A Universal Basic Income (UBI) is again being widely discussed as a radical policy to tackle inequality and provide us all with a new level of freedom in an uncertain future. I will leave aside the moral arguments in favour and against for this article and instead look solely at how we could pay for a UBI at a meaningful level using a new micro-tax on all electronic transactions.
Preceding the 2016 Swiss referendum on introducing a UBI BIEN-CH the non-profit organisation behind the vote proposed introducing a micro-tax on all of Switzerland’s electronic transactions. This would be levied on financial institutions like the Tobin-Tax, but crucially it would also include all electronic transactions made by everyone in the country. A sort of Super Tobin-Tax that the University of Zurich estimated when applied at a rate of 0.2% would generate 200 billion Swiss francs, more than enough to pay for a UBI in the country.
It is quite difficult to find complete data on the true value of electronic transactions in the UK, but looking at the most reliable data available, the potential taxable amounts are mammoth.
The most complete data I could find was from the Bank for International Settlements (BIS) who published statistics on payment, clearing and settlement systems in 2016. The data cover a wide range of transactions made in the UK in that year. The figures put the value of electronic payments by banks; consumers; interbank transfer systems like BACS, CHAPS and faster payment service; transactions cleared by central counterparties and clearinghouses; and transactions processed by selected central securities depositories at a cool £386 trillion.
The BIS data is missing the value of trades made on the London Stock Exchange, but the World Federation of Exchanges (WFE) publishes monthly and 12-month rolling figures. The WFE put the total value of share trading by the LSE group in the calendar year of 2019 at £162 trillion.
The total value is probably much higher due to the complexity of the systems and the lack of good data available, but just working with these figures, we can estimate the total value of UK electronic transactions to be £548 trillion.
If we were to apply a Universal Transaction Micro-Tax in the UK across all of these transactions even at half the rate of the Swiss model at 0.1%, we could potentially raise £548 billion in revenue.
The bulk of the revenue from the micro-tax would come from financial trading and services, and the low rate would have a minimal impact on monthly household expenditure. The Office for National Statistics estimated the average weekly household spend in 2018 to be £573. Even assuming all of that spending is done through electronic transactions, a micro-tax applied at the 0.1% rate would be 57p a week per household. The universal application of the micro-tax ties in very nicely with its funding a Universal Basic Income, with everybody contributing to the fund.
Is this enough to pay for a Universal Basic Income?
If we were to split the notional revenue raised from a Universal Transactions Tax annually between 55 million people over the age of 15 in the UK, then we could pay a basic monthly income of £830. This would not be enough to replace work but would certainly be enough to make a meaningful difference in people’s lives. We could levy the tax at a higher rate should we wish to increase the monthly level in future.
A Universal Transaction Micro-Tax should, therefore, be seriously considered as a means to forge the way forward on this policy.
* Darren Martin is the Press and Communications Officer for the Hackney Lib Dems.
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25 Comments
@ Darren Martin,
“we could potentially raise £548 billion in revenue.”
However you want to spin this, if you are taking in £548 billion, or whatever more realistic the figure turns out to be, you do need to understand it does have to come from somewhere. This is going to have considerable consequences on the level of aggregate demand. In the unlikely event that you’ve discovered a pile of money that everyone else has forgotten about, the spending of it will be just as inflationary as if the govt just created it from scratch. Thanks to the GFC and the Covid-19 outbreak we now know the govt can do just that. Whether they should is a different matter!
The economy isn’t really about money. Its about people actually doing and making things. Money is just a way to make that happen. So what we should really want is to make sure as many people as possible are, er, doing and making things! It’s rather naive to think that everyone will just carry on if they are going to be paid the same anyway. If anyone would like to do an experiment, the next time your window cleaners, or your plumbers, or whoever, call, tell them they can do the job if they want to but you’ll pay them regardless. I’m sure some will be so flummoxed that they actually will do it. Personally, I wouldn’t want to take the risk.
This is not to say that people should be without work who need work. And that it should be poorly paid. But a UBI is not the way to make everyone better off. Pavlina Tchernova has given the topic some thought and is always worth a read.
https://basicincome.org/news/2014/02/pavlina-tcherneva-16-reasons-matt-yglesias-is-wrong-about-the-job-guarantee-vs-basic-income/
@Peter Martin It’s certainly not a new pot that nobody has thought about. It’s essentially a universal version of the FTT. The City will tell you this would be a disaster but of course they would, they are the most powerful lobby in the country.
