From the TUC

Transaction tax: the detractors need to name their alternative

15 Nov 2009, by Guest in Blogging, Economics

The TUC call to use a tax on major financial transactions to help reduce the public deficit has created a minor blog bust-up.  But one important point at risk of being overlooked here is the question of what might be the alternatives to a transaction tax. 

The TUC believes that the deficit is not an urgent problem but it is one that will need to be dealt with over the medium term.  In our submission to the Treasury ahead of the PBR, we argue that any measure designed to reduce the deficit needs to meet five criteria.  It must be:

  • effective: any measure must genuinely reduce the deficit;
  • progressive: the costs of any measure must fall to those most able to pay;
  • proportionate: any measure must meet the reality of the challenge posed by the fiscal problems rather than any exaggerated or understated claims;
  • limited in its economic consequences: any measure must not prolong the recession of threaten recovery;
  • just: the costs of any measure should not fall on those who bear no responsibility for the financial crisis and recession that has caused the fiscal problems.

Our concern is that the leading contenders for addressing the deficit – major public spending cuts, a big rise in VAT or a big rise in income tax – fail when judged against these criteria.  A transactions tax, we felt, did meet most of these criteria.  I accept not everyone will agree with that conclusion but given that we are in a tough fiscal situation, there must be a certain obligation on those entering the fray to identify their alternatives and explain how they meet these criteria. 

Of course, they may not agree with the criteria but then they need to explain that position as well. 

Who knows, we may end up with a constructive and creative discussion rather than the usual snarky blog fight.  Hope springs eternal …

5 Responses to Transaction tax: the detractors need to name their alternative

  1. Tax Research UK » If the City thinks a Tobin Tax is possible why do the dogmatists disagree?
    Nov 16th 2009, 8:09 am

    […] Adam Lent of the TUC makes a similar point: The TUC call to use a tax on major financial transactions to help reduce the public deficit has created a minor blog bust-up.  But one important point at risk of being overlooked here is the question of what might be the alternatives to a transaction tax. […]

  2. Tim Worstall
    Nov 16th 2009, 10:44 am

    A Tobin or transactions tax fails most of the criteria you put forward as desirable. That’s why I am opposed to it.

    The idea that we can just pull 3% of GDP out of the ether in tax without it having impacts elsewhere is simply deluded wishful thinking.

    As an example, the desire to limit economic consequences. The tax will entirely close down the interbank markets, the commercial money markets, money brokers. Unless you are willing to put forward a case as to both the impact of this and the desirability of this then I would suggest that you reconsider your support for the latest of Mr. Murphy’s inane nostrums.

  3. If the City thinks a Tobin Tax is possible why do the dogmatists disagree? | called2account
    Nov 16th 2009, 12:40 pm

    […] Adam Lent of the TUC makes a similar point: The TUC call to use a tax on major financial transactions to help reduce the public deficit has created a minor blog bust-up.  But one important point at risk of being overlooked here is the question of what might be the alternatives to a transaction tax. […]

  4. Alex
    Nov 16th 2009, 2:08 pm

    “Transaction tax: the detractors need to name their alternative”

    The idea that the global financial criss and the budget deficit are so closely linked is simply misinformation. The UK has the largest budget deficit, but it has suffered from a lack of inbound investment since 1997, which is why we have industrial decline now. Strip out the government consumption which has been growing at 6-8% from the flat GDP and the rest of the economy has been in decline since 2003.

    A tax on financial payments without regard to the nature of the payments is neither fair, reasonable, constructive or practical. Some payments maybe linked to highly speculative businesses, but some may be for straight forward commercial transactions while others are part of the facilitation of normal financial markets, such as making markets in the foreign exchange and money markets.

    Is this tax supposed to pay for the budget deficit? Why. The deficit was growing before the financial crisis. OK the government bailed out the banks that failed, but in return they acquired shares in the banks which they intend to sell. Moreover, where the government has taken on some risk the banks have paid substantial premia to the tax payer.

    What about the other banks? Shouldn’t they pay something. Well banks already deposit non-interest bearing reserves at the Bank of England, which is a form of Tobin tax, and have been doing so for years. In return they expect proper supervision of the entire banking industry, because they stand to lose as much as anyone else if other banks fail. The UK banks that were not touched by the global financial crisis, HSBC, Standard Chartered, Clydesdale, the remaining building societies and arguably Lloyds before it took on HBOS can all feel that the supervision of the industry was not adequate because it let the business at RBS, HBOS, Bradford & Bingley and Northern Rock get out of hand. There is little reason for the surviving banks (with the notable exception of Barclays) to pay for those supervisory failures.

    And thirdly, you are double or triple counting. A tax cannot stop banking excesses, pay for future losses ad plug the budget deficit. If baking excess stop there is no money to pay for future banking failures. If it is used as an insurance against future failures, it is not available to plug the budget deficit.

    The only way to plug the budget deficit is to raise taxes, but if it ends up that there isn’t enough private sector production feeding cash into the tax system to pay all the public sector net salaries (ie. after deduction of taxes), then the only solution that will balance the books is to cut public sector salaries or number of workers.

  5. Tweets that mention Transaction tax: the detractors need to name their alternative | ToUChstone blog: A public policy blog from the TUC — Topsy.com
    Nov 17th 2009, 4:16 pm

    […] This post was mentioned on Twitter by ToUChstone blog and Nigel Stanley, TIGMOO. TIGMOO said: ToUChstone blog: Transaction tax: the detractors need to name their alternative http://bit.ly/2PsPW9 […]