EU: Financial Transaction Tax (EUC Report)

Lord Davies of Stamford Excerpts

Tuesday 17th December 2013 Grand Committee

[Lord Davies of Stamford (Lab)]

My Lords, I start by congratulating my colleagues, who did 90% of the work on this report before I joined the committee, on having done some sound work and having revealed, way ahead of the Commission or the Government realising it, the impact on non-participating states of this proposal.

By the way, the Government’s position is quite absurd. Most reasonable, sensible people litigate only when they feel very strongly about something. If they feel strongly about something they are given the opportunity to vote on, they vote against. This Government succeeded in abstaining and then in starting litigation. Their credibility is pretty small.

In my brief time, I will summarise in four propositions what I feel about this proposal, about which I do not take as tragic a view as many of my colleagues. The first proposition is that all taxes are unpopular. Any new tax produces an outcry, sometimes hysterical, from those who are going to be, or might be, impacted. One has to keep one’s cool against that noise.

Secondly, all taxes have perverse economic consequences. I say to the noble Lord, Lord Hamilton, that all taxes, as a first-order effect, reduce GDP because they reduce demand. Whether they ultimately have a negative effect on a net basis depends on how that money is spent by the taxing authority. However, direct taxes are enormously dangerous because they impact directly on incentives to work, to save, to take risks, to set up enterprises and to invest. On the other hand, indirect consumption taxes have the effect of impacting most, by definition, on people with the highest consumption ratios—in other words, the poorest people in society—so they are very unfair. The financial transaction tax has neither of those two disadvantages. If you implemented it around the world, it might be pretty close to being an ideal tax.

Thirdly, contrary to what you might expect theoretically, tax arbitrage, or displacement of financial markets in response to taxation, is actually much less effective and efficient than you might suppose, for a whole host of reasons. One is that people always want to trade in the deepest markets. If you move out of the most liquid, deepest markets, you will find that you are operating against wider spreads, which will more than compensate for any avoidance of tax. That is particularly true if, as in this case, a tax is 10 basis points.

The main reason why the market in trading in UK equities has not moved into derivatives, contracts for difference, the option market and so forth is because people would be paying for much greater spreads than they would be gaining on the stamp duty tax—that tax, of course, is 50 basis points. There are other reasons why there is not so much displacement as you might expect, one of which is the time zone problem, another of which is that financial markets, particularly clearing houses and their principal customers—the major banks—do not like cutting across major tax authorities. They are particularly terrified of the IRS, of course, but they do not want to have an argument with any major tax authority, including, in this case, the Fisc or the Finanzamt. They do not want to have an argument with the Inland Revenue, which is why, when they set up American depositary receipt markets in New York in British equities, the American banks concerned have always paid the stamp duty at the front end on an advance basis: I think it is something like 200 basis points. They have accepted that although I do not think that obligation could ever be enforced in a court of law. Perhaps the Minister will confirm this.

Finally, the report argues that this tax will impact in practice on a lot of investors, both retail and wholesale, and on a lot of residents—institutional and otherwise, corporate and otherwise—in this country, even though we do not participate in it. If we get none of the benefits because we do not receive any receipts from the tax, of course, and the benefits of displacement from other markets where they are participating directly in the tax are much less than anticipated, there may well come a time when the equation is such that it would be worth our while to join in the tax and join in sharing in the proceeds. This is a matter which we need—if the tax comes in at all—to keep permanently under review.

--- Later in debate ---

[Lord Newby]

My Lords, I will not go through a blow-by-blow account of which member state we spoke to at which point. The view was taken, which I believe was the correct one, that at that stage this proposal was unblockable, because of the political will to which the noble Lord, Lord Liddle, referred. We may think that other member states are misguided. History may prove they are misguided. But there is a slight tendency in the UK to believe that we always know best. We may well know best in this case, but the French and the Germans think they know best, and it is a bold UK Government—or committee of your Lordships’ House—who are unambiguously sure that they know better than a large number of major EU member states.

[Lord Davies of Stamford]

My Lords, I put it to the Minister that the Government’s position is completely absurd. He is saying that the Government did not vote against this proposal because they thought they had a majority against them. Any democratic institution would break down if no one bothered to vote because they thought that at any one time there might be a majority against them. If the Government really felt strongly about something, so strongly that they were prepared to litigate, which is a much more provocative thing to do because it would put at risk all sorts of good will, the least they could have done would have been to have voted against it when they had the opportunity to do so. By not doing so, they lost a great deal of credibility.

[Lord Newby]

As I said earlier, we will have to agree to disagree on that. I do not believe that the Government have lost credibility in the EU because of the stance they took. People believe that the Government understood the political realities.