The TUC’s massive report on how we can raise $200bn or so annually from the banks without any cost to our economy can be found here.

I am running low on time and political capital at home, so this has to be brief.  The nicest thing I can say is that not every sentence in it is rubbish.   For example, it is true that this has been a crisis centred on banks.  Hedge funds and private equity are not much to do with it.

First some problems with numbers

As the TUC have pointed out, the charge on FX and swaps etc is meant to only be half a basis point.   So, who could complain, huh?  And look how much it raises: $33bn from the $900trn of currency trading, if the latter falls by a mere 25%, and similarly $118bn from the $3150trn of other trading.   I mean, WOW!

Unfortunately, how much profit is there to take from these areas? Let’s see.  From the Bank’s latest FSR:

Hmmm, the average for FICC trading and US banks is something like $40 bn.   If these US banks made up a third of the global banking that might be stung with this, they are still proposing taking over 100% of the profits.

Now onto shares

The UK is held up as an example here, because we already have a stamp duty of 0.5%, and it apparently has no costs.  Not according to the IFS who found this wrong with it in 2002:

• it reduces the efficiency of the stock market for UK listed companies;
• it lacks any investment allowances and therefore imposes a disproportionately large burden on marginal investment projects compared with a corporation tax;
• it distorts merger and acquisition activity, producing a bias towards overseas rather than UK ownership.

And others also found that the costs of this tax ended up on ordinary pension funds.  Read this story.

The LSE and NAPF say stamp duty, which levies 0.5 per cent of the value of a share trade, costs individuals about twice the sum most people receive as their annual pen-sion payout.

The groups have calculated that the average stamp duty cost to a person’s pension fund is £93 a year, which, if held for 25 years and allowed to appreciate, would create a windfall of £8,000

Stamp duties on shares in the UK still raise about £4bn  – or $6.5bn.  The report hopes to raise loads more worldwide.  How much?  Well,

Estimates of total spot share dealing per annum are cautiously estimated to be US$60 trillion. On this basis, and assuming the fall in the value of share trading in 2009 was aberrational, it is estimated that if a tax of 0.5% was applied and trading volumes fell by 25% revenues raised might amount to US$225 billion per annum.

Hmmmm.  So they hope to raise about 35 times as much as is raised in the UK.   Do they think that the UK only houses 1/35th of the share trading in the world?    It doesn’t seem likely.

But my more substantive problems are with liquidity, the major cost of this scheme.  Do they address this?  No: much of the report seems to be taken with counting the profits from their imaginery escapade, rather than properly thinking through the consequences. In terms of the question of liquidity, the key cost to the scheme, here are the attempts to prove it is not a problem:

  • “as providers of liquidity to markets banks play a key macro-economic role in all economies”
  • “Of particular note is the fact that the market has not collapsed despite a fall in the value of trades undertaken by more than 50% in less than two years. For those who fear that the imposition of financial transaction taxes will destroy market liquidity and end functioning markets this is a clear indication that this is not the case.”  (Me: Huh?  Where have you measured that the liquidity has not gone worse?  Have you not noticed the high profits the remaining banks have been able to make?  How are you measuring ‘things have not gone badly’?)
  • “as the London Stock Exchange has shown in the last two years, trading volume can fall by more than that amount without any threat to liquidity or viability.”
  • “financial transaction taxes should only eliminate marginal trades but leave markets intact with ample liquidity,

That is it.  A proposal that would somehow remove $200-400bn (in theory) from providers of liquidity, and those assertions are the reason we should not worry.   SO much of the report is devoted to counting how big the banking sector and its transactions are – you can almost feel the salivating – and so little to the unintended consequences.  I find it quite amazing that they think they can raise over $200bn from banks that have capital of $455bn or so – and yet only see volumes fall by 25%.  That is as far as they have thouht about it. Forgive me if I continue to worry about this topic.

The other thing that really bothers me about this report is that I agree we have a problem with banks. It is just that I don’t think the problem is with the number of transactions they do.   In fact, the high-transaction side of banking is a part of what they do well, and is valuable to the community – offer ready liquidity in a variety of useful areas.  This earns them profits – very small ones, per transaction, but the quantity of the transactions makes the liquidity.   And these profits over the next few years are needed to make them stable and address what was the real problem – too high leverage, insufficient equity, and being trapped in illiquid positions that crashed them.  Read ‘Too big to Fail’.  What bothered people about Wachovia or Lehmans?  Not their many liquid trades.  It was their illiquid, stinking property-related untradeable toxic waste.

For political reasons, we have one good shot at fixing banks.  This is a good way of firing that shot in the wrong direction, and injuring innocent passersby.*

*I have skimmed this piece.  A longer reading may find merit in the other things they discuss, like the question of tax evasion.  This post does not constitute a commentary on that side of things.

Advertisements

45 thoughts on “Robin Hood part Deux

  1. There are so many issues raised here it is hard t know where to start.

    First, and most importantly though is that whilst financial transaction taxes are the issue of the moment they need not be the place to start when taxing banks. This report makes that very clear. This report also suggests:

    1. An accounting standard to require banks to report their profits and losses, tax paid and limited balance sheet information for each jurisdictions where they operate.

    2. Global adoption of a General Anti-Avoidance Principle to strengthen the position of tax authorities wanting to challenge sophisticated tax avoidance structures used by banks to shift profits to low or zero tax jurisdictions.

    3. Binding Codes of Conduct for banks requiring them to adopt tax compliant policies.

    4. Limitations on the time period that banks can carry forward their losses incurred during financial crises for offset against future profits.

    5. Limitation on the amount of bonus distribution that can be offset against profits for the purposes of reducing the bank’s tax liability.

    In other words, financial transaction taxes are an option and there are ample more available for those who think them inappropriate. Those submitting the report deliberately present options: it is equally clear that not all could be done – the capacity to impose them all does not exist. We know that. I recommend reading of the whole report.

