The IFS is a Mouthpiece for the Status Quo, including on Financial Transactions Taxes – and It’s Time to Call That Out
by Keval Bharadia on December 3, 2019



In the past 300 years the financial markets have changed and grown drastically while the solitary tax on UK share trading has been frozen in time due to the power of the financial services lobby. This power has been driven by the UK’s key role, as the core site of financial capitalism, in neoliberalism. As an economic system this has allowed the wealthy to earn vast profits by gambling on financial market products such as derivatives, without socially fair taxation, whilst there has simultaneously been a failure to support long-term change, in socially or environmentally sustainable projects, or around financialisation. The effect of this cannot be understated economically but we also need to be aware of ideological impacts on the way finance is treated as a given, and how this grounds the understanding embodied in the key institutions for providing insight on our economy.

163 leading economists from a variety of countries and callings have publicly declared their support for Labour’s economically sound, compassionate policies to help the most disadvantaged alongside taxation of the very richest amongst us. 50% of Tory funding comes from the City, who have for decades systematically deregulated the UK in order to pursue both greater profits and to concentrate their own power at all costs. The financial services lobby’s control over neoliberal politicians and political parties is perhaps our greatest threat to democracy and we can see this even within the advice of superficially neutral actors.

The idea that economic think-tanks convey knowledge that is neutral and devoid of ideology is a ridiculous notion. Value judgments have to be made, in deciding on what warrants scrutiny and what methods are deployed, and any honest commentator would be explicit about those value judgments. For the Institute of Fiscal Studies, whose backers include the who’s who of capitalist class interest and neoliberalism – the City of London Corporation, the World Bank, Shell, the CBI and KPMG to name but a few – to pretend to offer a balanced critique of Labour’s election manifesto is absurd. Even if we imagine they can divorce their interests and evaluations, the IFS should have acknowledged that they could have a perceived conflict of interest, since some of the policies in Labour’s manifesto like the proposed just transition fund tax on oil and gas companies, or the proposal to split up big audit firms have clear implications for IFS funders like Shell and KPMG. The IFS could easily be seen to be beholden to these funders in taking a position on the Labour manifesto.

Thankfully, other writers have already debunked the IFS analysis on Labour’s manifesto, including Labour’s plan to boost currently chronic levels of under-funding in public services and investment to bring the UK into line with other European countries. The IFS calls this move ‘colossal’ and repeatedly declares this: ‘spending not seen during peacetime’, implying this expansion of government spending has not been seen since the NHS was formed under a Labour Government in 1948.

It is an odd choice of words, but perhaps not, when one is privileged and therefore structurally immune to working class struggles and therefore unaffected by the sorts of knowledge and experience produced by them. It seems for the IFS that 120,000 preventable deaths from austerity imposed by the Tories, who used public money to bail out the banks, is not a national tragedy and millions living in destitution and poverty in the fifth richest country on Earth constitutes ‘peacetime’ for them.

The IFS have raised, in particular, three weak concerns about Labour’s plans to reform the tax on financial market trades, which I helped write, and conveniently missed out key details from the proposal that if were mentioned, would objectively remove these concerns.

The existing tax covers only UK share (equity) trading and has been in operation for 300 years and has remained broadly the same despite significant changes and growth in trading activity. 40 countries successfully have something very similar in their financial markets and collectively are raising over £30 billion per annum. The UK tax currently raises over £3 billion per annum by charging 0.5% on UK share trading. Put another way, that’s half a penny on every pound traded. Compared to VAT, which is charged at 20 pence on the pound for products and services, the existing financial transactions tax on UK shares is tiny and in need of urgent reform.

When you go to the supermarket, products are priced with VAT included. This amount does not change depending on your ability to pay more or less VAT. A uniform tax such as VAT is therefore deemed regressive. A larger share of poorer people’s income is spent paying VAT than richer people’s for the same products. The City’s warning to clients is ‘trade only what you can afford to lose’ making financial market trading the playground for society’s wealthy with cash to burn. Labour’s proposed tax is therefore more progressive and fairer than VAT because richer people tend to have the means to trade in financial markets, and should be taxed for it.

Labour proposes to extend the tax to cover equity derivatives, corporate bonds, commodities, interest rate derivatives and wholesale (not retail) foreign exchange markets, which would make it the broadest financial transaction tax of its kind anywhere. It plans to charge existing stamp duty rates, and just 0.01% to 0.12% of a trade’s value. Just one to twelve hundredths of a penny on every pound traded. After taking into consideration assumptions about changes in market behaviour, the tax could raise an additional £8.8 billion annually. This demonstrates the scale of untaxed trading and gambling through financial markets everyday.

A tax of this design naturally dis-incentivises high frequency traders, speculators and day traders. These are gamblers who provide little to no value to the long-term stability of financial markets, or our economy, or to working class people. The incidence rate of the tax falls overwhelmingly onto these gamblers with cash to burn when compared to corporates occasionally entering into OTC contracts for hedging purposes or pension funds adjusting positions in line with quarterly FTSE index constituency changes.

