Taurus is not a word to mention lightly to older denizens of the London Stock Exchange. It was the code name for a grand project to replace the overstretched back offices of stock market firms with a fully computerised settlement system. The project stalled ahead of the 1986 Big Bang, then multiplied in scope and complexity as the various participants insisted that it cover all known contingencies and variations. Finally, after many delays, it was readied for stress testing and failed miserably. It was the pioneering big computer project disaster. If only the NHS, for instance, had examined why it went wrong, it might have saved billions.

In March 1993, Taurus was abandoned, more than £400 million was written off, the exchange chief executive resigned and the mess was humiliatingly handed to the Bank of England, which knocked heads together and had the simpler Crest system developed. The affair cost the Exchange its status as a grand City institution, the first step on its way to becoming just a profit-maximising financial software operator.

Taurus’s failure also saddled investors with another, much greater cost that endures to this day. The government of the time, eager to support London’s development as the international securities capital, had promised that it would abolish the remaining 0.5 per cent stamp duty on share transactions when Taurus was brought in, enabling it to be designed out of the system. But Taurus never was brought in, so the tax remains.

Before each Budget, there are half-hearted calls for it to be abolished. But it raises substantial revenue that the Treasury cannot afford to forgo and, since it applies only to UK securities, it has not seriously driven business abroad.

One reason for this is that big City firms have created various loopholes to avoid the tax. The Treasury either sanctions or dare not close them for fear of really damaging the City, which has become the UK’s most successful (but mobile) business.

Instead of buying shares, for instance, speculators and heavy dealers trade in contracts for difference on shares held or borrowed by exempt investment banks. And takeovers, which attract stamp duty, are replaced by schemes of arrangement, which do not. Even the Treasury’s own former Permanent Secretary, in his new role as a City bigwig, has indulged in this perfectly legal avoidance measure.

So stamp duty on securities has become an unfair tax, paid largely by private savers and the long-term institutions representing them. A tax that is voluntary for the big battalions and speculators and paid by the little people is a corruption on the body politic, a standing rebuke to the Treasury and to the City.

There is a way, however, to legitimise this normally harmless tax as well as to push more people into paying it. This is one instance where a tax should be hypothecated.

From time to time, populist politicians suggest that all manner of taxes should be hypothecated: that the proceeds should be earmarked for funding a specific activity rather than paid into the general exchequer pool. This is usually a very bad idea.

If tobacco and alcohol taxes were earmarked for the NHS, for instance, doctors would have a vested interest in maintaining consumption. Londoners have seen how some of the congestion charge, which is hypothecated to transport, is spent in ways that would carry a much lower priority than services that are being cut to meet general budgets. Public spending priorities vary independently of the proceeds of any individual tax.

Stamp duty on capital could be the exception to this rule against hypothecation, because its proceeds, though variable, would probably rise substantially. In 2005-06 the duty raised £3.5 billion. In the year just ending, this probably recovered near to the £4.5 billion paid in 2000-2001. This would be only a mite short of Britain’s overseas aid budget.

Funding Britain’s future aid entirely from the stamp duty on capital would have a number of advantages. It would be the UK’s pioneering version of the Tobin tax. This was a scheme to levy a tiny tax on all the world’s financial market transactions to fund aid to poor countries, a fine idea but unlikely ever to attract the global consensus needed to make it work. Gordon Brown could offer this as a practical alternative for others to follow.

Linking aid to duty would associate the City and its prosperity directly with poverty relief and development, an image makeover it desperately needs. It would exert moral suasion on financial companies, particularly big names, to pay the tax rather than avoid it. And it would give the Chancellor moral authority to tighten the rules, for instance by including schemes of arrangement. It would even strike a much-needed creative note in his final Budget.

graham.searjeant@thetimes.co.uk

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