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VAT for banks is a more logical option
June, 05th 2013

Sir, Avinash Persaud (“Europe should embrace a financial transaction tax”, Opinion, May 29) argues: “Financial trading is undertaxed relative to the rest of the economy, in large part because the industry is exempt from value added tax.”

But the logical conclusion would seem to be that the industry should be subject to a value added tax, rather than a tax on part of its activity that will inevitably lead to distortions.

After all, everybody seems to agree that a transactions tax will need to be carefully designed if it is not going to be avoided by the banks and funds engaged in financial trading, and careful design in a technical area does not normally go hand in hand with the to and fro of EU politics.

The failure to subject finance to value added tax has a further consequence, as well as undertaxing the sector. It strongly encourages vertical integration (to keep more activity VAT-free). This has contributed to the weakness of competition in banking, and made banks complex and hard to regulate, with the consequences we’ve seen since 2008.

However, I suspect that a proposal to apply VAT to banking would make the lobbying against the financial transactions tax look low key.

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