    Turning to financial transaction taxes, as Giles Wilkes does, I think he has missed the point of the report, which is very different from the standard NGO approach to this issue. First, it does not claim that all FTT revenue will be paid by banks. It sets clear limits on their capacity to do so. Second, in the case of stamp duties it recognises the incidence issue is unclear at present and suggests more research is needed (although I would argue, and do below, that the issues involved are not those that standard analysis suggests to be the problem). Third, it clearly recognises that an FTT will reduce other tax yields: gross revenues for this tax are not the same as net revenues to any exchequer in this case and the report is honest about this fact. In other words, all the issues raised have, I hope been considered.

    We’ve even considered that rather odd ratio (I admit) of UK stamp duty take to total predicted revenues around the world from such a charge. The explanation is the USA: Dean Baker et al suggest that stamp duty take there will be $165 billion of the $225 billion referred to in the report. That makes the UK ratio seem entirely plausible when the tax base is extended, as the FTT we suggest would do. The numerical oddity of this is acknowledged: I took comfort in publishing the data that someone like Dean Baker had concluded as he did using similar assumptions and probably similar data to that I used. My suggestion is therefore, be careful before you extrapolate.

    But I’d also suggest much more care needs to be taken on the issue of what is profit and how incidence falls. I considered these issues in depth when writing – which is one reason why the report is long. First – profit is a residual after costs. But when those costs clearly include rents purloined by bankers then that residential should be treated with care is my suggestion – this is a dynamic situation after all, not a static one. I suggest in the report that a significant part of the incidence of a currency transaction tax on foreign exchange, and probably one on derivatives etc as well, will fall on bankers and not just banks. It would be quite dishonest to assume that there would be a 25% fall in volume of transactions and no staff implications and that a fall in demand for those doing these deals would not have considerable impact on their pay rate, which may fall dramatically. The consequence is, I argue, that third parties trading with banks will see reductions in volume costs to offset their tax incidence and banks will likewise save significant cost to offset tax paid – but will also, I admit, probably suffer profit falls too. I cannot be sure that will happen outside that sector – and see no reason why it should. I happen to think the perverse paradox of this tax is that it will be the ultimate tax on bankers’ bonuses and that the charge will rebound into banks and on bankers. It’s not a simple argument, but let’s not pretend this is a simple issue. Please read the logic in the report.

    Next let’s also be clear: incidence is not an issue for taxes alone. If the incidence of stamp duties falls on pensioners (and that’s odd as they are only a part of the stock market – and not the largest art either) let’s also be clear that the incidence of the charges for churning their investments made by the finance sector of which stamp duties are a part, but not by a long way the biggest part, also falls on pensioners. You really can’t have the argument both ways. In other words – bankers’ (and similar persons’) pay comes out of pensions right now – and in that case there is a massive potential social yield by cutting deal volumes – especially given the appalling overall rates of return after charges on equities over the last decade.

    This issue of the tax cannot be picked in isolation – the broader issue has to be addressed as well. But this, I think, may have broader employment and pension related consequences which I honestly admitted needed more research in the report – work I’d like to do as the capture of pension funds for the current benefit of the financial elite seems to me to be a matter of enormous significance which this analysis of incidence – when done properly, as I think I am trying to do – suggest needs much more work if we are to right the wrongs going on.

    Finally – a small point on liquidity. The UK stock market saw trading volume by value fall by 50% in 2009 and the world did not fall apart as a result: there is no need for volume to create liquidity, at least in the scale seen to date.

    None of this though says that these issues tackled all the problems in banking: the corporation tax issues may well do so more than the FTT ones in any case. But they do indicate ways to raise revenue – and that is what the IMF is looking at and that is why the report was written. In the process of doing so serious issues that will I hope allow the tax incidence of FTTs to be reappraised, the impact of the finance sector on pension yields to be highlighted, the issue of international tax avoidance to be noted once again and practical measures (such as those advanced on the treatment of bankers’ pay for corporation tax purposes) to be promoted, all arose. That is what the report tried to do in a dynamic and honest way.

    When analysing it please read it in that light. Please don’t read profit as a given. Please note tax follows the money and incidence is not unrelated to charge. Please do consider the issue of rents. And please consider the whole smorgasbord of recommendations: the report would remain relevant without any mention of FTTs. But to offer analysis now without considering them would have been wrong. That said, if revenue is to be raised then the report offers easier ways of doing it – and that is not by way of am levy either.

    1. Richard

      Many thanks for such a comprehensive reply. I notice you submitted twice because WordPress did not properly recognise you the first time. I have takent he other one out, but note here that you point out this is put down in a personal capacity.

      I am currently very rushed – a combination of my own publication and family life during half-term – but promise I will try to get to some of the substantive points you raise

      All the best, Giles

  2. “Second, in the case of stamp duties it recognises the incidence issue is unclear ”

    Well, perhaps you could explain that Richard? Giles mentions most of the reports that I know about on the subject., All of them conclude that the incidence falls upon consumers of the financial system, not the operators.

    You then go on to conclude that the incidence of other FTTs will fall on the operators not the consumers.

    Which leads to two questions.

    1) Could you point us to those other papers you have perused which make the incidence of stamp duty “uncertain”? Given that those mentioned don’t persuade you, there must be others out there which provide that uncertainty, persuade you of the opposite.

    2) If you can’t, can you explain how and why the incidence of one FTT is going to be entirely different from the incidence of another very similar FTT?

    As for this:

    “In other words – bankers’ (and similar persons’) pay comes out of pensions right now – and in that case there is a massive potential social yield by cutting deal volumes”

    That rather depends upon whether bankers and pension fund managers pay provides any value to investors or not. We do generally assume that voluntary transactions are positive sum you see: thus while there might be a disproportionate split of the value created by the transaction, both sides benefit.

    Now, if you want to claim that banking, pensions, investments in general, are zero sum or even negative sum then you can do so but such an extraordinary claim will require the usual extraordinary evidence. Please do note that “sum” here is limited to the participants in the exchanges, not the much more nebulous “socially valuable” argument. Do also note that a tax, by definition, is negative sum for the participants. So you’ve got quite a hurdle to overcome to show that we’ll be better of by, as you suggest, taxing bankers out of existence. Or even some of them.

  3. Tim

    Have you actually read what I say in the report?

    And have you noted that what I say is that if incidence is on consumers so are the charges – and that the saving in charges more than offsets the tax charged?

    And that I am not saying there is no incidence outside banks – I quite specifically say it is on some bankers.

