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Share Tax Hurting UK Economy

by Robert Lee,, London

03 May 2007

New research has shown that ordinary savers and pensioners in the United Kingdom bear the brunt of the GBP3bn tax on share transactions, and found that abolition of the tax would bring substantial benefits to the UK economy.

The report, released Wednesday by Oxera, an independent economics consultancy, said that stamp duty on share transactions is damaging the economy, eroding pensions and savings and hitting investment.

The study, commissioned by the Association of British Insurers (ABI), the City of London Corporation, the Investment Management Association (IMA) and the London Stock Exchange, goes on to point out that stamp duty is being paid by ordinary people, whose savings and investments are being reduced as a result.

The levy, charged at 0.5% on purchases of shares of UK listed companies, reduces a typical occupational pension scheme fund at retirement by between 1.52% and 2.38%, or between GBP6,441 and GBP11,538 in today's money, the report said. Government schemes such as Stakeholder Pensions are also impacted significantly, by GBP7,540 to GBP10,389.

The report also concluded that stamp duty affects the relative attractiveness of UK private and public equity; the cost of equity for publicly listed companies is increased by around 7% to 8.5%, while the effect on the cost of equity for private equity firms is negligible.

Despite generating revenue of around GBP3 billion per annum for the government, the research concludes that the Treasury would recoup revenues lost from the abolition of stamp duty through a sustained rise in the UK's GDP of between 0.24% and 0.78%. This would result in an increase in the government tax-take of up to GBP4 billion (minus lost direct receipts of GBP2.9 billion), the report stated.

Furthermore, abolishing stamp duty could lead to a one-off boost in share valuations by 7.2%, and could see fixed annual investment by FTSE 350 companies rise up to GBP6.4 billion, and lead to a reduction in UK companies' cost of equity capital by 7% to 8.5%, increasing to as much as 10% to 12% in the case of technology companies, and 9% to 11% in the case of retail companies, the report claimed.

Moreover, the report found that even a government commitment to a gradual abolition of the tax over a five year period would deliver as much as 90% of the benefit in the reduction of cost of capital associated with immediate abolition.

Commenting on the findings, Michael Snyder, Chairman of Policy at the City of London Corporation, observed that: "This report proves conclusively that stamp duty has a negative impact on the UK economy, savings, pensions and investment. London is the world's leading global financial centre but stamp duty risks putting the UK at a competitive disadvantage."

Richard Saunders, Chief Executive of the IMA, added: "Stamp duty penalises ordinary people who invest in flagship government schemes such as stakeholder pensions, Child Trust Funds and the proposed system of Personal Accounts. The irony with all of these is that the Government is giving with one hand while taking away with the other."

Assessing the impact of the tax on companies, the report found that abolishing stamp duty would increase ordinary peoples' savings, capital expenditure of UK companies and share prices and valuations and reduce the cost of equity of UK listed companies.

Peter Montagnon, Director of Investment Affairs at the ABI, argued that: "Stamp duty is a real handicap. It is a drag on savings and investment and makes our market less competitive. Moreover, it has encouraged the development of alternative trading mechanisms such as contracts for difference, which have damaged transparency."

Clara Furse, Chief Executive of the London Stock Exchange, concluded: "In a global economy, a company's cost of capital relative to its international peers can make the difference between success and failure. For UK public companies, stamp duty raises the cost of capital relative to other markets and other forms of finance, such as private equity. This report shows how abolition of the tax would level the playing field for UK public companies and in so doing boost the country's economic output."

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