What is the Financial Transactions Tax (FTT)?

The FTT, popularly known as the Robin Hood Tax, is a small tax on the purchase (and, in some countries, the sale) of financial assets, such as shares, bonds, foreign exchange and their derivatives. The tax rate is usually a fraction of 1% with the usual range between 0.005% and 0.5%.

The FTT is principally paid by financial firms, who buy and sell assets on a continual basis, as opposed to individuals, who tend to make more occasional purchases.

In the UK, we have had an FTT for many years, the Stamp Duty Reserve Tax levied at a rate of 0.5% on the purchase of shares, which currently raises £3.3 billion a year (Annual Stamp Tax Statistics 2015-16, p.6:).

The FTT has a provenance dating back to the 1690s and an economic pedigree dating back to John Maynard Keynes in the 1930s and Nobel-prize winning economist, James Tobin in the 1970s. In terms of heritage, it is worth noting that the UK’s stamp duty pre-dates income tax*.

* In 1797, British Prime Minister, William Pitt the Younger, described stamp duty as “easily raised, pressing little on any particular class, especially the lower orders of society, and producing a revenue safely and expeditiously collected at small expense.” The inception date of the modern income tax is typically accepted as 1799, when it was introduced by the same Prime Minister.

Why do we need an FTT?

Ordinary citizens at home and abroad are still bearing the brunt of a financial crisis they did not cause.  It is only just that an FTT redistributes money from those responsible for the crisis to those who, through no fault of their own, are suffering its effects the most. The FTT would ensure that the currently under-taxed financial sector pays a greater and fairer share.

By modernising the UK’s existing FTT on shares, closing existing loopholes and extending it to certain derivatives and bonds, it would raise an extra £4.7 billion a year or £23.5 billion over the course of a parliament. This additional revenue could make a substantial social difference. It could, for instance, plug last year’s NHS funding gap, fix the adult social care crisis and hire 20,000 new teachers with money left over to build more than 70,000 affordable homes.

How much revenue would be raised by Financial Transactions Taxes (FTTs)?

FTTs would raise substantial amounts of new revenue. As much as £20 billion could be raised in the UK alone and as much as £250 billion every year if they were implemented globally.

We propose that in the first instant our current FTT (the stamp duty on shares) should be modernised to close existing loopholes and extended to derivatives and corporate bonds, raising an additional £4.7 billion a year (see: Improving resilience, increasing revenue, Avinash Persaud, May 2017).

With Brexit, financial firms are concerned about their future, why burden them with more tax now? Won’t it cause them to relocate to Frankfurt or Paris?

Modernising our current Stamp Duty on shares to get rid of loopholes and extend it to a few more products would be a modest tax increase entirely affordable by a financial sector rich enough to reward their CEOs every year with multi-million pound pay packets.

Banks relocating because of the FTT doesn’t make sense. Given the UK already has an FTT on shares, if the strain of such a tax was really a determinant of the location of their business then finance firms would have relocated to Germany (where no FTT exists) years ago. The reality is that the FTT is just one of a number of costs of doing business and not high enough for a finance company to relocate its operations.

The real question is what would actually lead UK finance firms to relocate? To which the answer is if the outcome of Brexit negotiations does not give these companies sufficient (or sufficiently profitable) opportunity to do business with EU countries.

Finance firms have opportunistically seized on Brexit as an argument to prevent any moves to tax their sector more. Ultimately, what we cannot have is politicians using uncertainty over the Brexit outcome as a reason for delaying a fair, affordable and timely tax increase which is needed to ease the problems faced by many people across the UK as a result of the financial crisis the banks caused. 

Who supports the FTT and what progress has there been internationally?

The FTT has gained substantial backing over the last few years. Extremely prominent advocates have declared support, not least philanthropist and founder of Microsoft Bill Gates whose report to the G20 Leaders specifically recommended FTTs to raise funds for development. Other big names include: George Soros, Al Gore and Ban Ki Moon.