    And the reason why the incidence of some FTTs is different than others is that they have different user profiles

    All of which you seem to disagree with, but none of which you seem to have noticed

    Richard

    PS I do not share your assumptions about ‘voluntary transactions’. You may have noted that a great many people undertake a great many transactions – especially in finance – the true nature of which they do not understand. You can assume they know, but the truth is they are clueless as to the meaning. In which case your argument simply does not stack. Please try arguing on the basis of the obviously true assumption that a) people do not understand their pension products b) if they did so they would not still contribute despite the negative returns they have suffered c) contribute none the less – often for reasons wholly beyond their control. That would make your arguments useful, Assuming there is no problem to address is classic economist behaviour, as we all know, but as we all also know – it does not answer the real question however smart it makes you look in class.

  4. “Have you actually read what I say in the report?”

    Yes.

    “And have you noted that what I say is that if incidence is on consumers so are the charges – and that the saving in charges more than offsets the tax charged?”

    Yes, I note you saying that. And I disagree as above. An essential part of such a claim is that the financial transations taking place are zero sum at best. That is something you would have to prove, not simply assert.

    “And that I am not saying there is no incidence outside banks – I quite specifically say it is on some bankers.

    And the reason why the incidence of some FTTs is different than others is that they have different user profiles”

    Again, I have noted that. And I’ve asked you to come up with something more than simply your own ruminations. We have empirical studies of the incidence of the FTT that we have. None of them support your position (apologies, none of the ones that either Giles or I have found. If you know of others please do direct us to them…..something I’ve asked you to do above) that it is the operators (either banks or bankers) that carry the economic burden of the tax. Rather, it is the consumers of the financial products that do. As examples, pensions in the form of lower returns (no, no one is saying that only pensions carry it. So your remark that it’s odd that pensions carry the burden while making up only 17% of the market or some such isn’t a valid criticism. Indeed, it’s wibble. What is being said is that we can see some of the burden falls upon pensions. Pensions being an easy place to calculate it as they are long term, often largely in equities, large numbers of people have them and so on.) and companies in the form of higher costs of raising capital….and thus workers in the form of lower wages as we know happens with charges upon returns to corporate capital.

    Indeed, these empirical studies seem to show that the tax as a whole raises a negative sum of money. The distoritionary effects on other activity are so large that the revenue raised in Stamp Duty is less than the revenue lost from other taxes.

    Now, you do indeed go on and say that there will be losses from other taxes as a result of the FTT. Quite correct, there will be. But if it’s like the one FTT we have then we’ll get a negative tax yield from the FTT, not a positive one.

    Thus, no pots of money to reduce deficits and no pots of money to spend on the Third World.

    Just to make myself clear here. I’m not addressing the question of whether a smaller financial system would be beneficial. I’m not doing so partly because I don’t really mind very much and partly because it’s not a question I think I have any relevant information to add to.

    The two questions I am trying to addrtess are these:

    1) The Robin Hood Tax people are stating, as a fact, that consumers of financial products will not pay this tax. As far as I can see (and if you’ve got, as above, access to empirical papers which refute of question this then please do share them with us) this is simply not true: so not true that it’s actually a lie. The economic burden of an FTT will lie upon those very consumers, just as it does with the FTT we already have.

    2) The FTT we actually have seems (again, from the empirical papers and if you’ve got evidence to the contrary do share) to have a negative effect on revenue. The Robin Hood people are claiming that their tax will raise $400 billion. If it does indeed work like the FTT we already have then I assume (and if you’ve got evidence to the contrary….again) that there will be tax revenue losses of more than $400 billion elsewhere in the system. There is therefore no pot of money to be used to do all those desirable things.

    Finally, as to your other points, anti avoidance principles, country by country reporting, yes, this is your usual list and yes, I’ve argued against them often enough. So could we just stick to these two criticisms I have of the current proposal?

    Where is your evidence of the incidence of the tax? And where is your evidence that it will be a net revenue raiser? For the empirical evidence we have so far is that the assumptions you are making are wrong.

    Just as an added bonus….this idea that a tax can have such incidence that the losses to those who bear the burden can be greater than the revenue raised. Might I point out that this isn’t the product of some crazed right winger like myself? Atkinson and Stiglitz (yes, that Joe Stiglitz) 1980.

  5. Tim

    Let’s nail this down to two issues. First you want me to disagree with the Robin Hood campaign. Second you want to argue my incidence argument is wrong. Which also lets me note that your sole reason for engaging is negative, which as ever reduces my enthusiasm for doing so.

    But let me answer the points. First, as must be obvious I do think that the argument that the incidence of a financial transaction tax could never fall on an individual is wrong. That cannot, I think, be proven. I stress, that is my opinion. I leave it for others to justify what they claim. That’s their opinion.

    As is also clear, I do not think the tax will raise $400 billion – I make clear that there will be revenue offsets. But again, that’s solely my opinion. If others think that there is alternative evidence – I am happy for them to make their case.

    Turning to incidence, I have presented my case and you have not engaged with it. It is based on logical argument. All economics was once upon a time, and was much the better for it. Let me explain why using the studies you and Giles note. If it is true that, as they claim, UK stamp duties (as Giles notes) costs individuals about twice the sum most people receive as their annual pension payout then very obviously two things should have followed. The LSE should have issued immediate warning that UK equities were not suitable pension investments and secondly the NAPF should have told all pension funds to sell all their UK equity holdings. And the NAPF should have also ensured that pension charges – per annum so much more on average than stamp duty charges – should have been slashed as they obviously guaranteed the same logical outcome.

    None of those things did happen. Why not? Because the NAPF et al do not actually believe this research, that’s why not. Research done on the basis of the assumptions of perfect markets (and all the other nonsense the IFS etc assumes when looking at this stuff which is all as palpably untrue as your assumption that people have perfect knowledge, implicit in your assertion yesterday) is recognised even by those who commission it for its propaganda value to be meaningless and not worth acting upon.

    It seems it’s only you and your libertarian friends who are taken in Tim. In the real world my argument on incidence is compelling – and you have not sought to engage with it. Why not? Could it be that it would be embarrassing to admit that the incidence of bank profits and banker’s bonuses is fairly and squarely on consumers wholly justifying market intervention – not least by way of a financial transaction tax to reduce their market churning activities which produce no proven value – as pension fund returns prove?