The key element is the micro application of the tax. As I say, the figures I quote are modest, others that have done more research put the figure much higher. Applied at an extremely low rate it would have a limited impact on inflation and other areas of the economy. Don’t forget that everyone being paid a basic income every month would also fuel the economy.
The rest of your comment is around the moral debate of introducing the policy, my article was about how we could pay for it.
@ Darren ,
No, you’re wrong. Everyone being paid a basic income, regardless, would not “fuel the economy”. You may think you can buy bread because you have money in your pocket. In reality you can only buy it because someone has taken the trouble to bake it. In other words you are assuming that you can vary the demand side, to produce your desired outcome, and the supply side will be unaffected.
It’s not simply “a moral debate”. It’s all very practical. It’s better not to find out the hard way! As you will when your local shop doesn’t bother to open, and your morning bus doesn’t turn up to take you to work! That is if you’ve decided it’s still worth going!
@Peter Martin
“ The economy isn’t really about money. Its about people actually doing and making things. ”
It should be about that, but unfortunately much of our economy is based on money. Financial services and complex products just moving money around.
This tax may have the impact of making high frequency trading and other risky banking activities less profitable, but I don’t see that as a bad thing.
Consumption in the rest of the economy will not slow with a few extra pence applied to a transaction. Consumer payments last year were over £80 trillion, the bulk of which were electronic transactions. The convenience of using electronic payments would only be stifled by a tax being applied at a high rate, not at 0.1%.
@ Darren,
Yes, money is important. But you’d know that a packet of biscuits was more valuable than a purse full of gold sovereigns if you were starving after being shipwrecked. I think the author Robert Tressell made that point in his classic “The Ragged Trousered Philanthropist” written more than a hundred years ago. There’s a lot in there that should appeal to Lib Dems even though it is regarded as a socialist classic.
It really doesn’t matter if its 1%, 0.1% or 0.01%. Raising and spending an amount which is approximately 25% of annual GDP is going to have huge macroeconomic considerations which cannot simply be ignored.
This isn’t to say we shouldn’t have a FTT. Maybe we should. But that doesn’t mean any revenues should be used for a UBI. They are separate issues. For one thing the govt doesn’t need to raise revenue to be able to spend.
@Peter Martin
You are certainly right, any new tax would need to be examined much more throughly than a 600 word article.
A micro-tax certainly has the potential to raise substantial revenue, whether we use the revenue to pay for a UBI or not depends on whether you support the policy I suppose.
The Swiss non-profit I quote in the article advocate the tax beyond UBI as a means to replace other forms of taxation.
We’ve been around the houses with a FTT /TobinTax / Robin Hood tax. Its proponents laud it as the real magic money tree from which all problems may be solved. But even the way it’s described should give some pause for thought – a tiny, tiny tax that will raise £billions. Which is it? A tiny tax or a massive tax? It can’t be both. You can’t, as Peter Martin says, take huge amounts in tax and somehow imagine the effects will be small.
I also agree with Peter Martin when he says that the real economy involves making and doing things. This is just as true of financial services as other industries. For example, a manufacturing company making widgets has costs of materials, labour, overheads etc then sells the widgets for a profit – or so it hopes. In fact it’s taking a risk with all this. Small margins in costs or the amount they receive for their widgets could make the firm unprofitable and un-viable. Likewise financial services, for example banking and insurance. Like the widget maker they have costs and risks and expected revenues. Small margins can make the difference between making a profit at all or going under. We can’t just imagine that we can add to costs of firms and individuals and have no negative effect.
This is one of the least thought out articles on ldv for a very long time
A UBI would definitely help the economy, as does any wealth redistribution – and anyone arguing that redistribution of wealth would lead to inflation that would match that redistribution has a questionable understanding of inflation (and economics in general).
Turning to that point on economics – Financial Transaction Taxes have been found generally to reduce transactions, which decreases market liquidity and also causes the tax to generate less revenue than expected. Even the tiniest amount of friction on a transaction will cause this effect, as well as causing trading to be moved off-shore. Your addendum (making a FTT applicable to all transactions) would likely cause this to become regressive (since richer people will simply move money around less, whereas poorer people would have no choice).