In 2011, shortly after the Robin Hood Tax campaign was launched, the FTT was endorsed by 1,000 leading economists – including Nobel prize winners Joseph Stiglitz and Paul Krugman – and 1,000 parliamentarians from 30 countries. In Europe, more than a million calls for a Robin Hood Tax were sent to decision makers in 2015.

The Robin Hood Tax is not just a nice idea, it’s now becoming a reality. Today, 10 European countries – Germany, France, Italy, Spain, Austria, Belgium, Greece, Portugal, Slovenia, and Slovakia – have agreed to proceed with the implementation of an FTT. The tax could raise in the region of £20 billion a year – much needed revenue to fund domestic and international social priorities during times of austerity.

Is the European FTT a Brussels tax?

No. Like virtually all taxes, the revenue will be collected nationally meaning it is up to each individual country to decide how to spend the money. Both France and Germany, the biggest supporters of a European-level FTT, are against using the revenue for the EU budget.

How will the money be spent?

Applying the FTT internationally, covering shares, bonds, derivatives and the wholesale market in foreign exchange, would raise as much as £250 billion a year in new revenue. To ensure that it lives up to its name of a Robin Hood Tax, the money must be allocated to domestic and international social priorities. We are calling for the money to be spent in the following ways:

  • 50% to protect the most vulnerable at home and save jobs and public services;
  • 25% to help those in developing countries hit hardest by the financial crisis;
  • 25% to fight climate change at home and abroad.
In the present economic climate, ensuring that a fair proportion of FTT revenue is spent on international commitments is indeed a challenge and far from assured. Thankfully supporting governments have responded favourably to our asks. France and Germany have both stated that at least part of the revenue could be spent in this way:

German Chancellor Angela Merkel said, “one could discuss the use of part of the revenues from the Financial Transaction Tax for development and climate adjustment” (Statement by Chancellor Merkel to the Development Committee of the Bundestag in November 2011.)

Can the FTT work without global agreement?

Definitely. More than 40 countries – including many of the world’s largest financial centres – have implemented FTTs unilaterally either permanently or temporarily over the last few decades.

A good example, and one of the earliest FTTs is the UK’s Stamp Duty on share transactions. This 0.5% tax yields more than £3 billion a year and hasn’t stopped the London Stock Exchange being one of the largest stock markets in the world. Many other countries raise substantial amounts of revenue from FTTs, such as India, Hong Kong and South Africa. All these countries have successfully implemented their FTTs on their own demonstrating that FTTs do not need to be implemented globally to work.

It is simply untrue to say that financial institutions will relocate their transactions to avoid having to pay. The key point is that if the FTT is designed properly, the geography of the trade is irrelevant to the capture of the tax. The IMF confirms this stating that FTTs “do not automatically drive out financial activity to an unacceptable extent”.

Will ordinary citizens like you and me pay the tax?

No. The FTT will be paid, first and foremost, by the principal buyers/sellers of financial assets. In fact 85% of the taxable trades are carried out by banks and other financial institutions, such as hedge funds, whose clients are often high-net-worth individuals. Ordinary people do not, by and large, trade assets such as bonds or derivatives. The IMF has studied who will end up paying FTTs concluding that they would be “quite progressive”.

This means they would fall on the richest institutions and individuals in society, in a similar way to capital gains tax. This is in complete contrast to VAT, or sales tax, which falls disproportionately on the poorest people. So it is businesses, rather than individuals, who are constantly trading as opposed to making a one-off purchase as an investment, who will consequently end up paying the FTT.

Would the FTT hit pensioners?

Pensioners will not lose out because of the FTT. The tax would target traders who buy and sell financial assets frequently, often turning over their investments in a day. In contrast, pension funds invest over long time horizons, buying and selling on average once every couple of years.

A tiny tax applied at entry and exit from the market would therefore have a negligible effect on pension funds. This argument is often used as a scare tactic to put politicians off taxing the financial sector.

Can the FTT easily be avoided?

No, not if it is well designed. The fact that many FTTs already successfully exist, such as in the UK, USA, India and South Africa, bears testament to this.