    Richard

    1. Georges

      So the promotion of a hypothesis supported by reasoned argument is no longer allowed?

      I know opinions are dangerous things – to misquote Descartes “I think therefore I’m dangerous” – but I didn’t realise how much you libertarians objected to the process 🙂

      Richard

  6. “Which also lets me note that your sole reason for engaging is negative, which as ever reduces my enthusiasm for doing so.”

    You seem to have missed the science part of your education here. “Being negative” is the point and purpose of the process. You and or anyone else puts up a hypothesis. Good, excellent, well done you. It is now incumbent on all of the rest of us to examine this hypothesis, think about it, prod and poke it and try to prove it wrong. If, after we’ve all taken our best shots as showing it to be wrong we cannot then the hypothesis moves from being one to being a theory. We accept it as explaining some part of the real world: until and only until someone manages to prove it wrong.

    Now I agree that economics is not a hard science like Physics of Chemistry but in so far as it is indeed a science it has exactly this structure. We are supposed to be negative about new ideas and new claims. Because that’s how we try to work out whether these new ideas and or claims do reflect reality or not.

    “But let me answer the points. First, as must be obvious I do think that the argument that the incidence of a financial transaction tax could never fall on an individual is wrong. That cannot, I think, be proven. I stress, that is my opinion. I leave it for others to justify what they claim. That’s their opinion.”

    Good, we advance. Thus we need to look at empirical studies of where that incidence does indeed fall. Which brings us back to the papers that both Giles and I point to. I know of no papers which show the opposite, that incidence does not fall upon consumers (that I do not know of any proves nothing of course: as I’ve said several times above, please do show us those that I’ve missed). Thus, given that scienciness above, at present the theory we should be working to is that consumers bear the burden of an FTT.

    To dispute this all that is necessary is for you or anyone else to either do or point to empirical studies which prove the opposite. That would be “negative”, yes, but that’s the way it’s supposed to work.

    “As is also clear, I do not think the tax will raise $400 billion – I make clear that there will be revenue offsets. But again, that’s solely my opinion. If others think that there is alternative evidence – I am happy for them to make their case.”

    Again, this is an empirical point. What will be the nett revenue from this? Your plan and the Robin Hood plan (which now uses your numbers rather than their original ones from the Austrian paper) both make the assumption that there will be a nett gain in tax revenue. The RH plan of course entirely drops your caveat that there wil be losses elsewhere.

    This is something you need to show, not something you can simply assume: what will be the nett revenue effect? After all, if the nett effect is negative then a large part of the impetus for the tax goes away, doesn’t it? Certainly, a large part of the public support for it will.

    “Turning to incidence, I have presented my case and you have not engaged with it. ”

    Yes, I have engaged with it. Perhaps you don’t understand the point I make about it though.

    “If it is true that, as they claim, UK stamp duties (as Giles notes) costs individuals about twice the sum most people receive as their annual pension payout then very obviously two things should have followed. The LSE should have issued immediate warning that UK equities were not suitable pension investments and secondly the NAPF should have told all pension funds to sell all their UK equity holdings. And the NAPF should have also ensured that pension charges – per annum so much more on average than stamp duty charges – should have been slashed as they obviously guaranteed the same logical outcome.”

    No, this is not true. For you are again assuming that this is all zero or even negative sum.

    An example just to illustrate the logic (or yes, indeed, logical argument is the better part of economics).

    Over x years I save y amount into my pension plan. When this matures I have y plus z as the total amount in my plan with which to purchase an annuity. Z is the return to that investment, y, over x years.

    I don’t think that any of that is controversial, is it?

    Good. Now, over those years there are a number of charges that are made against my investment. It doesn’t matter whether they are from sum y (say, annual fees on assets or ingoings, the salesman’s original cut, whatever) or from sum z (say, hedge fund idea of taking a cut of any investment profits). At this point it also doesn’t matter whether part of the sum taken from that final y plus z is fees for services, a rip off by pinstripes or a tax to government.

    To me as a consumer, a buyer of the pension, what I want to know is whether the value of y plus z is greater than the original value of y. I have benefitted from this whole series of transactions and charges: sure, so have others, but because all of us involved in it have done so it is a positive sum transaction. To be sure, y plus z being less than y originally would mean that it was not positive sum.

    Now we can start to break down what are those charges applied to either y or z. Charges which are innate to having a pension plan at all, having a pension fund manager, trading of assets and so on, yes, the incidence of these does indeed fall upon me the pension saver. But it’s still possible, despite some profiting from my having bought a pension plan, that I also benefit. That is, the transaction is positive sum.

    However, when we look at the tax: this is not a necessary part of my having a pension plan. It is not a positive sum transaction in this narrow sense. It is purely a loss, a negative sum transaction, to my pension. Thus we can consider the two cuts being taken out of my y plus z quite differently.

    One is a necessary part of my having a pension plan at all: just as the butcher making a profit is a part of my being able to buy butchered meat, the brewer my beer and the baker my bread.

    The other is a tax: and yes, while tax is necessary for so is the State, we would really rather than taxes were not negative sum transactions. And where the negative sum is greater than the amount raised in the tax then we really really would rather find some other way of raising the necessary money.

    Finally, on this point, the advice to not invest in equities should only have been given if the result of y plus z was known to be less than the alternatives available at the time. Historically this has not been true (even if it is possible to identify, now, short periods when it has been). Which leads us to this point:

    “people have perfect knowledge”

    Of course, no one at all is asserting that anyone has perfect knowledge of the future. Only that we have some knowledge of the past. Which is exactly what we’re pointing too: even given the charges on equity based pensions they have provided better returns than other forms of saving for retirement. Even given the stamp duty…..

    “Research done on the basis of the assumptions of perfect markets”

    Snigger. The research has been done on the basis that there is imperfect intervention into the markets: that’s the whole point. That is, that the basic assumption is that markets are not perfect here.

    “In the real world my argument on incidence is compelling”

    No, it isn’t. For in hte real world we can look at the incidence of an FTT and we can see that it is not as you say.

