders either.
Even the European Commission’s own impact assessment found that “a transaction tax on securities could, without the application of mitigating effects, reduce future GDP growth.” The Danish economy minister said the measure could destroy hundreds of thousands of jobs.
The UK should go further than merely opposing the EU. It should also axe our disastrously inefficient stamp duty on equities, our very own, albeit more limited version of the Tobin tax. A report by Lord Forsyth found that the higher transaction costs caused by stamp duty depress share prices by up to 10 per cent. One study suggests that if the levy were abolished the increase in the market cap of the FTSE All Share could hit £150bn; the £4bn a year the tax raises is poor value. Oxera found that abolishing it would cut the cost of equity for firms raising capital by 7-8.5 per cent, with technology firms paying up to 12 per cent less. The government should not just oppose the EU’s plans – it should lead by example and abolish stamp duty on shares.