Osborne’s banking levy falls short of IMF benchmark

George Osborne’s planned financial services levy is a lamentable failure according to international benchmarks. The IMF has called for any banking tax in Britain to be set at £6 billion. Last week, Left Foot Forward highlighted the socially regressive nature of the £2.5bn tax which will mean banks contributing 50 per cent less than families (child benefit and tax credit cuts) to the government’s fiscal consolidation programme.


The Chancellor has dismissed the idea of a financial transaction tax, (‘Robin Hood’ campaign), and appears reluctant to curb excessive banking sector profits and remuneration without international support.

That leaves as his only option the banking levy, which will raise £2.5bn 2013/14. The IMF, however, has argued that Britain’s financial industry should be taxed to the tune of £6bn. The exact applicable tax rate has yet to be finalised by Mr Osborne. To compound matters his plan has already been dumbed down.

The original plan was to have a £20bn threshold, with tax applying on the entirety of a bank’s balance sheet (i.e inclusive of the £20bn). Now instead of this threshold, every institution will have a £20bn allowance that will not be taxed. The banking levy will affect only liabilities above that level.

The forecasted revenue from the levy is pitifully low when compared to the costs of the banking sector bailout. According to a recent IMF report of financial sector taxes, the yet to be recovered fiscal cost to the UK is 6.1 per cent of GDP (as of end-2009).

However, this figure grossly underestimates the actual cost and exposure of the entire crisis to the UK. It is believed in most advanced and developed nations it could have been as high as 25% of GDP.

Mr Osborne’s planned levy of £2.5bn, which equates to roughly 0.2 per cent of GDP in the UK, is a clear illustration of this government’s abdication of any notion of social fairness. It simply cannot be right that a recession, caused by a collapse in the financial sector and markets, places such a disproportionate share of the burden on the public.

To reduce the iniquitous Comprehensive Spending Review fiscal consolidation settlement, the burden on the financial sector can be drastically increased with the adoption of a financial activities tax (a tax on remuneration, profits and bonuses) or a financial transaction tax (a Tobin tax or the Robin Hood campaign).

Net direct costs of recapitalisation and asset purchases is estimated to average 2.8 per cent of GDP or $877 billion for the richest G20 economies. The table below highlights the recovery rate for the advanced nations of the G20. It currently records a recovery rate of 21 per cent. This illustrates the extent to which the global financial sector has escaped its moral dues.


To his credit, the Chancellor has been pushing for an international financial activities tax, which will be on the G20 agenda next month. If his government genuinely believes in ‘fairness’, they must push hard not only for an additional financial sector tax, but one that truly prices their actions past, present and future.


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IMF rebuffs critics and poses questions for financial transaction tax fans

The IMF has finally released its long-awaited report into financial transaction taxes (FTT).  The report does not seek to endorse or dismiss the idea, but rather provide a categorical analysis and evaluation of the history and full workings of any possible international transaction tax(es).


It should be welcomed by proponents, as it challenges and rebuffs many of the criticisms that have been leveled against it.Critics of financial transaction taxes, ranging from Giles Wilkes, the former chief economist at Centre Forum, and now economic adviser to business secretary Vince Cable, to the freelance journalist Tim Worstall, have outlined their opposition to the idea on several fronts.

Firstly, they argue the cost of the tax will be borne largely by the public, not the financial industry and traders operating in the speculative markets. They hold that the tax incidence, or economic burden, will fall on ordinary investors, shareholders, pension-fund holders, travellers etc. Mr Worstall even goes so far to argue that the effects are “so strong that the government could raise revenue collected by abolishing stamp duty on shares”.

A further counter to the much-vaunted tax is that an FTT will destroy marginal profit-making speculative trading. Mr Wilkes posits it is a “virtual outright ban on any speculation that is not looking for very large average profits”. He holds this would severely constrain market liquidity, and thus damage normal market operations and the workings of an efficient financial sector.

