RAchelle Reeves seeks to increase taxes instead of eliminating them. No problem: here is a line that must be removed by a government that calls itself pro-growth, pro-business and pro-investment, and it has been the highlight of the week. The Great Summit. And the attractive claim of abolitionists is that getting rid of the tax – with some reservations – can pay for itself over time as other Treasury revenues increase.
The tax is stamp duty on shares or, more specifically, stamp duty reserve tax, or SDRT. This is a 0.5% tax on share purchases by UK companies, which will bring £3.8bn to the Treasury in the 2022-23 financial year. Ireland has a higher rate of 1%, but no one else does. The United States, China and Germany have not imposed any similar taxes. Therefore, the claim that the UK is at a competitive disadvantage in attracting listings and liquidity to its stock market appears sound. At a time of panic over London's sleepiness, particularly in the bottom half of the stock market, that point should resonate.
Don Needletax Policy Associates, which is defending the repeal this week, pointed out other consequences and distortions. While the tax is ultimately borne by end investors (individuals, pension funds, unit trusts, etc.), companies also have a cost when raising capital. As the requirement for buyers to pay stamp duty is a dampening force on share prices, the cost of equity capital for companies is slightly higher than it would otherwise be.
Similarly, companies have an incentive to use stamp duty-free debt rather than equity. “All of this creates a bias in favor of British companies over foreign companies, public companies over private companies, and debt and equity. None of this is desirable,” Needle argues. Absolutely correct.
The claim that stamp duty can pay for itself is softened. This is based on a calculation by independent consultant Oxera Center for Free Market Policy Studies that assumes a permanent increase of between 0.2% and 0.7% of GDP, which would mean between £2.1bn and £6.8bn in more taxes. high. In the middle of that range, £3.8bn would be offset by the Treasury's loss.
Will the boost to the overall economy really happen? The argument is that by reducing the cost of capital, companies' overall financing costs and business investment should eventually increase. Marginal projects become more attractive and there should be a compounding effect. Directionally, the argument seems sound, but, as the range of predictions suggests, precision is tricky.
So Neidle's recommendation seems better: repeal the tax by phasing it out: a reduction of 0.1 percentage points a year for five years. To calm treasury nerves, review after two. As he says, avoiding an immediate downside to current owners (from rising stock prices) would have a useful side effect.
Fund manager Abrdn and others are promoting an alternative approach: removing stamp duty on all shares outside the FTSE 100 index. The shares are already exempt from the Aim market, but the extension to FTSE 250 shares will directly benefit the party. of the market most affected by the liquidity crisis. That idea has merit too: the FTSE 250 could test the waters for a complete phase-out.
Whatever the model, something has to happen. Indeed, at a time when we are inundated with reports on how to reform the UK capital markets, it is strange that the abolition of stamp duty has not been at the center of the debate. You need to dig to page 18 of the Capital Markets Industry Taskforce's latest report to read the best argument that the Treasury would be foolish to tax UK retail investors when they buy shares in the sports car maker UK-listed Aston Martin and publicly traded Tesla. .
The reluctance arises from the idea that it is difficult to imagine the Treasury, especially under a Labor administration, handing out £3.8bn from the start through a policy that smacks of a freebie to the share-buying classes and big-city corporations. .
In that sense, there are two answers. Firstly, the City does not benefit directly in the sense of the big investment banks, because the market makers don't pay anyway. The SDRT is primarily a tax levied on ordinary pension savers, other end investors and companies raising capital. Secondly, another of Needle's arguments is that it will be easier for a Labor chancellor to navigate chaotic politics around otherwise logical reforms than for a Conservative.
If Reeves is looking to pull a rabbit out of a hat on Budget Day, abolishing the SDRT would be the solution, especially if it raises the capital gains tax at the same time. As a serious sign of openness to investment, it will be better than a feel-good summit.
