Before every Budget, for as long as memories extend, stock-brokers and fund managers have written to the Chancellor telling him that unless stamp duty on share purchases is abolished, the Square Mile will shrivel to nothing. Nowadays, the pre-Budget report gives lobbyists a second annual opportunity to make these special pleadings, while word-processors have made it easier to regurgitate the submissions. But with the same regularity that the City dispatches them, chancellors routinely reject them.
The arguments have changed over time, from a straightforward appeal about boosting City business, through claims that the tax would inhibit Britain’s euro entry, to suggestions that abolition might solve the pension crisis. The phrase ‘level playing field’ is much used. The latest assertions from the London Stock Exchange are that abolishing the tax would reduce the cost of companies’ capital by 0.8 per cent and boost share prices by 10 per cent.
Gordon Brown is too clever to be fooled by such arguments. Stamp duty is certainly anomalous — it applies only to UK companies, so investors pay it on BP shares but not on ExxonMobil stock bought on the London market. On the other hand, it at least has the virtue of discouraging fund managers from racking up dealing costs by churning their clients’ portfolios.
Nor are chancellors completely inflexible. Only last December Brown exempted foreign-based ‘exchange traded funds’ to boost the London market. A previous Labour government took the tax off gilts 30 years ago to stimulate a market it was about to flood with supply. In 1986, the year of Big Bang, stamp duty was halved by Nigel Lawson to its current 0.5 per cent rate. And in one of the Treasury’s better jokes, it promised to abolish the tax completely to coincide with the launch of Taurus, the Stock Exchange’s ill-fated electronic settlement system. Perhaps Whitehall had sufficient experience of duff computer projects to know that the paperless system would be delayed until, like the pledge, it was finally cancelled.
The dilemma for Brown is that he raises significant sums from stamp duty on shares. True, the £3.5 billion yield in 2005/06 was £1 billion lower than at the turn of the decade, but this is an ad valorem tax and share prices are still well below dotcom boom levels. The tax take has risen steadily since the market bottomed four years ago.
It’s probable that more shares would be traded if the duty were removed, and possible that prices would be higher. But from Brown’s point of view it matters little how high turnover rises if he receives no percentage of it. His problem is how he would replace the revenue lost by giving this boost to City business. Even if the Stock Exchange is right in thinking capital costs would be lower and prices higher, its own estimates of the additional tax on profits and capital gains fails to compensate for the loss.
Of course, Brown could look to a wider focus group and hold a competition to find out what tax the public would like. That’s what the Netherlands did in 1624, and the winning scheme chosen by the Dutch was, yes, a form of stamp duty. One suspects a poll of the public now would favour a tax on share-buying over most alternatives. It was actually the Roman emperor Justinian who started taxing documents in the 6th century, but Britain borrowed the idea 70 years after the Dutch when William and Mary needed finance for the war against the French. They promised to repeal it after four years but stamp duty has proved no more temporary than income tax — even if our attempt to impose it on America provoked the Boston Tea Party and lost the colony.
Stamp duty was extended to real estate in 1808 and the tax on property now yields twice the sum paid by share-buyers. It is no longer payable on such items as playing cards, medicine bottle labels, life-assurance policies or cheques, but the duty on equities is too golden an egg to drop. If Brown ever felt like justifying its retention, he could happily quote William Pitt’s Budget speech of 1797 when he told Parliament that it is ‘easily raised, widely diffused, pressing little on any particular class — especially the lower orders of society — and producing a revenue safely and expeditiously collected at a small expense’. Pitt promptly doubled his nice little earner.
Brown had to face a similar dilemma when bookmakers threatened to go offshore unless betting taxes were cut. Faced with receiving a high percentage of next-to-nothing, the Chancellor grudgingly settled for a smaller percentage of something. But not only does that experience discourage him from undermining more of his tax base: he has no need to make concessions on stamp duty. Big bookies had already started setting up shop overseas, whereas the only major quoted UK company to re-register abroad has been Experian, when it demerged from GUS last year — and it seems more likely the directors were attracted by Ireland’s low corporate tax rate than by the savings for investors on stamp duty.
Trading in stamp-duty-free CfDs — contracts for differences — has certainly soared but that’s because their main appeal is the ability to gamble on share prices without putting up the capital. And they are too much of a gamble for pension funds, which continue to buy real shares despite having to pay the tax.
This is what must be going through Brown’s mind as he prepares his final Budget next week. A 0.5 per cent tax on shares might not be popular but it is less than the 17.5 per cent VAT we pay on chocolate bars or motor cars. And how can tax-free share speculation be justified when first-time homebuyers are paying 3 or even 4 per cent to put a roof over their heads? That’s a hard question for a socialist Chancellor to answer, but it may be no easier for shadow chancellor George Osborne, who has pledged that stamp duty on shares will go out when the Tories come in.
In the end, despite decades of dire warnings, it is clear that the Square Mile has not declined because of stamp duty. City share dealings are at record volumes even though they’re taxed more heavily than rival markets. New York and European stock exchanges have not stolen London’s financial position. Pension funds are not shunning UK shares and filling their portfolios with foreign stocks to avoid the duty. City dealers are hardly suffering financially.
Until there is a flow of FTSE-100 companies quitting Britain, the Treasury has little incentive to grant the City its long-held wish. The lobbyists have cried wolf. Don’t be surprised if Brown, like his predecessors, ignores the howls.