Real firms and businesses, from insurance to industry to government finance, would face a massively higher cost. Mr Wilkes states:

“Instead of facing a 0.2 per cent spread for doing a gigantic FX transaction, the absence of millions of small other-speculators on the other side might blow this out – to 0.5 per cent, to 0.9 per cent, more. Who knows? But this translates into a giant cost of capital charge on everyone else.”

A third criticism is that advocates have no idea what impact the tax will have on trading volumes and consequently, on revenues accrued. Related to this point, is their objection on practicality grounds.

So what does the IMF report say to all these points? The report argues it is difficult to make a strong economic case for introducing a currency transaction tax (CTT), since it would raise much less revenue on a considerably more elastic base than a security transaction tax (STT). This piece largely focuses on securities transaction taxes (STT).

Mr Wilkes’s point that financial transaction taxes would considerably increase capital costs for very short-term trading is confirmed by the report. However, they define very short-holding periods as a day(s). An STT at even the very low rate of one basis point reduces securities value by almost half. But for very long holding periods (e.g., 10 years), the drop in value from even a 50 basis point STT is quite small (1.4 per cent).

The report found that, in 2009, the average holding period for stocks in the Standard and Poors 500 stock index was 0.4 years, or about 3.5 months – down sharply from the average holding period of 1.8 years in 1990. The table below illustrates the reduction in security valuation and increase in cost of capital for different applied transaction tax rates:


So for an asset which has a holding period of three months (below the current market average) a 0.01 per cent STT would only reduce asset valuation by 1.3 per cent and increase capital costs by 0.04 per cent, a modest transactional cost. Also, transactional taxes over time can get priced in. For instance, the United States’ Securities and Exchange Commission (SEC), its equity market regulator, imposes a 0.17 basis point non-tax charge on stock market transactions to fund its regulatory operations, which has done little to damage market liquidity.

To soothe opponents of an STT, one potential option would be to introduce variable rates in accordance with the length of holding for an asset, i.e. a lower STT would be applicable for very short-term trades. This would take into account the narrow bid-ask spreads of short-term trades. The downside to such a system would be the additional complexity introduced. This is an idea worth exploring though.

To protect savings and investment made by the wider public, any proposed STT could be conditional on the size of the trade. Earlier this summer, Pete Stark, a US Congressman, introduced the ‘Investing in Our Future Act of 2010’ – which would amend the US Internal Revenue Code to impose an excise tax on currency transactions exceeding $10,000, equal to 0.005 per cent of the value of the currency acquired in the transaction (currency transaction tax). The $10,000 threshold is designed to target only large trades, which are predominately made by big financial firms.

Financial transaction taxes, if designed correctly, can raise substantial revenues. The IMF report stated that any proposed STT should have the broadest tax base possible, to avoid evasionary opportunities. If the goal is to raise revenue from the financial sector, one option is to improve the application. Taxing both debt and equity products will also reduce distortion of investment and financing decisions. However, they warn to be careful of taxing public sector debt, i.e. sovereign debt which would push up the cost of government borrowing. Not to do this, though, would reduce liquidity in the private bond market and increase capitals costs. This is something proponents will need to address.

The report found that unilateral STTs can work, even if they are only levied on narrow bases. They catalogue the different nations ranging from the UK (0.5 per cent stamp duty on all secondary share trading since 1986), Switzerland, Hong Kong, Singapore, and South Africa who have levied some form of an STT. This indicates that such taxes do not automatically drive out financial activity, particularly in major financial hubs like the UK and Switzerland.

There is a highly progressive element to any proposed STT, as a large part of the burden of an STT would fall on owners of traded securities. High-income individuals possess a “disproportionate share of financial assets, and would be ones to initially suffer from a fall in taxed securities prices”. In terms of revenue, a low-rate STT on stocks, bonds, foreign exchange and their derivatives could raise substantial sums. An example is that “a one basis point STT on global stocks, bonds and derivatives is estimated to raise approximately 0.4 per cent of world GDP”.