    “Could it be that it would be embarrassing to admit that the incidence of bank profits and banker’s bonuses is fairly and squarely on consumers”

    As above: of course the charges and profits made by banks and bankers are a cost to those using their services. Just like the butcher and baker. The question is, are those who use such services better off afterwards even though they pay such charges? That is, is a pension plan a positive sum transaction, just like my buying lamb chops or a pint?

    1. Let’s deal with the zero sum issue. Or rather let me quote Roger Bootle – no fan of financial transaction taxes – dealing with it here http://www.telegraph.co.uk/finance/comment/rogerbootle/6147123/Limiting-bonuses-will-not-solve-the-deep-problems-in-the-banking-sector.html

      I think this criticism is misguided. The point about financial activity is that most of it is of an intermediary sort – no one wants it for itself – and/or much of it adds nothing, i.e. it is zero-sum. So the appropriate comparison is not with the output of reality TV but rather with the “market” in which the resources used in its production are traded. There is, for instance, a legitimate public interest that the cost of TV production should not be inflated by endless meetings about meetings in a bloated bureaucracy – particularly if this occurs in a publicly funded organisation such as the BBC.
      There are several respects in which the market for financial services works appallingly badly. First, many wholesale financial activities are heavily concentrated so that effective competition is limited. In essence, they are provided in a sort of oligopoly where the providers set the prices. Second, the consumers of wholesale financial services are themselves mere intermediaries who are not that sensitive to price – i.e. senior executives of non-financial companies or the providers of retail financial services to the public.
      Third, at the retail end, there are large asymmetries of information and understanding between provider and customer. Moreover, it is difficult to shop around and to switch. Fourth, the market for people does not work very well. The normal incentives towards keeping costs down do not apply in investment banks because the senior executives who set pay for the others are on the same gravy train.
      Fifth, the institutional shareholders who own the shares in these businesses are supine and ineffective. Sixth, the ultimate guarantor of banks has been the state and therefore banks and bankers are incentivised to undertake excessively large risks. They earn the rewards from these when they pay off – while being bailed out by the taxpayer when they don’t.
      Because of these various market failures we have the result that in financial markets people of great talent, low talent and no talent at all receive rewards out of all proportion to their contribution to society.
      Does it matter? Turner thinks it does. Richard Lambert, head of the CBI, apparently thinks that it doesn’t. I am with Turner.

      In his recent book he is more explicit: he states categorically that financial markets are less than zero sum because of the costs charge, do harm welfare and redistribute wealth upward at cost to us all.

      And he’s no lefty.

      But he is considered by many an astute observer. His observation profoundly disagrees with your theoretically based objections Tim – most of which are wholly impossible to support on the basis of fact. For example, equity markets have been a lousy way of providing for pension saving – but that’s got nothing to do with stamp duties and all to do with market structures – a point I have made time and again but which you persist in ignoring.

    2. Let’s now deal with this:

      Thus we need to look at empirical studies of where that incidence does indeed fall. Which brings us back to the papers that both Giles and I point to. I know of no papers which show the opposite, that incidence does not fall upon consumers (that I do not know of any proves nothing of course: as I’ve said several times above, please do show us those that I’ve missed). Thus, given that scienciness above, at present the theory we should be working to is that consumers bear the burden of an FTT.
      To dispute this all that is necessary is for you or anyone else to either do or point to empirical studies which prove the opposite. That would be “negative”, yes, but that’s the way it’s supposed to work.

      I think there are three things to say. As Martin Hearson (hat tip) notes below your interpretation of the surveys is cavalier at best

      Second, oddly the alternative hypothesis has not been tested because no one has been willing to fund it – that’s asymmetry in research funding here due to market bias, not because the hypothesis is wrong. So I have not got research to offer. But your assumption that only empirical data proves an argument is quaint and oddly touching. If, as we ll know, the hypothesis tested is wrongly constructed, the data is flawed, the stats are done badly and . the wrong confidence intervals are applied to outcomes (and those standardly used are entirely arbitrary) then as we all know empirical work may not just prove nothing – it can be grossly misleading.

      As, I think even you conceded, the data you use might well be

      Which leaves us with reasoned argument to fall back on.

      1. “So I have not got research to offer.”

        Better go out and get some then perhaps?

        “But your assumption that only empirical data proves an argument is quaint and oddly touching. ”

        Nooo, that’s not quite what I say. Rather, that when we’ve got two conflicing possible explanations of the real world, two possible different logical chains, then we need to make reference to the real world to see which actually reflects the reality of that world.

        “Gravity doesn’t exist, the Earth sucks!” explains nicely why we land on out arse when we fall over. To test whether gravity exists or not we need to do some testing of the theory. Do people who fall over on the Moon also fall on their arse? We’ve done this test and yes, they do. So we can reject the “earth sucks” as an explanation.

        That testing was, umm, what is generally called “empirical research”.

        Reasoned argument does indeed have its place, as you say, but that place needs to be tested by comparison with reality. Reasoned argument alone gets us to how many angels on pinheads stuff.

        As to Bootle, your quotes tell us that he thinks finance could be more efficient. Not that an FTT would be a good idea. The zero sum part is your assertion of what he said and, let’s be honest here, I don’t trust your assertions. As you don’t mine.

  7. Oh, and just on this point:

    “and all the other nonsense the IFS etc assumes when looking at this stuff which is all as palpably untrue as your assumption that people have perfect knowledge,”

    Umm, no, you see, umm, the reason that people have pension plans and the reason that they buy annuities is because we don’t have perfect knowledge. We don’t know how long we’re going to live, see? That’s why we save to buy something that pays us a guaranteed income as long as we live.

    The very existence of annuities proves that we are not assuming perfect knowledge.

    1. I haven’t been able to keep up with this – meetings etc – so thank God for Tim – but I must admit the argument Richard used – “The LSE doesn’t warn people off using pensions. Therefore the tax incidence can’t really matter” – is one of the worst I have read in a while. I’m sure he can’t mean it.

      I think I am going to have to print this out and go to a library

      1. Giles

        Oh dear, I did not realise you were in the pedants club.

