Brown should send stamp-duty to join window tax

Usually at this time of year, with a heavy thump, a parcel arrives in this office, courtesy of the London stock exchange.

Ahead of the Budget, this multi-tome affair, signed off by chairman Dan Cruickshank, would argue from every conceivable angle how imperative it was that the government immediately abolish stamp duty, currently levied at 0.5% on share transactions.

The exchange's annual remonstrance, backed up with this econometric study and that international comparison, looked faintly ridiculous during the boom years: the last thing the London market needed was a fillip to business, when every third member of the adult public seemed to have taken up day-trading.

Yet now that the equity market is on its knees, the annual Case for the Abolition of Stamp Duty has failed to turn up. There has been a deafening silence from the exchange - and we suspect it has nothing to do with the fact that its chief executive, Clara Furse, might have other things on her mind.

Instead, the abolitionists have given up for now, presumably aware that with the Treasury's finances facing a painful squeeze, Gordon Brown is unlikely to tolerate tax cuts benefiting the City.

But both the government and the market authorities are wrong. Now is exactly the moment to get rid of stamp duty once and for all. In fact, its continued existence amounts to a regressive tax on smaller and/or poorer savers, while simultaneously foisting a culture of highly leveraged punting on regular stock market investors.

We are referring here to contracts for difference, a form of duty-free derivative that gives investors economic exposure to individual shares without actually buying or selling the underlying stock.

For most of the 1990s, CFDs remained the domain of sophisticated, professional speculators and traders. Rather than buying 100,000 shares in ABC company, say, at 500p apiece (costing £500,000, plus stamp duty of £2,500), a CFD would be arranged. The speculator would simply make a margin payment of around 10% and, since CFDs do not attract stamp duty, the cost of exposure to £500,000 of stock would be £50,000. (If the share price subsequently fell, the speculator would have to make further margin payments to maintain the 10% collateral; if the price rose the ratio of profits-to-cash invested could be dramatic.)

Because of the persistent desire to avoid stamp duty, London has become an expert in the use of these derivatives. Crucially, they have allowed speculators an easy way to go "short" - effectively selling shares into the falling market of the past three years.

Which is all well and good. Markets need liquidity to operate efficiently, and CFDs have provided buyers and sellers by the bus load.

The trouble is, so commonplace and "normal" has CFD trading become that the system is now being marketed aggressively at retail investors - typically by the spread-betting firms who built their businesses offering bets on stock index movements, but who are now increasingly taking business away from traditional stockbrokers.

Take a a glossy brochure from City Index, which fell out of last weekend's Financial Times. Apparently, CFDs are "one of the most exciting products to be made available to the retail investor in recent years".

Spelling out the attractions, such as avoiding stamp duty and margin payments as low as 7.5%, the firm produces a detailed example whereby a trade in a stock which rose 3.6% in three days nets the punter a 31.4% return on his "initial investment". What City Index does not spell out is that the same trade in a stock which fell 3.6% would wipe out 37.4% of the investor's money. Such are the thrills and spills of leverage.

In a real life example, a punter who took out a CFD over 10,000 shares in De La Rue on Monday, paying a 10% margin on the market price of 290p-a-share, would be looking (after Tuesday's profit warning) at a loss of £10,500 - three-and-a-half times the "initial investment".

Of course, we are not saying the chancellor should ban gambling here; the world would be a much duller place with out it. And, to be sure, City Index and rivals like IG Index are well run, fast-growing businesses which have worked hard for their custom.

But it cannot be fair that ordinary, longer term savers, such as those using ISAs or those shovelling money into their pension fund, petrified that the market meltdown has destroyed their retirement plans, should pay a penalty tax when short-term market punters are allowed to skirt the duty.

Gordon Brown has had to weather a lot of unwarranted gyp over his move, five years ago, to abolish the dividend tax clawback enjoyed by pension fund investors. Some claim the man is single-handedly responsible for a halving of the FTSE 100 index over the past three years.

By announcing an abolition of stamp duty in this year's Budget, the chancellor could go a long way to deflecting his critics. The tax raised £2.9bn in the year to last April, against £4.4bn a year earlier. This year's figure will be much lower, for obvious reasons, so a chop now would be relatively cheap.

It would also help stem a rising tide of reckless market gambling.