The IMF has provided no ringing endorsement for advocates of FTT (particularly for CTT), but they have provided clarity to the issue and a framework of how it can be successful. They believe an STT coordinated and implemented internationally will reduce market elasticity, and thus be able to raise larger amounts of revenue with a lower rate. If we can secure global agreement, even at a regional level (eurozone) then this dream may yet become a reality.


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How Ed Miliband can become the Tobin Tax’s greatest leader

Ed Miliband has brought a new purpose and ambition for the centre left. Central to his campaign was a bold economic prospectus calling for fairness and social justice. A financial transaction tax, more commonly known as the ‘Robin Hood Tax’, is a key tenet to his vision.


Left Foot Forward has previously argued the merits of such a tax, and highlighted the growing international support behind it. The tax could raise as much $700 billion from a 0.05 per cent levy on all trades in the $4 trillion a day forex market. Global momentum continues to build despite the current government’s international opposition; there now exists a unique opportunity for Ed to lead British efforts worldwide for the adoption of the tax.

Recent weeks have seen a flurry of activity. Though differences exist within the European Union, France and Germany have been pushing hard for a FTT, with German Chancellor Angela Merkel declaring a few weeks ago in her national parliament:

“…we are going to try to persuade as many countries as possible.”

Her counterpart, Nicolas Sarkozy, has been equally vocal:

“Finance has globalised, so why should we not ask finance to participate in stabilising the world by taking a tax on each financial transaction?”

The French president has said if progress is not made on the idea, he will make it a key part of the agenda when they chair the G20 group of large economies. Spain and Portugal have also affirmed their support, at the UN summit last week on the Millennium Development Goals.

Earlier in the year the European Parliament voted overwhelmingly in favour of the tax, and the European Commission, the EU’s executive arm, is preparing a paper at the request of Europe’s finance ministers on the possible workings of the tax. Belgium has suggested that if no agreement can be reached at the EU level, the eurozone should look to take it forward separately.

As a passionate advocate of the tax, Ed should seize this momentum and lead the British charge globally. There are three principal ways he could do this.

1. Start arranging meetings and conversations with European leaders, particularly key proponents of financial transaction taxes. Not only will this be a great way to introduce himself to policy-makers throughout the continent, but it will add pressure on the government to re-think and engage more constructively with the proposal.

It will also demonstrate that the world’s leading financial centre is not averse to the idea, and that political support does exist.

2. Lead a political ground offensive for the tax. There already exists a major grassroots movement, which has cleverly clothed the idea as the ‘Robin Hood’ tax. This campaign is being led with celebrity endorsements and propelled through social networks, TV adverts and collaborative online forums. To date it has over 200,000 members.

Ed should meet with these campaign leaders to discuss how we can build on their efforts and what he and the Labour party can do to take it to the next level. As a party, we should also launch our own campaign. Ed has paid tribute to his defeated brother’s ‘Movement for Change’, a grassroots initiative mobilising and training local leaders. He has pledged to mainstream this within the Labour party. This is an ideal cause for it.

3. Provide clarity on any proposal for a financial transaction tax. One of the weaknesses of the campaign is that the idea can be found lacking in detail and definition. There are advocates who argue solely for a levy on currency transactions, and others for one on all financial and trading movements.

Proponents, including world leaders, have been guilty of re-defining its purpose for convenience; i.e. the tax will recoup the bailout of the financial world by taxpayers, protect taxpayers from future bailouts, help meet Millennium Development Goals, or be used for climate adaptation and mitigation in the developing world.

Understandably, this helps win support and the process of negotiations. But if we are to achieve any final resolution, then advocates have to be clearer in their intentions and mechanisms. Ed should be flexible, but have a strong idea on what type of FTT he wants and how it should be implemented.

The case for a financial transaction tax is overwhelming. It embodies every principle the left believes in: fairness, justice, and reciprocity. The time has now come for the new generation in the Labour party to take this to the next level.


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Winning the argument on taxation is the key to reviving the left

We may still be licking their wounds from one of our worst electoral defeats in history, but timidity is no recipe for renewing and building a revitalised progressive force to counter the growing threat posed by the ConDem coalition government. We need to be as radical as we are ambitious.


