An FTT and pensions taxation, well, no, not really

Larry Elliott tels us that as Rachel really needs more tax revenue maybe then and therefore:

But there are other options. A tax on financial transactions is one. Limiting pension tax relief to the basic rate of income tax – as suggested by the tax expert Richard Murphy – is another.

To describe Richard Murphy as a tax expert is a category error. But beyond mere jeering it’s necessary to grasp his misunderstanding of pensions. He thinks - insists - that money that goes into pensions is just dead money. It’s only used to buy up or trade those secondary bits of paper on the stock market, d’ye see? Therefore we can tax pensions contributions more heavily and all we get is that river of revenue. It doesn’t matter that by taxing contributions more heavily we get less of those contributions, less money in pensions, because that money never does anything.

This at the same time that government is straining every sinew to increase pensions contributions to as to increase the amount of money flowing into those secondary bits of paper on the stock market so as to increase prices and so make raising new capital cheaper.

Strange as it may seem it’s government that is correct here, not Murphy (or, to make the statement more believable, government is less wrong than Murphy but then near all are less so). More money in pensions invested in the stock market increases share prices which makes raising new capital cheaper. Further, higher secondary prices increases the gain to be had from new investment. So, more money in more pension funds increases investment in the economy and so makes the future richer. Taxing those same pensions flows more heavily reverses the process. Given what everyone’s trying to do taxing pensions contributions more is contraindicated.

The financial transactions tax, well, we’ve all been here before. This does not raise revenue - in fact, an FTT reduces tax revenue. There’s even a peer reviewed, proper, scientific paper proving this - modesty forbids detailing the author. For the same reason too. An FTT lowers asset prices - especially those secondary pieces of paper on the stock market - and thereby reduces both capital formation through saving and also investment from that saving.

That both of these tax “ideas” make us poorer is one thing. But that they both - as a result of making us poorer than otherwise - reduce tax revenue is a really good reason not to institute the ideas in the name of increasing tax revenue. They don’t achieve the stated goal - so, why do them?

Now, with suggestions from Murphy we should all know this already - not gonna work. But the same is indeed true of the FTT as well. So, let’s not do either then, eh?

Tim Worstall