Why is Oxfam lying to us about the Financial Transactions Tax?

It's a sad thing to have to say but, sadly, every single word in that video above is a lie. And this is not just to say that of course all acting is a lie: it is to say that the entire basis upon which Oxfam is operating here is incorrect and also that they know that they are incorrect.

Here is their briefing paper which accompanies that video.

A tiny tax could raise as much as €37bn and would be a heroic victory for people and planet above the special interests of the financial sector.

The lie is in there, in that one single sentence.

The Financial Transactions Tax, as proposed, will raise no revenue at all. Indeed, it will lead to a reduction in revenue collected.

Leave aside all the wittering about the evils of HFT (that did not, in any manner, cause the financial crisis). Leave aside their seeming hatred of derivatives trading (none of which had anything at all to do with the financial crisis). Leave aside their ignorance of the fact that it was mortgages which did cause the crisis: and mortgages tend, even when packaged into bonds, not to get traded very much so a transactions tax is going to have no effect on this market. We can even leave aside the views of this year's Nobel Laureate, Robert Shiller, who insists that it was the absence of trade in derivatives on mortgages that aided the bubble in expanding to the point of collapse. And we can even leave aside the views of Diamond and Mirrlees, Laureates both for their studies of taxation, who point out that transactions taxes are a very bad form of taxation indeed.

We can, instead, simply turn to the European Union itself and its own study of the effects of such a financial transactions tax. As I've pointed out before:

No net revenue will be raised by the specific proposals that have been put forward. This will sound strange to those who can see that there will indeed be revenue coming from the tax, but that is because while there will indeed be revenue from the tax itself there will also be falls in revenue from other taxes. The net effect of this is that there will be less revenue in total as a result of an FTT. But of course, do not just take our word for it. That of the European Commission should be sufficient1:

‘With a tax rate of 0.1% the model shows drops in GDP (-1.76%) in the long-run. It should be noted that these strong results are related to the fact that the tax is cumulative and cascading which leads to rather strong economic reactions in the model.’ (Vol. 1 (Summary), p. 50)

Revenue estimates are as follows: ‘[A] stylised transaction tax on securities (STT), where it is assumed that all investment in the economy are financed with the help of securities (shares and bonds) at 0.1% is simulated to cause output losses (i.e. deviation of GDP from its long-run baseline level) of up to 1.76% in the long run, while yielding annual revenues of less than 0.1% of GDP.’ (Vol. 1 (Summary), p. 33)

A reasonable estimate of the marginal rate of taxation for EU countries is 40-50% of any increase in GDP. That is, that from all of the various taxes levied, 40-50% of any increase in GDP ends up as tax revenues to the respective governments. Thus if we have a fall of 1.76% in GDP we have a fall in tax revenues of 0.7-0.9% of GDP. The proposed FTT is a tax which collects 0.1% of GDP while other tax collections fall by 0.7-0.9% of GDP. It is very difficult indeed to describe this as an increase in tax revenue.

There are, however, bureaucratic reasons why the European Commission might still suggest such a tax move. The revenues from the FTT would be designated as the EU’s ‘own resources’, that is, money which comes to the centre to be spent as of right; not, as with the current system, money begrudgingly handed over by national governments. The EU bureaucracy therefore has a strong interest in promoting such a change. What’s in it for the rest of society is harder to spot.

This result is not unexpected. When the Institute for Fiscal Studies looked at the impacts of the UK’s own FTT, Stamp Duty upon shares2, they found much the same result – from the same cause too. Such a transactions tax upon securities lowers securities prices. This then makes the issuance of new securities more expensive for those wishing to raise capital. More expensive capital leads, inexorably, to less of it being used and thus less growth in the economy.

Please note that this is not some strange application of the Laffer Curve argument. It is not to say that lowering all taxes, or any tax, leads to such extra growth that revenues increase. Rather, it is derived from Diamond and Mirrlees (1971)3 that transactions taxes multiply then cascade through the economy. They are therefore best avoided if another method of achieving the same end is available. Indeed, they point out that taxation of intermediate inputs is to be avoided if possible – better by far to tax final consumption or some other final result of the economy. This very point is acknowledged in the way VAT is structured. Rather than a series of sales taxes which accumulate as one company sells to another along the production chain, there is a value added tax which amounts to one single rate at the point of final consumption. That this point is recognised in a major part of our taxation system suggests that it might be wise to recognise it with regard to the FTT.

1 http://ec.europa.eu/taxation_customs/resources/documents/taxation/other_taxes/financial_sector/impact_assessment.zip

2 http://www.ifs.org.uk/wps/wp0411.pdf

3 Diamond, P. A. and J. A. Mirrlees (1971) ‘Optimal Taxation and Public Production II: Tax Rules’, American Economic Review, 61, 3, 261-78.

And yes, I do know that Oxfam are aware of this paper and of the basic truth contained within it. For I have discussed it with them. And their response is, well, umm........*crickets*.

An FTT would raise no net revenue: therefore all tales about how lovely things have been done with the revenue it will not raise are, well, what do you want to call it? Untruths? Misleading? Something stronger?

I would point out that that paper of mine above has been peer reviewed: something I doubt has happened to Oxfam's press release or video. Perhaps that's why the House of Lords Sub-Committee that looked at this proposal believed me not them.

Just as an interesting little update to this story I posted from this same paper in the comments section of The Guardian. On a Bill Nighy piece commending the FTT. Indeed, I used exactly the same quote. And of course the moderators deleted it near immediately.

Comment is free indeed.