A couple of days back I Tweeted against the EU’s proposed Financial Transaction Tax (FTT, or Tobin Tax), and David Cammegh @davidcammegh replied:
“Let them collapse or clear off because then new honest banks might take their place in a competitive market”.
Nice idea, David, but the market doesn’t work like that.
There are absolutely no Brownie Points for politicians who defend bankers, so I won’t. Or at least, not very much. And the EU is busy trotting out anti-banker ideas. Not only the FTT, but now the bankers’ bonus cap, which chimes well with the resentment many of us feel against these Fat Cats who ruined our economy, yet keep coining seven-figure bonuses. Or at least so the tabloids say. No one will deny that many bankers did many foolish things, but the root cause of the crisis lay with politicians and national treasuries (I mean Central Banks, but the word “Bank” is misleading in this context).
It was Bill Clinton demanding home ownership for low-income American families. It was Alan Greenspan holding interest rates too low too long, and reckoning that “asset bubbles would unwind themselves in due course”. They did, of course, but not quite in the way he’d anticipated.
The problem is that the bonus cap won’t hit the Fat Cats against whom we harbour such resentment. They’ll just take themselves off to New York, or Singapore, or Hong Kong. As it happens, I’ve lived in both Singapore and Hong Kong, and visited New York a number of times. I can tell you that they are very nice places to live (and I daresay nicer still if you’re living on seven-figure bonuses). So it’s no skin off their noses. Equally, the big banks themselves are quite capable of transferring their Head Quarters abroad, to more friendly and welcoming jurisdictions with lower tax régimes. I imagine that HSBC will be first in the queue, and will go back to their roots — Hong Kong and/or Shanghai. They’ve already dropped broad hints.
But we should be worrying about the tens of thousands of people employed on moderate incomes in banks, and in the financial services industry more generally. Many thousands of British jobs will be lost. Meantime George Osborne and the Treasury will lose the current tax on those big bonuses. And the tax on the major banks that move offshore. And the income tax and VAT that would have come from all those more modest financial services jobs, now redundant. And then to add insult to injury, the Treasury will have to find unemployment benefit and welfare to all these unemployed middle and junior managers who lost their jobs.
This would be a vast and damaging hit to GDP, to tax revenues, and to jobs. Imagining that new banks would arrive and take up the slack is just so much wishful thinking, and frankly (sorry, David) naïve.
Then there’s the FTT, where a degree of cognitive dissonance seems to have set in. On the one hand, they tell us, the rate is so small (at only 0.1% per transaction, or 0.01 for derivatives) that it will be trivial, and have no impact on the economy (which sounds like putting just a little sand — not very much — into your petrol tank). On the other hand, they say, it will raise €100 billion a year (or write in your own fanciful figure) in revenue, which we can use to solve all our problems.
Clearly, these two propositions cannot both be true. Either the tax is so small as to be trivial, in which there’s no point in doing it. Or it will raise €100 billion — in which case it will have a large impact. And in fact the latter looks more likely. Of course it won’t actually raise the amount claimed, because so much business will move elsewhere. But it will hugely damage financial services in the EU, and confirm Europe’s status as an area in long-term relative economic decline, and not worth investing in. Unemployment, lower GDP, reduced tax revenue. Lose-lose-lose. This is what happens when you let ignorant ideologues play with economics.
So by all means organise hate sessions against Fat Cat bankers. By all means stick pins into an effigy of Fred Goodwin, if it makes you feel better. But for heaven’s sake let’s not proceed with a course of action which will shrink GDP, drive more business off-shore, cause massive lay-offs in a major British industry, and decimate Treasury tax revenues.
The media are saying that Cameron and Osborne are engaged in frantic last minute lobbying efforts to blunt the edge of the bonus cap. Not good enough, guys. The message is “Just Say NO”.
The government should send Brussels a message as follows: “We have decided that we cannot implement either the bonus cap or the FTT, because each would have a devastating impact on a major British industry, and on the British economy as a whole. We do not believe that the EU has any right to interfere in the setting of remuneration and taxation in member-states in this way. We will not recognise any adverse ruling on these issues from the ECJ or any other body, and we will not accept any penalty which the courts may seek to apply. We propose to initiate immediate negotiations on the EU treaties designed to clarify the point that the EU in this case is acting ultra vires, and if and when those negotiations fail, we will conduct a binding In/Out referendum of the British people on the UK’s continued EU membership”.
Try it, Dave and George. You might like it.