Ritchie\’s latest bright idea

Let\’s have a financial transfer tax on sums that move through CHAPS.

This tax has everything going for it.

Note: I advise the TUC on tax matters

The proposal is here:

A transaction tax of 0.05 per cent would have raised £37 billion in 2008, but would only impose a very modest charge on each individual transfer. A tax on the average CHAPS transfer of £2 million pounds would cost £1,000.

The TUC believes that after adjusting for changes in the behaviour of financial institutions, a transaction tax of 0.05 per cent could raise around £30 billion a year.

I\’m finding the cognitive dissonance difficult to deal with here.

They really do seem to be assuming that you can simply whistle up 2.5-3.0% of GDP in taxation without it having any effect on other things.

As Willem Buiter points out, the City (rather than all financial services) provides about 4% of UK GDP.

Do they really think you can tax 75% of the entire value added of a sector and not change things?

Purely as speculation on my part, wouldn\’t this kill overnight lending stone dead?

Err, yes, I think it would actually. I assume that interbank lending is done using CHAPs as the payment method (anyone want to correct me?). LIBOR is about 0.5% at present. That\’s an annual rate of course.

Now I cannot remember how many banking days there are in a year….something like 260? Let\’s use 300 just for ease of calculation. That means that for lending money from one bank to another overnight you\’re going to get 0.0016% of that sum lent.

And you\’re going to get hit with a tax of 0.05% of the sum lent.

Congratulations, you\’ve just killed the entire interbank lending market. Stone fucking dead.

In fact, you\’ve just killed it stone dead until interest rates rise over 15%….which is the level at which the interest earned will be greater than the tax paid.

This does depend on the banks using CHAPS as their method of payment for interbank lending: something I\’m trying to find out.

14 comments on “Ritchie\’s latest bright idea

  1. So you can raise 37 billion in tax, why would you want to? Who will best spend that money, the tossers in government or the people they stole it from?

  2. A quick Googling (search: interbank lending chaps) suggests about 20% of overnight lending is conducted through CHAPS.

  3. Looks like the BoE will end up going out of the CHAPS business and something else would take it’s place…

    And, the man cannot count either. Here is my calculation, using this link: http://www.docstoc.com/docs/10683256/%E2%80%98The–relationship-between-the-overnight-interbank-unsecured-loan-market

    Banking days: 252
    Daily turnover: 22bn
    total: 3344bn
    0.05% thereof: 167.2bn

    (also, 0.05% of 2m = 100k, not 1k…)

    How about a levy on stupid ideas instead? Cheaper, and a lot more popular.

    Cornucopia count for today: 360bn+ 37bn = 397bn, or, using my calculation: 527.2bn. Gushing!

  4. Well, at least we can have every confidence that Richard Murphy has carefully thought through the consequences of destroying overnight lending.

  5. note proposal applies not just to CHAPS but “any new instantaneous, irrevocable financial transaction system.”

  6. Patting myself on my back, I realise that dyslexia strikes once and Gnumeric amplifies it to two direct hits. *blush*

    Let me try this again:

    Bank days * daily volume:
    252*£22bn = £5,544bn

    0.05% thereof = 2.7720bn

    And the transfers would be to borrower and back to lender:
    Total = £5.544 bn (if you don’t count transfers into and out of the BoE.)

    High costs = less profits = less tax receipts, so isn’t the treasury robbing itself here anyway?

  7. Broadly I agree, but inter-bank lending is partly what allowed the banks to get into the mess they are in. Banks were supposed to take deposits from savers and lend it to borrowers.

  8. “Banks were supposed to take deposits from savers and lend it to borrowers.”

    OK, but without interbank lending that means that each bank must ensure it has enough cash lying around to cover eventualities. This means banks with more cash than they need cannot lend it to banks that are short of cash (a straight “gain from trade” situation I’d have thought). I’m not on solid ground here, but I’d have thought the volatility in daily cash requirements is fairly high, even if you are just taking deposits and making loans to individuals and firms.

    Presumably, it boils down to reducing the efficiency of banking by making them hold large buffer stocks of cash will just mean they either charge more for loans and / or pay less to savers … another tax incidence argument.

    I suppose there’s an argument this might be a price worth paying for greater stability in the banking system …. I’m not immediately sure how to think about that. If banks didn’t do short-term interbank lending, would the system be a lot safer?

  9. So the tax will raise 0.05% of nothing.

    To Mr Murphy et al, I’m sure there are two solutions to this problem:
    1. Increase the rate
    2. Accuse (or even prosecute) everyone who doesn’t transfer their money via CHAPS, including those who just don’t transfer any money at all, of tax evasion.

  10. As often happens here (and I intend no criticism of commentators because this is, after all, mainly an economics blog, but there is another way of approaching the issue), you’re looking at the practicalities – how much would be raised, how much lost – and ignoring the fact that there is no moral justification for this tax (OK, there’s no moral justification behind ANY tax, but let’s start drawing lines, please). It’s my money, I earned it; get your grubby hands off!

  11. Assuming that a fair proportion of the money that flows through CHAPS is moved on a daily basis, this puts a 250×0.05% = 12.5% annual levy on currency flows.

    If you look at most big UK banks you will find £500 bn – £1 trillion of amounts representing assets and liabilities from derivatives and associated collateral postings. Payments to post collateral and settle these contracts are made through CHAPS and generally on a gross basis. If a bank enters into a collateralised swap trade with another bank and hedges its position in another trade with a third bank, then the total movements of collateral on the two trades will far exceed its net value at risk. You ghave to say this would likely kill most sterling settled derivatives.

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