        Yes I did mean it – completely and utterly. But what I meant was that if those who commissioned this research clearly ignored the only obvious conclusions that could be drawn from it – which I have noted correctly I think – then all the rest of us should ignore those conclusions too

        But of course we should consider incidence – most especially the incidence of the charges of those who churn pension funds for their own gain (let’s call them bankers and fund managers for examples sake) at cost to society through reduced pension return at considerably greater expense than the unneccasry stamp duty charges they generate as a result.

        That is the real incidence concern – and if my hypothesis is right we should reduce that charge and a financial transaction tax will help us do so

        In that case an financial transaction tax is of benefit

        And as I said further research will be needed to prove that point

        Which is, surely, a pretty reasonable argument – especially given the flaws noted in the data you quote and their patent lack of objectivity?

        Richard

    2. Oh dear Tim: to confuse a pension savings plan with an annuity that it might one day purchase is really a very big error, don’t you think?

      An annuity is transparent and entirely predictable. The risk is known

      Just about the exact opposite of a pension plan – of which you assumed the purchaser was in possession of full facts in a previous comment to which I was referring

      1. “An annuity is transparent and entirely predictable. The risk is known ”

        Well done, missing the point entirely.

        The reason we buy annuities is because we face a risk we cannot quantify: how many years will we live?

        Thus the very fact that we buy annuities is proof perfect that we do not have perfect information.

  8. Hmmmm. So they hope to raise about 35 times as much as is raised in the UK. Do they think that the UK only houses 1/35th of the share trading in the world? It doesn’t seem likely.

    —–

    No, 1/35th is the UK’s share of global trading volume. The reason is the US accounts for 50% of global trading volume on its own, mainly due to computer (algorithmic) trading apparently. Of course this raises the issue of whether a lot of that would disappear with a FTT tax, but the number 1/35th seems right. .

  9. “Indeed, these empirical studies seem to show that the tax as a whole raises a negative sum of money. The distoritionary effects on other activity are so large that the revenue raised in Stamp Duty is less than the revenue lost from other taxes.”

    Chaps,

    Could someone point me to the empirical studies referred to by Tim in the above quote? Giles cites the IFS study of stamp duty that says:

    “• it reduces the efficiency of the stock market for UK listed companies;
    • it lacks any investment allowances and therefore imposes a disproportionately large burden on marginal investment projects compared with a corporation tax;
    • it distorts merger and acquisition activity, producing a bias towards overseas rather than UK ownership.”

    But the next sentence in the IFS report says:

    “While reliable empirical estimates of the impact of these problems are not yet available, alternative revenue sources do not share all these problems to the same extent. It therefore seems sensible to at least consider alternative ways to raise the revenue currently provided by stamp duty.”

    It goes on to conclude that:

    “In conclusion, the only real runner for a revenue-neutral change to stamp duty involves a change to corporation tax. This could either come as an explicit increase in the tax rate or, more probably, in forgoing a potential rate cut in order to fund the abolition of stamp duty.”

    Sounds like the IFS are saying that empirical studies don’t lend themselves to precise figures, but that abolishing stamp tax would mean a net loss to the UK fisc. In which case I don’t think this can be the paper Tim is referring to which finds, “that the tax as a whole raises a negative sum of money.”

    Not saying that they don’t exist – I’ve probably just missed them in this epic comment thread!

    Cheers,
    Martin

  10. Admittedly not the most entirely unbiased of sources: research commssioned by the LSE from Oxera.

    http://www.oxera.com/main.aspx?id=5938

    http://www.londonstockexchange.com/about-the-exchange/media-relations/press-releases/2007/researchfindsthatabolitionofstampdutywouldbenefiteconomy.htm

    “Despite generating revenue of around £3 billion per annum for the Government, the research concludes that the abolition of stamp duty could bring substantial benefits, including:

    * A long-run permanent rise in UK GDP of between 0.24 per cent and 0.78 per cent, with an increase in the government tax-take of up to £4 billion (minus lost direct receipts of £2.9 billion);”

    As to the bias or not: I would point out that repeatedly above I’ve been asking Richard for those studies which he has perused which refute this assertion.

    1. OK, so as I understand it:

      1. There’s one single study, not several (although granted that study presents two different methodologies and cites the one with a lower result)

      2. It’s not an empirical study but a prediction, and a fairly simplistic one at that. It says this:

      “Given the current UK GDP of £1,225,339m,31 this is equivalent to a permanent increase of
      £2,978m to £9,558m. The long-term impact on the government’s tax-take can then be
      estimated by considering the total tax burden relative to the GDP. In particular, assuming an
      overall tax burden of 42.6%,32 the abolition of stamp duty would be predicted in the long run
      to increase the government’s annual tax-take by £1,268m to £4,071m (minus the £2,930m
      reduction in the annual tax-take due to the loss of stamp duty receipts).”

      I’m not brainy enough to be able to build a model myself, but it strikes me that simply saying “GDP will increase by £X and the tax burden is Y% of GDP, so the gain to the exchequer will be £X.Y” is not that sophisticated.

      3. Its outcome is inconclusive. Neither the report nor the press release calculates the net result, despiet it being a simpel subtraction. Working from the figures quoted above, I get a range of -£1662m to +£1141 for the impact of abolishing stamp duty.

      [That is what they mean by “minus lost direct receipts”, since the £1,268m to £4,071m range is 42.6% of their GDP increase range of £2,978m to £9,558m.]

      In sum then, rather than,

      “these empirical studies seem to show that the tax as a whole raises a negative sum of money”

      it would be more accurate to say,

      “that single estimate – from an admittedly biased source – suggests that the tax could raise a positive or a negative sum of money”

      Agree it would be good for both sides to cite empirical (and preferably peer-reviewed) studies that back up their arguments, but don’t think the Oxera one counts!

  11. Richard,

    If this argument is indeed data/fact free and based entirely on logic, then it might behoove you, as the author of “The Missing Billions”, to recuse yourself from the conversation.

    Anyone who argues that any tax paid which is less than the official top marginal rate = evasion/avoidance (‘avoidance’ in the ‘equal to evasion’ motif) is sorely lacking on the logic front.