The big challenge is to set out our vision for society. Integral to that is the tax system. So far the leadership roadshow has largely ducked the opportunity to engage in a genuine debate about the nature of tax. We cannot miss this moment to realign the economic debate in favour of progressive ideals.

Four principles should inform any new tax system for the left. Firstly, it must be progressive. This means seriously re-considering the merits of personal allowances. Analysis conducted by Left Foot Forward has demonstrated the regressive nature of income allowances, which provide a universal and indiscriminate tax cut for all earners. Middle to higher earners gain disproportionately more from this.

The coalition government’s recent announcement for an increase next April will only further increase this tax subsidy. A radical alternative is to abolish them altogether, or reduce them to a lower level, while introducing greater marginality in higher rates. The current system is arguably too flat, with individuals earning £8,000 paying the same 20 per cent rate on their tax liable income as someone earning £40,000.

A more progressive system would be to have lower and more variable rates for differential income, i.e those earning between, £5,000-£10,000 have a 2 per cent rate, £10,000-£15,000 5%, £15,000-£20,000 10% etc. These extra marginal rates for lower earners could be funded through the abolition of universal allowances. And to ensure part-time workers, or those on very low incomes do not lose from this new system, appropriate changes can be made to benefits and tax credits.

Social justice is equally important. Taxation is one of the most powerful ways in which to shape socio-economic relations. We need to ensure that any new system does more to help the weakest and poorest in society. One of the ways we can achieve this is replacing council taxes with a local income tax. Council taxes are highly regressive, as they hit lower-earning households harder as a percentage of their income. A local income tax would be an effective and efficient way to account for wealth.


To make this policy even more progressive, councils representing poorer districts and regions could be given a grant by central government to encourage them to have lower rates of income tax than the national average. Another idea is for 1 per cent of the bank bailout when repaid to be put into a national endowment fund for poor communities to access.

Public support for taxation is crucial in preventing alienation and disenchantment. The system needs to speak to people’s basic sense of fairness. This means capital gains tax should be fully aligned with marginal income tax rates, thereby abolishing any discrepancies and avenues for tax avoidance. Capital gains are merely another form of income and no strong argument exists for its differential treatment. The scale and nature of the cuts planned by the coalition government will disproportionately hit poorer households more. This cannot be right or fair.

Those who were bailed out by the government, or those who have done well in the good years should be expected to make a more considerate tax contribution. A fair system will have a bigger banking levy than the £2bn currently planned, a wealth tax in the form of a mansion tax (as argued by Left Foot Forward), and a financial transactions tax, ideally coordinated internationally, but done unilaterally if not. Previous analysis has demonstrated this can be done without harming individual countries’ economies.

The final principle to shaping a new tax system is competiveness. Taxation should be used to forge a stronger, just and more sustainable economy. Our economy is grossly imbalanced and heavily dependent on a few industries. We are vulnerable. We can change this through introducing tax incentives and measures to generate a more dynamic and resilient economy. We need to move wealth outside of London and the south-east.

Lower business rates and start-up costs in poorer areas could help generate economic opportunities in hitherto non-investable areas. The Tory plan to discount National Insurance employer contributions for the first 10 employees up to a value of £5,000 for new companies has merits. However, cutting corporation tax at the expense of capital allowances and abolishing Regional Development Agencies is highly damaging. We should be nurturing growth industries, not hurting them.

Sweden successfully cut its deficit in the mid-nineties by prioritising investment in human capital and potentialities. Education, skills and jobs helped Sweden not only to tackle its deficit on schedule but actually accumulate a budgetary surplus. They also enjoyed the highest growth figures of all OECD nations in the past decade, and weathered the latest financial crisis better than most.

That is why it is astonishing the coalition government are cutting this year and dramatically scaling back key human capital projects in education, skills, sciences, and our growth sectors. We should not be abolishing the Building Schools for the Future programme, Regional Development Agencies, Child Trust Funds, reducing manufacturing and investment allowances, cutting the science budget, and scraping the 50p phone line tax for super-fast next generation broadband and capping housing benefit. All of these will impact on human potential and future growth.

