The UK finance lobby has a long history of obscuring and miscommunicating taxes on gambling in financial markets by trying to dupe the public into believing it will harm UK productivity. The existing tax (in operation for over 300 years) on the UK stock market currently raises over £3 billion annually. Despite the tax, the London Stock Exchange has developed into a world leader in stock market listings, capital raising and trading.
Labour’s plans for a Financial Transactions Tax would increase the scope of the tax to cover more markets and raise an extra £8.8 billion per year for the public purse. And it will drive down dangerous and socially unproductive market speculation that has spawned under neoliberalism to help build a better, more equitable UK.
The finance lobby, arguably the UK’s most aggressive, has turned London into the world’s leading centre for international banking and finance by rigging politics to ensure it pockets the fortunes. I should know, I was former Head of Derivatives Product Development at the London Stock Exchange.
Elsewhere in London and around the UK, we see the impact of austerity since the 2008 financial crash. Homelessness, 14 million living in poverty, 1.5 million destitute, food banks and 120,000 dead and counting from austerity policies. The UN reprimanded the Tories for austerity, saying it has inflicted great misery and is driven by a political desire for social re-engineering not economic necessity in the fifth richest country in the world. Academics have called austerity a deadly class war.
The Pinstripe Mafia, more apt than ever given the number of banking scandals and market manipulation crimes outstanding, are responsible for 50% of the Tory Party’s budget. The finance lobby has donated more than £50 million since 2010 to the Tories, and just five wealthy hedge fund backers have collectively given more than £18 million.
The finance lobby argues, for instance, that they already pay their fair share in taxes. If that were the case, we would not see hedge fund managers, the most prolific of industrial gamblers of our time, earning over £1 billion ($1.5 billion) a year in pay. That’s £4 million each working day by playing the markets. It takes hedge fund managers less than 4 minutes to earn the UK national average annual salary of £28,000. Sky-rocketing executive pay means CEOs are earning 237 times more than their lowest paid member of staff.
The finance sector is fuelling poverty and inequality at an exponential rate. 1.3 million people were made redundant between 2007 and 2010 due to the financial crash which was in part caused by toxic derivatives being gambled around between the biggest market players and market manipulation. Since Thatcher and the dawn of neoliberalism, power and wealth has shifted from the State and into the private sector.
When capitalism inevitably fails, socialist policies step in to save it. The finance lobby, with four decades of neoliberal government backing, deregulated and privatised the economy to ramp up profits that sailed off to balmy offshore tax havens and lay the foundations for the financial crash. When the free market logic of competition, endless growth on a planet with finite resources and a race to the bottom eventually comes to a grinding halt, public money is used to bail them out. Corporate socialism and welfare is a mainstay of neoliberal governments and the finance lobby are making a killing – not only playing the markets but playing politics.
A tax on financial market gambling is not new or revolutionary. Back in 1939, the economist John Maynard Keynes unsuccessfully advocated for a tax on financial market trades because he felt speculators (gamblers) would come to dominate the markets, instead of those needing access to funds or insure themselves (hedge) for socially productive uses.
He was right. Nobel Prize-winning economist James Tobin also unsuccessfully argued for a global tax in 1972 on gambling in wholesale currency markets (not the day-to-day bureau de change activities holiday makers use) to reduce socially destructive currency volatility (market movements, or tells, that gamblers thrive on).
Importantly, a narrow Financial Transactions Tax on UK shares has existed for over 300 years, predating income tax. It is one of the cheapest taxes to collect, and virtually impossible to evade given the interconnectedness of UK financial markets and digital validation technology that underpin them. It is charged at 0.5% of trade value and raises over £3 billion annually.
Labour’s proposal covers equity derivatives, commodities, interest rate derivatives and wholesale (not retail) foreign exchange markets. It plans to set a much lower tax rate than the tax on UK share trading of just 0.01% to 0.12% of trade value. After taking into consideration assumptions about changes in market behaviour, the tax could raise an additional £8.8 billion annually.
The finance lobby’s criticism of this broad Financial Transactions Tax is underpinned by their attachment to neoclassical economic ideology. Developed during a time and space when Western Europe had slaves and colonial empires, which exploited and plundered the very commodities being traded and speculated on in the “free” market today. These wholesale financial markets include trading and gambling in sugar, coffee, cocoa, oil, gas, gold, silver, lithium as well as company shares, currencies and interest rates. Around $10 trillion dollars are traded and gambled globally through these markets every working day.
The finance lobby claim a comprehensive financial transaction tax, even set at the meagre level above, will see an exodus of the finance sector from the UK. However, after a cursory look at the size of the UK financial sector using CityUK’s numbers, that claim evaporates:
- The UK finance sector has $10.7 trillion in assets under management, the largest in Europe (France: $10.4 trn, Germany: $9.2 trn, Italy: $4.3 trn).
