You know, I think they might cock this up entirely

It will say: \”Where there are elements of the financial services industry that are generating super-normal returns for either executives or shareholders because of the existence of market failures, then there may be a case for increasing taxation on those returns.\” It will argue the transaction tax must be set at a low rate to avoid distorting the markets, but should cover all transactions, including trading in the complex derivatives that were at the heart of the US subprime crisis, as well as shares and currencies.

Something I\’ve noticed about all those slavering for such a transactions tax. They don\’t seem to have actually read the report which calculates the numbers for the tax which could be raised. You know, that Austrian report.

There are two ways you could do such a tax. On the money that changes hands or on the nominal value of the contracts.

Take, for example, insuring yourself against a default by the UK Govt. (These prices are entirely made up but they\’re of the right orders of magnitude-ish). Say you have to pay 20 basis points for this. This means that you hand over £20k each 6 months over a 10 year period (I think I\’ve got those times correct, if not, still, useful as an example) to be insured for that 10 year period against the UK defaulting on its debt. That buys you cover on £10 million of exposure.

And let\’s say that the transactions tax is 0.05%, as that Austrian report suggests.

So, what do we place the tax upon? The £20,000 every six months? That\’s £10 every 6 months. Neither here nor there in any important sense. The traders certainly don\’t care but more importantly, neither does the Treasury. Piddly amounts of revenue and almost certainly costing more to collect than is raised.

But what if we put the tax on the nominal amount? The £10 million? Hmm, that\’s £5,000. A £5,000 tax on £20,000 moving around. Hmm, now that will change behaviour, won\’t it? And of course the more leverage on a deal there is, the higher the tax becomes as a percentage of the money moving around.

Futures and options markets are going to get screwed, aren\’t they?

But here\’s the thing: the Austrian report states that we should indeed be taxing the nominal amounts. Not the cash moving, but the gross value of the underlying trade. That\’s the only way they can get these large numbers for revenue collected.

And that\’s how they get to the very weird thought that you can suck more in tax out of the financial sector than its contribution to GDP. Clearly, that\’s not actually possible (either the tax is not being paid by the financial sector or the financial sector closes down, one or the other).

But what slightly worried me is that the Treasury might not quite get this: they\’ll impose the tax upon nominal value. Which means that all of the highly leveraged markets either close down or leave. Interest rate, currency, metals, oil, gas, futures and options, all entirely fucked.

Appease me: they\’re not going to be that stupid are they?

2 comments on “You know, I think they might cock this up entirely

  1. > Which means that all of the highly leveraged markets either close down or leave.

    Or de-leverage. Which is what’s needed anyway.

    Not that a transaction tax is in any way shape or form a good way to achieve this.

  2. Oh, but it’s much better to have 100% of nothing than a small fraction of quite a lot. That’s social justice, that is.

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