    Georges

    1. I once pointed out to RM that he undoubted pays less than the headline rate of income tax because he uses the ‘tax loophole’ in the law that allows the first £5-6K of income to be free of tax. The theoretical income tax yield from RM should be 20% of income up to £36K-ish, and 40% thereafter. If it turns out to be lower, he is surely guilty of the same sort of ‘tax avoidance’ he decries in others.

      He wasn’t amused.

  12. I was going to post a comment to Tim saying surely I did not need to point out the difference between risk and uncertainty to him – presuming he’d, as ever, been deliberately obtuse

    The it dawned on me that this was not the case. he really does not know the difference between risk and uncertainty. That’s one good reason why he thinks empirical data can answer all questions – because he presumes all issues are simply probabalistic

    Sorry Tim – that’s not true. Might I recommend this to you? http://www.archive.org/details/treatiseonprobab007528mbp I know it’s a bit old, being written in 1921, but the authors still widely respected

    The desire for empirical data is, of course, also typically obfuscational. First, the causalities I suggest exist are unlikely to be capable of empirical testing. Secondly there is no data as there is no transition to such a tax to test as yet. Third, it just causes delay. And in the meantime the abuse of pension funds in the interest of city bonuses at cost to all the rest of us would go on.

    Sometimes we have to accept uncertainty. Sometimes logic is good enough. Sometimes the behaviour of market players – including as I’ve noted the refusal of market participants to believe or act upon existing empirical research has to be enough to convince us.

    This is such a case.

    Happy now Giles?

    1. “The it dawned on me that this was not the case. he really does not know the difference between risk and uncertainty.”

      Sure I know the difference. There is uncertainty about how long we shall live. This leaves us with a risk of outliving our savings. We transfer this risk by pooling the risk in the face of the uncertainty. For life spans as a group are less uncertain than life spans as an individual. This is the basis of any form of insurance which is, looked at one way, what an annuity is. Why they’re often offered by insurance companies for example.

      And we can take this further. There is uncertainty all around us. (Which takes us back to your near insane continual insistence that neo classical economics requires perfect knowledge of the future.) Such uncertainty over future growth rates, future technologies, future FX rates, future interest rates, future commodity prices, future energy prices….well, we can make a long list….means that we face risks. The way that we deal with such risks is by attempting to offload them from those who do not desire to carry such risks caused by uncertainty to those who do desire to do so. From, say, producers or consumers of wheat, corn, pig bellies, orange juice concentrate, loans, FX, housing, another long list, to speculators. And the method we use to do this is through derivatives. Futures, options, CDSs and so on, even insurance contracts.

      Sometimes we are able to reduce the total risk: the pooling effects of insurance for example reduces total risk. Sometimes this doesn’t quite work: sometimes we end up going further than uncertainty and find that we actually have ignorance. As with lifespans in general getting longer and thus screwing over many decades ago calculations about average lifespans. Sometimes we simply manage to shift risk around: wheat prices for example, we shift the risk due to uncertainty from farmers and bakers to speculators, without reducing the total risk extant.

      Of course, it is absolutely this very function of risk reduction and shifting that you wish to slow down as a result of your 0.05% tax on all derivative trades. Well done you. Reduce liquidity in the markets (and given that the tax is, by both your and the Austrian paper methods, to be placed upon the nominal sum, not the premium, value at risk or profit, you’ll reduce liquidity a great deal) and thus make such transference of the risk caused by uncertainty more expensive.

      That expense of course being part of the incidence of your tax.

      What an excellent idea really: let us make dealing with the uncertainty of life more expensive by making the transference of the risk caused by it more expensive. Producers and consumers the planet over will be just overjoyed.

      “The desire for empirical data is, of course, also typically obfuscational. First, the causalities I suggest exist are unlikely to be capable of empirical testing.”

      Look, I know you’re a GodSquadder but please, this is ridiculous. It’s one thing to say in front of the altar that proof is not possible, that one must have faith, quite another to say the same thing in the Temple of Mammon. No, sorry, you’ll really have to do better than that here.

      “Secondly there is no data as there is no transition to such a tax to test as yet.”

      We can at least test by analogy: as we often have to in economics. What is the effect of the FTT we already have? What would established theory suggest the effect of an FTT be?

      “Third, it just causes delay.”

      Sometimes delay is a good thing. The Samaritans have a phone line at Beachy Head for just such a purpose. Stopping and thinking before hoicking the entire global financial system over a cliff just might be a good idea.

      “Sometimes we have to accept uncertainty. Sometimes logic is good enough. ”

      Will you just excuse me (and your being a Good Christian I’m sure that you will) if I suggest that perhaps we might want to examine the logic before we act upon it? I personally have serious doubts (call them doubts of faith, my dark night of the soul if you wish) that we should be changing the taxation system of the global financial markets on the unexamined logic of a retired accountant?

      1. “Look, I know you’re a GodSquadder but please…”

        And that’s the point at which I stop reading this discussion. Totally uncalled for.

  13. Richard, I am often happy. No need to be personal. Whether your arguments are effective are not have little effect upon my happiness. I’m a bit selfish that way….

    I’ll remember next time anyone asks me to prove something with the real world and how things actually happen that ‘the desire for empirical data is obfuscational’. It is highly convenient to come up with a plan that raises $200 billion or more, and is yet impervious to empirical testing.

    Your logic about where the money would come from doesn’t ascend to that state. Claiming that because bankers are a cost this transaction cost will come from their salaries, and not end users, is an assertion, not logic. And I suspect there are plenty of places where it can be empirically tested. By the way, do you think that stamp duty in the UK has been born by stockbrokers, or pension funds? Look deep inside your logic ….

  14. Giles

    I asked an honest question. Apologies if it caused offence. It was not meant to…but if we’re being personal I’d refer to your misreading of my comments yesterday to which i was referring back. Shall we leave that aside hereafter?

    As for your claim I assert, I simply beg to differ. I think you’re rebutting my logic (for it is explained, logically and to the satisfaction of those it was tested on – who are more than capable I suggest of spotting the difference between assertion and logic) with assertion – not least because you offer no argument to support your rebuttal

    What you do assert is that the capacity to tax cannot be tested. That is wrong. That has been done empirically by me and others.

