The need to effectively tax
Without effectively taxing financial transactions, the inequality gap will continue to widen.
— Without effective taxes on capital, extreme concentrations in wealth occur.
— The trading of derivatives was originally conceived to help mitigate future risks on crops and homes by locking in prices or expunging obligations. It has now become a speculative market.
— Modernizing the UK’s stamp duty on shares — the world’s oldest financial transactions tax (FTT) — and extending it to products like derivatives, would raise an additional GBP5 billion a year.
Capital gains taxes and corporate taxes do not go to the heart of what is required. Inequality cannot be solved, let alone reduced in a meaningful way without taxing financial transactions.
I spent 15 years working at the London Stock Exchange, the last three as head of Derivatives Product Development during the global financial crash.
When I launched one of the first over-the-counter trading and clearing services for European derivatives in 2006, I was optimistic my industry colleagues at the world’s biggest investment banks would honor their word and use it to help counter rising systemic risk in the global financial system. They didn’t. Soon there were homeowners losing their properties because bad debts were repackaged inside clever derivatives with triple A credit ratings.
My peers, including wealthy investment bankers, brokers and traders, continued negotiating multimillion pound trades after the crash. Their immunity to the social and economic turmoil that was unravelling around us felt strange to me. Despite the evictions, unemployment and recession we were witnessing as part of the general economic situation, for them it was business-as-usual.
The house always wins
What became apparent, working at the stock exchange for a decade and a half, was the truth behind the old casino adage: “the house always wins”. The finance sector can garner vast streams of insider intelligence to easily predict market movements. Whether markets go up or down, it makes money by extracting value from the full breadth of society and the economy. Counter to common perception, this is where capital goes to become unproductive!
The trading of derivatives was originally conceived in earnest — to help mitigate future risks on crops and homes by locking in prices or expunging obligations. Early records indicate that the Babylonians used them extensively. Common examples are the farmer, who, when worried about what the weather might do to crop yields, locks in a price now for future harvests, to help provide some stability and security in the event of bad weather and poor yields.
Derivatives trading - a cause of inequality
But times have changed. Derivatives trading has now essentially become the world’s biggest betting shop for the wealthy, contributing greatly to rising inequality. Large speculative bets are made cheaply because they offer traders the ability to leverage their positions at a fraction of the cost of an underlying asset that does not need to be owned. Due to the trillions of capital exposed, huge profits are made when asset prices move by only fractions of a decimal place. Today, stock and derivatives exchanges share the stage with investment banks and the financial community as the epicenter of capital accumulation and concentration.
Inequality cannot be solved, let alone reduced in a meaningful way without taxing financial transactions. Capital gains taxes and corporate taxes do not go to the heart of what is required.
The need for effective tax systems
Without effective taxes on capital, extreme concentrations in wealth occur. Last year saw the biggest increase in billionaires in history, one more every 2 days. According to a report by Oxfam,5 82 percent of all wealth created in the last year went to the top 1 percent, with not a cent to the bottom 50 percent. The highest paid hedge fund manager is earning GBP1.2 billion per year, taking home the average annual UK salary every 3 minutes.
In the UK, inequality is widening dramatically because ineffective and inadequate taxes on capital allow wealth to grow at an exponential rate.
The top 10 percent in the UK who own 45 percent of wealth are immune to austerity, low wages and cuts to public services. Excess wealth needs taxing and redistributing to close the inequality gap, as does a reversal of austerity. There’s plenty of money for everyone, but unfettered capitalism is allowing those at the top to pull away from the rest.
Financial Transactions Tax (FTT)
Modernizing the UK’s stamp duty on shares — the world’s oldest financial transactions tax (FTT) — and extending it to products like derivatives, would raise an additional GBP25 billion during the life of a parliament. As set out in an influential paper by former financier, Avinash Persaud, not only would this produce much-needed extra revenue to improve spending on hospitals and schools, even a small tax would disincentivize high-frequency trading, with the result a safer economy.
If comprehensive FTTs were introduced across all major financial trading activity, we would have an opportunity to tackle some of the world’s biggest issues. In the global currency markets alone, the daily average value of all trades is more than US$5 trillion. It will take US$2.5 trillion to finance the Sustainable Development Goals and eradicate extreme poverty for 987 million people and feed the 815 million people who go hungry.
FTTs would not be detrimental to society — they would vastly improve it. A socially just FTT is essential if we are to eradicate exponential capital accumulation and tackle extreme wealth creation. What is our economy for, if not to improve the lives of ordinary citizens! Placing more tax on the financial sector is plain common sense.
Download the full 'What to tax?' publication here.
Keval Bharadia worked for the London Stock Exchange for 15 years, heading up product development for the derivatives business between 2007–2010. After leaving the city, he moved into the field of international development working for grass-roots human rights organizations and consulted for international NGOs including Oxfam, Christian Aid and Stamp Out Poverty.