UBI is a great idea, and we should find a way of funding it. Financial Transaction Taxes are probably overall a bad idea, from my understanding of the economics.
A detailed and well-structured piece, thank you Darren.
While this sounds remarkable, we have to consider the supply chain, and the fact that the economy is driven not just by how much is produced, but also how fast it’s produced.
So for the supply chain… To create the laptop on which I’m typing, an almost mind-boggling number of transactions will have taken place, from idea phase, through investment, manufacturing-procurement-manufacturing loop, assembly, marketing, retail, online shopping, shipping and so on. VAT only works because it’s recoverable in all stages except the end consumer. It seems unfair, but there it is – you want the thing, you pay the 20% VAT.
Now imagine if there was an incremental tax on every transaction (and lets face it every transaction in that chain will be electronic). Not only would that push-up the price of the end-product – shouldered by the consumer – but would also encourage much of the supply chain to be conducted offshore.
So for the rate of production – If a barrier to transactions is introduced, that discourages the transaction from taking place. As a business as soon as I’ve bought a Widget or an Asset, I’ve not only paid the market price, but a little more as well. When I try to sell that on, I need to recover not only the cost of the purchase, but what it cost me in tax as well. Business will hesitate, hold less stock, and be prepared to invest less.
As we come out of COVID-19, and face the ongoing debacle of Brexit, this is not what we want to do for business confidence, let alone consumer confidence.
@Simon McGrath your comment is one of the least thought out I’ve seen in a long time. Care to share any arguments with supporting evidence against?
@Adrian May thanks for your comment.
I agree that it would certainly have an impact. My argument would be that the value of transactions are almost certainly much higher than what I quote. I’ve seen research putting it in the quadrillions. This would mean that we could set it at a much lower level than what I propose and still raise the revenue needed. The question that needs to be answered through further research, like with any tax, what is the level it can be levied that has minimal negative impact on things like the supply chain as you set out?
Well said. Most card transactions incur bank fees on the vendor of over 1%. The EU has plans to radically cut these. But if a fraction was to turn into a tax instead, consumers wouldn’t even notice.
The question is, how big does a transaction have to be before it’s worthwhile taking the money out of the bank in large denomination notes and carrying it round to the vendor. I imagine your laptop vendor would have to pay all their UK suppliers that way.
It would be more acceptable if it also replaced things like council tax, business rates, employer NI and other fixed costs that distort competition or force people into work to pay ridiculous sums to the council which is then mostly wasted due to local corruption and inefficiencies. what was left over could then be used to replace welfare etc with UBI, set on the assumption that people would have to work to top it up. The virus illustrates that the economy must become much more dynamic and adaptable, having both a transaction tax and UBI would both help as they could easily and fairly be adapted in times of stress.
@Frank West I think you’re right about that and the Swiss non-profit actually suggested they could replace all/much of other forms of taxation with the micro tax.
It’s also worth noting that a huge chunk of the £222 billion the government spend on social security payments would also be directly replaced by the UBI, except for where the support needed is higher, like disabled people with considerable care needs.
No one seems to mention that a micro transaction tax already exists. An apocryphal story tells of the computer programmer who set a client company’s accounting package to always round up fractions of a penny and siphon off the extra to his personal slush fund. Last heard of living it up on the Costa del Crime. This used to be very real for me, when we sold products priced at £25 plus VAT, and many customers paid by cheque applying the government rule to round down the half penny. However, our stupid accounts program insisted on rounding up, so I was for ever tediously writing invoices for £24.99, plus a zero-rated service charge of 1p. My point is that all over the world there are conventional ways to deal with the loose ends of financial transactions and it would be comparatively simple for governments to mandate that they should work for the common good.
@James Belchamber- thanks for your comments.
It will almost certainly lead to a reduction in transactions, the question is by how many and what rate we apply the micro-tax so it still raises the required revenue.
Firstly, it may make risky high frequency trading less profitable, but that isn’t a bad thing.