Even right-wing think-tanks have come out in recent days to criticise the chaotic and disjointednature of the planned cuts. This can be a moment for the centre-left, but only if we have a vision for society. And taxation will be key to that. So let’s put it on the agenda.


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Why we need to debate the ‘poverty of ambition’ as well as inequality

One of the key ingredients to the successful renewal of the Labour party as a political force, and indeed as a political movement, is re-kindling our mission as anti-poverty crusaders.

Harold Wilson once famously declared that the Labour party “is a moral crusade or it is nothing”. We are a party born from an ambition to tackle the realities of poverty, deprivation, and injustice. That is our mantra and essence as a movement.

Compass heroically have been campaigning for a High Pay Commission where the wage-gap ratio between the highest and lowest earners in society is limited. This is a great campaign and will help to alleviate the wide-income gaps prevalent in society.

However, there is something else which we need to be equally passionate in fighting.

It’s something that destroys the life chances and potential for millions of people in this country. It’s called the poverty of ambition. We live in a highly-competitive world where our inter-connectedness is at a level never seen before.Thousands of students are struggling to get into university, with demand far outstripping supply. Graduates are fighting tooth and nail for jobs and the chance to realise their aspirations.

Very often though for individuals from deprived and disadvantaged backgrounds to succeed, they need more than just a good education. They need social connections and networks in the professional world to have the same chance as others in realising their full potential. Those who come from backgrounds with more established family histories, stable communities or have higher-earning parents thrive in this socially exclusive world of who you know and what they can do for you. Ed Miliband has spoken about how he believes immigration to be a class issue. This issue here goes to the heart of class privileges and we need to pierce it.

People without the necessary contacts, don’t benefit from the same insight into the professional world afforded to those with them. This not only makes it harder for them to seek the career they may aspire for, but actually hinders their personal ambitions. Very often you will find they lack the full awareness and knowledge needed to dream big, to ponder what might be possible and what they could achieve.

It is shockingly amazing that 90% of judges and 75% of lawyers have been privately educated, despite it only accounting for 7% of the education system. Individuals from a poorer background, suffer from a deficient ‘social consciousness’ of the top-tier professional world. It is a shackle that prevents them from fulfilling their true capability as individuals. We need to break this barrier to social progress and mobility, and we can start with our very own party.

The Labour Party is an incredible citadel of talent, experience and skill. We have leaders and members from all walks of life, be they legal, financial, scientific or political. This social capital needs to be exported. Not only should we open up internship opportunities as far as possible, but we need to build real networking forums in some of the poorest and most neglected parts of the country. These networks have to be tangible and provide serious opportunities to learn and develop a sense of the professional world. Once we have created a successful model, we should build a nationwide one engaging FTSE 100 companies, top graduate employers, Universities etc.

To take advantage of chances to network, one has to possess strong people skills. Private schools are very good at developing these ‘soft’ skills with their students through debating and public speaking training. Having the confidence and self-esteem to showcase oneself in the best light should not be an asset just reserved for the fortunate. This is why we need to roll out a national schools public speaking programme.

Too often, the costs of undertaking an internship or gaining work experience deter people from poorer backgrounds. It is wrong that you cannot claim JSA while doing an internship. As a starting point, we should follow Australia in allowing young individuals to claim JSA while they intern for a certain period of time. This would give them the opportunity to gain invaluable experience and the skills required to pursue their ambitions.

Parents have a significant influence over their child’s development, sometimes sadly to their detriment. Schools should introduce a structured careers guidance programme specifically designed for parents, so that they benefit from seeing all that is possible for their child. This will help to open up horizons and for some communities, break cultural stereotypes and taboo’s surrounding certain jobs.  Our attempts at renewal need to involve building a movement for change. If we have the determination to see through our ambitions, we can create one of the most radical shifts in social mobility seen in this country for generations.

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