A case in point is the UK’s Stamp Duty on share transactions. This 0.5% tax yields more than £3 billion a year and hasn’t stopped the London Stock Exchange being one of the largest stock markets in the world. It is simply untrue to say that financial institutions will relocate their transactions to avoid having to pay. The key point is that if the FTT is designed properly, the geography of the trade is irrelevant to the capture of the tax. The IMF confirms this stating that FTTs “do not automatically drive out financial activity to an unacceptable extent”.

Avoidance can be minimised if the behavior to get around paying the tax is turned into a high-risk, low return activity. In other words, by setting the tax rate low (between 0.5% and 0.005%) and making the costs of non-compliance high, the incentive to avoid paying the tax is significantly reduced.

It should be noted that all taxes are to some extent avoided and 100% capture never happens. Take the example of income tax in the United States, which is a principal source of revenue for the US Government. A study by the IRS showed that non-compliance was about 19%, equating to a staggering $345bn for that tax year alone. However, the year’s income tax receipt was $2,000bn. No-one would argue that because nearly a fifth of potential revenue wasn’t captured, this is not a valuable tax. When considering any taxation measure, the aim is to design it in such a way as to minimise tax avoidance and evasion, it cannot be eliminated altogether. 

What impact would the FTT have on our economy and jobs?

An FTT would increase economic growth and help create jobs. According to an Impact Assessment by the European Commission, introduction of the FTT would increase growth in Europe by 0.2% to 0.4%. The additional revenue provided by the FTT has the potential to contribute to job creation, infrastructure investment and poverty reduction. An FTT would also improve market stability and, through reducing high-frequency trading, reducing the probability of economic crises in the long-term.

The revenues raised, if used in a smart and progressive way, could be invested to help stimulate the labour market and increase employment in specific sectors such as manufacturing. This would help rebalance the economy, which especially in the UK has become over-reliant on the financial sector. The FTT may cause a relatively small reduction in the amount of people working in the specialist field of High Frequency Trading but this would be more than compensated by the increase in jobs in other areas of the economy, leading to a net increase in employment.

It is worth noting that many of the countries that currently have FTTs display strong growth, such as India and South Korea – some of the fastest growing economies in the world. 

Can FTTs reduce speculation and risky financial activity?

In recent years there has been an explosion in high frequency trading – transactions that happen every few seconds. There has also been a huge increase in derivatives, making the volume of financial transactions increase to more than 70 times the size of the world economy.  Many serious commentators believe this volume is dangerously large and de-stabilising, and that many of these transactions are, in the words of Lord Turner, former chair of the Financial Services Authority, ‘socially useless’.

Many of the most speculative, risky and socially useless transactions are based on very small profit margins, meaning that even at a very low rate such as 0.05%, an FTT would disincentivise such trading reducing the size of the market. Many economists and traditional financial practitioners support the FTT for this reason.

Most particularly the FTT will have an impact on High Frequency Trading (HFT)*, which is regarded as a good outcome by many economists who believe HFT is disruptive and risky and should either be regulated against or considerably reduced in size.

At Stamp Out Poverty, as well as being supportive of the FTT because of the money it will raise for social good here and abroad, if it also acts to reduce casino-like practices and make the economy safer that can only be a good thing.

* High-frequency trading (HFT) is the use of sophisticated technological tools to trade securities like stocks or options. HFT employs computerised algorithms to analyse incoming market data and implement proprietary trading strategies. Investment positions are held only for very brief periods of time – even just seconds – rapidly trading into and out of positions, sometimes thousands or tens of thousands of times a day. By 2010, high-frequency trading accounted for over 70% of equity trades taking place in the US and was rapidly growing in popularity in Europe and Asia (source: Wikipedia). Some finance experts believe the development of HFT is unhealthy and potentially destabilising. “Rapid increases in high frequency trading (HFT) have created a dangerously unstable web of computer-driven trading that spans global stock markets, putting them at risk of a system-wide ‘flash crash’.” See: Financial Crisis 2: The Rise of the Machines, (R. Gower, 2011): http://www.ubuntu.upc.edu/docus/Robin_Hood_Tax_Rise_of_the_Machine.pdf

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Key reading

For more detailed answers to these (and other) questions read our comprehensive Financial Transaction Tax Myth Busting document.