- The outstanding amount of loans made available by major banks to mostly big UK businesses totalled £477 billion at the end of 2018.
- UK and international companies raised £24.9bn in issues of shares on the London Stock Exchange in 2018.
- According to data from the Bank for International Settlements, the amount of debt securities outstanding in the UK was $5.9trn in the second quarter of 2018, placing it fourth after the USA, China and Japan.
- The predatory UK private equity and venture capital sector manages assets totalling around £270bn across thousands of UK companies where assets are stripped for private profits and mass redundancies take place in order to inflate the company’s balance sheet prior to selling them on (flipping) for huge profits.
- The UK is the leading foreign exchange market in the world, with nearly twice as many dollars and euros traded in the UK than in the US and Europe respectively.
- The sector is the world’s leading net exporter of financial services at $88 billion surplus.
- 39% of global interest rate derivatives business is done in the UK.
- Around 2.3 million people are employed in the UK across financial firms and related professional service firms.
- The UK is uniquely positioned within the global financial services industry as the UK trading day spans Asian market close and US market open.
The finance lobby also claim the tax will reduce liquidity in the UK. Labour’s tax will apply to UK tax residents only. UK tax residents are, for the reasons above, not going to be fazed by the meagre tax at all, and risk fracturing their relationships and businesses by moving them out of the UK and into another tax jurisdiction. The relocation, compliance, logistical, infrastructure, staff and technological costs of doing so are far more significant than this tax. So too is the proximity of the traders to the physical electronic order books of exchanges that reside in monolithic data warehouses in East London, where bandwidth is measured in terabytes.
In financial markets, where trading is increasingly dominated by the buying and selling of contracts within seconds, nanoseconds matter. The fastest access is made possible by co-locating the trading engines of the world’s leading investment banks, proprietary trading houses and stockbrokers within the servers of financial stock, derivatives and commodity exchanges.
When the finance lobby continues to cite the incidents surrounding the introduction of the Swedish Financial Transactions Tax it either demonstrates a poor understanding of the realities of London as one of the world’s leading international financial centres or, more sinisterly, is aiming to instil fear and obedience among policy makers.
Beyond the examples cites above related to London, the Swedish tax began in the 1980s on a limited number of its markets which meant trading moved into non-taxed markets or to London, reducing tax revenues substantially as volumes fell. Their tax rate was also much larger than that proposed here, and part of Sweden’s financial services sector simply moved out of Sweden to London to leverage London’s neoliberal (de)regulation and be closer to market participants who were responsible for large portions of Swedish market liquidity. With Sweden’s liquidity pool heavily driven by liquidity coming from London, it was natural for a shift of some liquidity to the UK.
Liquidity pools in the UK are entrenched here and not at risk of flowing into other centres as the finance lobby like to make out when they lazily cite Sweden’s example where, incidentally, volumes returned to normal after a decade of adjustments were made. Labour’s proposal is calculated using robust and nuanced demand estimates, using elasticity curves for both financial and non-financial firms. Despite estimated falls in volumes due to behaviour changes from price increases, £8.8 billion remains the estimated yield.
The finance lobby also claim the tax will be passed onto pensions but this is similarly myth and fear-mongering. The tax will disincentivise pension and fund managers to turnover (churn) portfolios unnecessarily, thus lowering trading costs that they attract from their traders. That they beat the market or the bluechip indices is also a folly. Changing the mindset away from short-termism in trading and the unnecessary churn of portfolios means pension providers will churn less, reducing their trading costs accordingly. Pension clients should demand that these savings be passed onto them, not pocketed by City fund managers.
The tax can be easily implemented by leveraging existing systems. There exists an extraordinary amount of financial communications technology in and from the UK linking up to global financial markets, UK government departments and official UK authorities that can be built upon to implement this tax.
Communication networks between financial data and information providers such as Reuters and Bloomberg; stock, derivatives and commodity exchanges; OTC trading and clearing venues covering foreign exchange and interest rate markets; clearing, settlement and depositary houses across all asset classes and markets covered by Labour’s tax to the HMRC and the Bank of England; these mean the ‘plumbing’ already exists. There only remains the political will and the establishment of a cross-organisational working group to implement a system akin to the existing stamp duty on share trading where taxes on each stock trade are calculated and paid to the HMRC effortlessly.
40 years of neoliberalism has produced a political economy run by the finance sector, who have effectively captured the state, are beyond regulatory oversight and are ideologically driven to invest for profit, not social or environmental need. We will not solve the crisis of the finance sector and their iron grip over politics by holding the debate on their terms before another financial crash occurs. When austerity linked-deaths are in their hundreds of thousands and growing, and the Tory backing hedge fund managers are earning billions each year, it is not an understatement to say the time for Labour and its comprehensive tax on financial market trades is long overdue.