    What I have said is that the logic I have offered on the incidence of introducing this new tax cannot be tested empirically: if you know where the data is please tell me. You could I guess try Brazil, but even there it would not probably be relevant: the structure of the proposed taxes and those they have tried is too significantly different. as such the point I make is valid: it is not an assertion. But if you can show I’m wrong please point out why.

    As for the incidence of UK stamp duty – it may indeed as it currently stands have an incidence on pensioners – this is a point the report I wrote makes. I wonder if you have read it as yet? The points on incidence falling back on bankers is made with regard to currency, derivative and other taxes quite specifically. I am not sure where the point of difference is here. Can you tell me?

    But I have made the point that the logical consequence of the findings you have read into the data you refer to (which Martin Hearson has not been able to replicate) is that pension funds should have stopped trading in equities. they didn’t. can you explain why you think they did not?

    Can you also explain why – as I have suggested time and again with the point being ignored – if the incidence is on pension funds a reduction in the volatility of trading and resulting charges from brokers – which exceed stamp duty costs – would not be of benefit – thereby providing increased returns from long term holdings in the style of Warren Buffet more than sufficient to absorb any incidence of a charge on the purchase of those holdings? Isn’t this the much more interesting point on incidence or are we doomed to grub around in the minutiae as some here would wish?

    Richard

    1. Pension funds have continued trading because they have little alternative. They need investments. People being ripped off does not stop them trading. Pension funds have a huge obligation to find sterling assets. The fact that those sterling assets do not have the ideal charging structure does not change that. And for a long time a big equity bubble was enough to obscure the very high transaction costs. They spent decades lobbying against stamp duties, because they were losing money for their pensioners.

      Really, I do respect you Richard, but your persisting with that argument makes it a smidgeon more difficult.

      My points about incidence – that a currency transaction cost would be passed on – are simply based on economic theory. Markets that approximate perfect competition, like FX – no-one can monopolise the delivery of $ or E – tend to have their costs driven down, so that when an extra cost comes on, it gets passed on. If it were a very oligopolistic market – like, say, some investment banking is, or the market in bankers’ pay – then the consequences would be different. But, just like when the oil price going up in one part of the world drives up petrol prices everywhere, so too would adding a charge to a currency transfer.

      There is plenty of empirical evidence of what happens when extra charges apply to transactions. Throughout finance, charges have been falling. I have personal experience of it. If the CBOE charges less for a per lot transaction on T-bond futures, this finds its way down the brokerage chain to the dealers and brokers and then end users. It could be tested thousands of times. I worked for 10 years in finance during which per-lot charges fell and fell, and so too did end-charges for users. My users were retail individuals.

      The tax is an exact functional equivalent to a commission. We know what happens when commissions go up!

      Richard, honestly, I am not as hostile to this idea as you may think. I just believe it needs good arguments. The arguments need to revolve around the axis: revenue raised for good causes versus liquidity costs and costs on users of finance. I agree that money needs to be raised. It needs to be raised from finance. I just don’t think that your arguments or assertions have shown that this is a good way – and when you use questionable argumetns like ‘pension funds ought to have stopped trading’, it may weaken what may be a make0able case for some sort of transaction tax.

      Best wishes.

    2. “The points on incidence falling back on bankers is made with regard to currency, derivative and other taxes quite specifically.”

      As above, the incidence of the tax upon derivatives will at least in part be upon those who wish to transfer risk. And as Atkinson and Stiglitz (19080) show, the incidence of taxes can be greater (not, can be, not will be) than the revenue raised.

      As an example, a colleague of mine once used London Metals Exchange derived options to shift risk on a trade. The purchase of secondary aluminium (reprocessed scrap to the uninitiated) from a plant in the Urals for delivery to Japan. The price in the Urals was a fixed cash one. The one in Japan was linked to the LME price on the day of delivery. There was a 3 week gap between taking and making delivery. By purchasing an out of the money put option he was able to lay off the risk that the price of secondary aluminium would decline substantially in that 3 week period causing a loss on the transaction as a whole.

      The price paid for such an option was lowered by the speculative froth in the market: by the liquidity that the trading of large numbers of contracts provides. A tax on such speculation would have driven up the price of purchasing such insurance against price movements.

      From memory, the Al prices was around $1,600 a tonne then. The option price was around $20 per tonne (it was well out of the money). Your tax is on the nominal value, not the premium paid. So, the 80 cents per tonne of the tax isn’t really here or there. But the movement in spreads and prices as a result of the removal of liquidity from the market could well be greater than this. As Giles has been pointing out, FX spreads have come down from 10 bps or so to 2 bps or so over the past decade or more, as more liquidity has come into the market.

  15. “The price paid for such an option was lowered by the speculative froth in the market”

    This doesn’t make much sense. I think you mean the transactions costs of buying an LME option have been lowered (I don’t know if this is true or not).

    1. I think what it means is: if there are zillions of speculators, the underlying spot market is less volatile and more liquid. Then options tend to be cheaper. This is all very true.

  16. “I think what it means is: if there are zillions of speculators, the underlying spot market is less volatile and more liquid. Then options tend to be cheaper. This is all very true.”

    Yeah right. But it’s a good point you make.

  17. “I think what it means is: if there are zillions of speculators, the underlying spot market is less volatile and more liquid. Then options tend to be cheaper. This is all very true.”

    I wasn’t actually going, or meaning to go, quite that far. The more liquid a market the narrower spreads will be. The more speculators there are (ie, the more compeition to take on a risk) the lower option premiums will be and quite possibly, the higher the volume the lower dealing costs themselves will be (commissions etc).

    So from a more liquid market, we get three (possible? potential?) different reductions in the cost of hedging an exposure to a risk caused by uncertainty. This quite apart from the influence of the derivatives upon the volatility of the underlying spot market.

    And we can usefully assume that reduction in liqudity will drive those three variables back up again.

  18. Just one little thing:

    “I think you have made it comprehensively,for me in the eyes of the impartial observer and I see no point on debating it further”

    Martin Hearson is the tax policy analyst at Action Aid. Richard Murphy has been known to write/advise on tax policy papers for Action Aid.

    This may mean all sorts of things but one of them isn’t that Martin is an “impartial observer” in an argument about Richard Murphy’s ideas on tax policy. It would be like me claiming that support for my thoughts from Nigel Farage came from an impartial observer.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s