So what did the IFS say of Labour’s financial transaction tax proposal?

The IFS has firstly warned that trading will move out of the UK to avoid the tax and is therefore doubtful about the amount Labour could raise. However, Labour’s proposal is based on the residency status of the beneficial owner of the trade. A UK tax resident will not save tax by shifting the trade abroad and foreigners aren’t paying the tax on derivatives so they wont shift their trades either. Where the trade occurs is therefore irrelevant, preventing the risk of trading leaving the UK and nullifying doubts about the amount Labour could raise. Critics may incorrectly argue that there still remains the risk of individuals moving their tax residence. This claim is wildly unsubstantiated given the microscopic tax rates explained above versus the lucrative benefits of still doing business in the UK, which is one of the world’s leading places for finance. This article explains in detail why no organisation would dream of leaving the UK to avoid paying such a paltry tax and thoroughly examines why the financial services lobby are keen to keep repeating their false warnings of relocation using a weak case study.

Indeed, with all the money swirling around our oversized financial sector, we must also recognise that it may actually be making us collectively poorer. A growing body of economic research confirms that once a financial sector grows above an optimal size and beyond its useful roles, it begins to harm the country that hosts it. If financial organisations want to leave the UK because they do not want to pay their fair share of taxes, we should let them go and be free of the finance curse. Frankly, we deserve better and everyone knows it.

Secondly, the IFS warn us that derivatives are “notoriously difficult” to tax. It is a strange statement to make given Labour’s proposal already outlines how it intends to do this. It will leverage the existing financial markets pricing, communications, trading and clearing technology rolled out amongst every major financial markets organisation in the UK. The taxation methodology is based on the economic value of trades, which for exchange-traded and over-the counter contracts are known. If, for any reason they are not, suitable proxies such as the present value of future cash flows could be used. A sector that buys up the brightest and sharpest minds, it is more than capable of overcoming operational issues in the tax’s implementation.

Lastly, the IFS argue “some [financial transactions] are economically valuable activities making markets work better”. But the IFS conflates liquidity and turnover here: liquidity is the good, not turnover. And finance should only be worthy of being judged to have economic and social value if society, as a whole is advanced through a democratically directed, regulated and taxed political economy. This has been largely eroded under neoliberalism where finance is run in the interest of the capitalist class, not society’s most vulnerable and where wages and investment have declined. Staggering inequality, grotesque remuneration packages, under-investment in the UK and the political influence of finance all but renders finance’s social value moot at this point and I say this as someone who had a career in finance myself. It cannot be stressed enough: inequality widens every microsecond financial markets remain wholly untaxed.

So did the IFS say anything important? Perhaps it was to say Labour’s manifesto should be ‘seen as a long term prospectus for change’. It is important because only Labour has promised a pathway out of the status quo of our broken political system run for the interests of the finance lobby. Where 4.4 million people in England are waiting for NHS operations but hedge fund managers, the most prolific of industrial gamblers of our time, earn over £1 billion ($1.5 billion) a year in pay, that’s £4 million each working day by playing the markets. It takes hedge fund managers less than 4 minutes to earn the UK national average annual salary of £28,000. Sky rocketing executive pay means CEOs are earning 237 times more than their lowest paid staff member. The finance sector is fuelling poverty and inequality at an exponential rate.

It is ideological of the IFS to not back the financial markets tax given the abhorrent excesses of the City and its undue financial lobbying. The IFS is ideologically unable to deal with the structure of British capitalism and presents its findings purely within a limited view on what redistribution should be measured by to understand change . Rather than encouraging new economic thinking, its main method of operation seems to be finding creative ways to fumble along and explain how capitalism could be made a bit less unkind inside a burning building. By maintaining the status quo and not siding with change, the IFS sides with anti-democratic, power-concentrating, inequality, poverty and destitution inducing neoliberalism. It should be reminded that by even claiming to be neutral in times of violence, it sides with the oppressor.


author

Keval Bharadia

Keval Bharadia is the former Head of Derivatives Product Development at the London Stock Exchange and currently advises on transformational approaches to end poverty and inequality.

related

To Each According to their Needs! On Labour's Universal Basic Services report.

John McDonnell's UBS report offers a potential framework for a revolution in the ways we conceive of and meet our needs.

Is Production a Panacea? Reviewing Stolen and The Case for People’s Quantitative Easing

In the past year Grace Blakeley and Frances Coppola's books have confronted the problems of rentier capitalism. However, in idealizing "productive capital" of the past, they miss its own flaws and power.

To Each According to their Needs! On Labour's Universal Basic Services report.

John McDonnell's UBS report offers a potential framework for a revolution in the ways we conceive of and meet our needs.

Is Production a Panacea? Reviewing Stolen and The Case for People’s Quantitative Easing

In the past year Grace Blakeley and Frances Coppola's books have confronted the problems of rentier capitalism. However, in idealizing "productive capital" of the past, they miss its own flaws and power.