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Robbing London to pay Brussels

Nigel Williams, 31 July 2014

Mervyn Stone, Emeritus Professor of Statistics at UCL, long-standing Civitas contributor and author of Failing to Figure, has provided a new analysis, which is available here. His discussion looks at the the issue of High Frequency Trading. Sophisticated dealers in financial services can profit from placing repeated deals a tiny fraction of a second ahead of others in the market, allowing them to accumulate profits that do not depend on their skill in assessing prices.

Professor Stone sees a financial transaction tax as a potential solution. Without a tax, it does not matter if the profit on each transaction is tiny provided there are enough of them to add up to a large overall profit. With a tax in place, the dealer would stand to lose far more in taxation than he or she would gain from the transactions.

The financial transaction tax was one of the issues over which David Cameron illustrated the extent of his isolation in Europe. In December 2011, he used the British veto in talks aimed at easing the Eurozone crisis. Specifically, he was demanding safeguards for the City of London, including resistance to a financial transaction tax. The result of that meeting was the seventeen Eurozone countries went ahead with an agreement to which the UK remained peripheral. David Cameron was not offered any extra safeguards and the UK has resorted to European courts to try to keep the financial transaction tax at bay.

Yet a financial transaction tax remains a popular idea. It carries affectionate nicknames such as Tobin Tax  or Robin Hood Tax, which are rare accolades for any sort of taxation. Supporters of the ‘poll tax’ and ‘bedroom tax’ preferred the nomenclature ‘community charge’ and ‘spare room subsidy’ without the t-word. Professor Stone sees the tax as a remedy for at least one abuse by the financial services sector. If the bankers started the crash and all shared in the subsequent austerity, but only the wealthiest, bankers among them, are doing well out of the eventually recovery, a Robin Hood Tax appears to offer retribution and redistribution. The tax can apparently reduce the deficit by punishing the sector that brought about the crisis and can nudge them into more responsible behaviour henceforward.

The problem is that this particular version of the Tobin Tax came from Europe. Under the version vetoed by Mr Cameron, the proceeds would not all go directly to the UK Treasury but to the European Union. Note the key words  ‘Part of the tax would be used as an EU own resource which would partly reduce national contributions.’

What follows would be the usual horse-trading to attempt to reduce other forms of contribution from member states. Only an optimist would expect any agreed reduction in the UK contribution to be adequate compensation for the loss in UK trade. All are agreed that London would be disproportionately affected by the tax. The British public may feel that they get a poor deal from the City but they would lose out still more if London’s export earnings from financial services were hampered. Enlisting Robin Hood to take from London and give to Brussels looks like a mistake.

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