Savers will pay a terrible price for Europe’s latest stealth tax
MONEY, money, money – there is much still to learn from Abba, the wonderful Swedish band, especially when it comes to economics. Take their garish outfits: the crazed hotpants, the white boots and the bizarre shirts.
It turns out that they were chosen for tax reasons: under the crippling Swedish tax system under which Abba were forced to operate, any relief was worth taking. The system included a provision for work clothes – but these were only tax deductible if they were so weird as to be clearly only wearable on stage. Hence the strange outfits which came to define Abba in the public consciousness just as much as hits such as Dancing Queen, SOS, The Name Of The Game, and Knowing Me, Knowing You.
The revelations are contained in Abba: The Official Photo Book by Björn Ulvaeus; as far as I’m concerned, it was the best story of the past couple of days. It illustrates one of the central lessons of public policy: taxes always have an effect on behaviour. People adapt and change and respond to incentives; and there are always unintended consequences to hiking taxes (such as influencing global fashion).
It’s a shame that the Euro-establishment hasn’t learnt anything from its childhood pop idols. The financial transactions tax which the EU is continuing to push through will be a complete disaster, as new research from London Economics (and commissioned by Canada Corporation and TheCityUK) confirms. Like all such taxes, it will end up being paid by savers – including those with pension pots – who will see the value of their assets tumble.
The economics literature is clear on this, as is the evidence from countries that have introduced a financial transactions tax: the day the levy is announced, share and bond prices fall significantly. One key reason for this is that a chunk of the value of the asset gets confiscated each time it is bought or sold; so even though the number of transactions will decline, the value of the financial asset is reduced by the net present value of the sum of all of these taxes. A levy of 0.1 per cent of the value of an asset may not sound like much – but it all adds up pretty quickly over time.
While the UK is supposedly not covered by the tax, which will only affect some Eurozone countries, it too will suffer. The reason is that the tax will affect financial assets issued in participating Eurozone member states, as well as to secondary market transactions involving financial institutions from participating Eurozone states – so many UK based savers and investors will be affected, even though by much less than in neighbouring countries.
The impact could be as large as €204.9bn in Italy, a loss of 14.1 per cent of the value of the assets being taxed. Germany would be the next most affected (€150.6bn, 5.8 per cent of GDP), followed by Spain (€79.6bn, 7.6 per cent of GDP).
Scandalously, Spanish households would have to save for an entire year to restore the value of their savings to the level prior to the introduction of the tax, the report points out; in Italy, households would have to save for an extra 18 months. What about the UK? The tax will slash the value of equity and debt holdings by £3.6bn (0.2 per cent of GDP), a nasty stealth tax.
It will be a bitter blow for millions – though, tragically, the public will not actually notice what is happening as their loss will be invisible and most likely blamed on market forces rather than on callous, economically illiterate City-hating money-grabbers from Brussels.
The government wants to encourage people to save by allowing tax-free Isas and tax-deductible pension contributions. That effort will be undermined by this horrific new tax on savers. But it could have been even worse. The coalition government was absolutely right to refuse to sign up to this destructive Euro-nonsense of a tax.
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