How scary is a financial transactions tax?

City of London skyline Would it matter if a tax put a dampener on the banking sector?

Since it is the British government which may end up as the main obstacle to the introduction of a financial transactions tax, it may be worth pointing out that (more than two years ago) the first serious figure in Europe to argue for such a tax in the wake of the great crash of 2008 was Adair Turner, the UK's most powerful regulator as chairman of the Financial Services Authority.

His point was that much of the explosive growth in the trading of complex financial products - CDOs, ABSs, CDS, EFTs and so on, until we were all alphabetty crazy - may have been (in his words) socially useless.

Or to put it another way, a good proportion of all that innovation and trading was not serving the wealth-creating instincts of businesses and households, but was (consciously or unconsciously) picking their pockets or extracting rent from them - by selling them stuff that was impossibly complex and whose true risks were hidden.

So how much of the financial trading falls into the category of deals that the world would be better off without, such that we shouldn't weep if it were taxed away? Probably no small amount.

If you take the increase in foreign exchange trading as a proxy for the growth in financial trading, that rose 234 times from 1977 to the crash - whereas global nominal GDP increased (a perfectly respectable) seven times. Or to put it another way, the vast majority of foreign exchange trading was supporting market speculation, not genuine wealth-creating activity by businesses.

So for the world as a whole, if a financial transactions tax put a bit of a dampener on financial innovation and trading (whether low frequency or high frequency), that would probably be no reason to weep - unless (to state the obvious) investment banking is your life.

None of which is to argue that it would be rational to introduce a financial transactions tax in the European Union and nowhere else: banks and hedge funds could probably avoid it reasonably easily by relocating to Singapore, or Wall Street or Zurich.

That is why the Treasury says it would not oppose a global financial transactions tax, but is set against one for the EU alone.

Since it is unlikely that all the G20 leading governments - especially the US - will sign up to put the big squeeze on investment banks, the Treasury may succeed in killing the tax (the UK can veto it in the EU). And for what it's worth, the European Commission accepts that it would be a much more effective tax if implemented everywhere.

Here is the thing: the Corporation of London estimates that some 80% of a financial transactions tax would be paid by institutions based in London. Which it says (understandably) is unfair.

However research by the Bank for International Settlements, the central bankers' central bank, provides a useful counterpoint. This demonstrates that countries with disproportionately large financial sectors, like the UK, have disproportionately small manufacturing sectors - because capital and talent tend to gravitate to the ostensibly big returns on offer in banks, hedge funds and so on, and because the exchange rate tends to rise to a level well above what's comfortable for exporters.

So, arguably, the British economy will not be rebalanced - towards more making, and less financial engineering - unless and until the City is less dominant. Which possibly means that a government committed to such rebalancing, as this one is, should not be quite so wary of a tax that would squeeze City profits.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 1.

    This tax should be implemented. If you are in any doubt, look at this BBC News video:

    We have to get control of this people!

  • rate this

    Comment number 2.

    ...a government committed to such rebalancing, as this one is...

    Are they? This adds to the evidence that they dance the bankers tune.

    Call their bluff. Do it and see if the banks relocate. I won't cry over their departure

  • rate this

    Comment number 3.

    There are 2 parties in any sale. If one of the parties has EU shares or money, then it doesn't matter where the other party is based: tax levied. Not beyond the wit of man to solve, surely?
    I pay a tax, called bank charges everytime I do a transaction, to add 0.1% if it involved an EU transaction is not a killer.
    UK tax on banks worked, without them moving.

    What am I missing here?
    4c ch:(

  • rate this

    Comment number 4.

    An exercise in shifting much of the cost of this pointless bailout to the UK.

    If pursued this could be the straw that breaks the camel's back.

    Britons will seriously question the balance of benefits from the current relationship and demand a more equitable arrangement.

    And they would be right.

  • rate this

    Comment number 5.

    "the vast majority of foreign exchange trading was supporting market speculation, not genuine wealth-creating activity by businesses"

    All these dubious at best financial instruments along with short selling should be banned .

    All that will happen with a tax is it will extract more money from us in the end as it will be passed on to us through higher charges.

    400 char is not enough to fully comm


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