Secondly, I quote very modest figures and a nominal rate of 0.1% as I have only referred to figures I have been able to verify. Others that have done similar work on valuing the total amount of transactions have set out potential values in the quadrillions. This would mean we could set it much lower, still raise the needed revenue, but not have to impact individual transactions to the point where they are no longer profitable.
I don’t really understand why richer people would move money less, the micro-tax would apply to all electronic transactions. All payments people make including debit and credit card transactions, therefore it would be very hard to avoid. Also, if anything, poorer people have been shown to use cash more, the tax wouldn’t apply to cash transactions and I have deliberately left out ATM withdrawals for this reason.
Further to the point on the impact on consumers, @Dave Raval makes a very good point above- “ Most card transactions incur bank fees on the vendor of over 1%. The EU has plans to radically cut these. But if a fraction was to turn into a tax instead, consumers wouldn’t even notice.”
@ Anthony Durham thanks for your comments, and you are absolutely right.
One of the best tools the banking industry has is to make us feel like what they do is far too complex for us to meddle in.
Over on Facebook one of the main arguments is exactly this, it would be too difficult and lots of systems don’t work sometimes. It would be like a sole trader saying they can’t get their tax return right because their calculator doesn’t work.
For all I have seen, it would be fairly simple to implement.
Thanks for your examples, very useful.
@Darren the concern isn’t so much about making things less profitable and more about making markets less stable – by adding friction to the trades themselves you create bigger peaks and troughs, causing more volatility and deeper crashes.
@Anthony Durham that’s the plot to Superman 3.
I take a different view. Finance “industry” is shuffling around trillions, an dpaying little tax for this activity.
So tax them in a normal way as other activities are taxed. If you build your economy on retail + finance then this is where the money has to come from.
Darren Martin
Did you read the University of Zurich link you attached. It is a static estimate based on a dynamic system. That is the approach used by John McDonnell to produce his claims about how he would have run the treasury.
It should not be much of a challenge to at least produce a basic dynamic analysis, I suspect the reason many advocates of a FTT don’t do this is it would show the revenue raised would be nowhere near what they want to be able to promise.
The reality is life is that most policy options are trade offs with problems often taking the shine off. There is no magic money tree, life is a matter of trade offs and you have to be realistic.
That is leaving aside the negative impact of making markets less liquid, but that is a longer consideration.
Darren Martin
Perhaps it would help you to test your assumptions against real world figures.
Your estimate of how much money this tax would raise is about 25% of GDP so a quarter of the total valuation of production goods and services of the country.
Now the commons library (to be fair that is 2018 figures but it won’t have changed that much) put the financial services industry at 6.9% of GDP.
Your estimate of the tax revenue is that you will extract from the financial services industry over three and a half times the total production of that industry.
It can be attractive to grab out put from activists (including those working in universities) and try applying it to an approach that you want to see but can you imagine the next LibDem Leader trying to square that circle under questioning of Andrew Neil on national TV during an election?
Universal Citizens Income is how I recall this party framing it in the 80’s.
If the coming post industrial revolution is true to expectations, the manual jobs as well as professional and clerical jobs will take a hammering and the government will have to do something like this, however expensive. The process has started and the tech giants will ensure it is well on the way in the next 5-10 years. The present crisis proves that even a Tory Government will spend vast sums if the alternatives are worse.
The HMRC rules on definitions of self employment were very specific and in no way allowed this gig economy thing to get going. Workers needed at least 4 employers offering substantial work, to buy their own various factors and more. Yet gig economy employers and workers were allowed to flaunt these rules via couriers, taxi’s, food delivery and much more.
In a coming world where driving, deliveries , warehousing, medical consultancy, legal services, call centres and much more are automated and the work that remains is increasingly brief and made incredibly competitive, governments will have to work together, regulate and tax it properly, so employers cannot get around them to the market and not just roll over as they did over the gig economy.
Of course an industrial revolution will throw up new work, never previously a thing, but the manual + intelligence nature of the present changes mean that new work could mainly be subsumed into the technology.
This world has been a long time in the making as it was all predicted in extraordinary detail in Alvin Toffler’s “The Third Wave” written in the 70’s.
UBI could be made a little less costly if it tapered off according to accumulated wealth and high income. The snag of that being that the scheme would then have more influential opposition.