More discussion with Ritchie

\”Which brings me to your long point on FTTs: tell me what the real cost of a 10bp margin is and who will really lose.\”

OK. Taking the numbers you\’ve given me here.

Before the tax we have a 2 bps margin. We add the 0.5 bps tax. We then have a 10 bps margin. Those are the numbers you\’ve given me.

Take one more number. The approximately $30 billion you say such a 0.5 bps tax will raise from the FX market.

Margins have been raised by 8 bps as a result of the tax. That is 16 times the revenues from the 0.5 bps tax. That is $480 billion.

Note that this is indeed already including the effect of lower transaction volumes: for your estimate of the tax revenues already includes this.

All users of the financial system are thus carrying a burden of $510 billion (the tax plus the rise in margins) in order to gain $30 billion in tax revenue.

The losers here are the users of the financial system by some half a trillion dollars. Those who gain, well, it looks to me like the bankers actually. They\’ve got $480 billion in higher margins to play with.

The net effect of this tax therefore is a huge transfer from us the consumers of financial products to the providers of financial products.

Doesn\’t sound what like any of us is trying to do really. Certainly the outcome is exactly the opposite of what you say you\’re trying to achieve.

6 comments on “More discussion with Ritchie

  1. I don’t want to state the obvious, but if as in your example forex trading now is $480bn more profitable, then there will be an enormous amount of entrants into the market to compete away the profits?

    Tim adds: Sure. But I’m working with the numbers he gives me…..

  2. Yeah, but you can’t leave it there – your analysis is too static. So spread widens to 10bnp, enormous ‘excess profits’ (sorry Ian!) are made, then firms will enter the market to compete away those profits and the spread will come back down etc etc.

  3. I am sure that the Retard will immediately propose to tax the $480 billion to fund some yet to be imagined delusional fantasy.

    In the Retard’s world, tax has become an aim in itself.

  4. I think this argument has gone off on a bit of a tangent.

    When Ritchie first argued for increased Corporation Tax, he argued from the goal of redistribution – of both tax burden and wealth/income.

    A good idea on a superficial level: companies have plush offices, lear jets, fancy boardrooms etc, so they must be rich. So if you tax them, you are taking from the rich. Simples. And appeals nicely to the paying customer (the TUC).

    Problem is, once you start thinking about incidence and the fact intangible entities can’t internalise the cost for very long and have often plenty of people on low incomes to inflict the pain onto, then the link between the tax and the goal doesn’t look so good.

    And regardless of whether we get bogged down in whether Devereux does this or that, the one thing we can say for sure is that corporation tax as a tool for redistribution is AT BEST a very blunt, hit and miss tool (given that no 2 companies will pass on the incidence of the tax identically), and at worst, counterproductive in that goal, despite the initial superficial appeal.

    Ritichie got so caught up in the ‘everyone who disagree with me is from the far right’ blinker, that he couldn’t see that his prescriptions were weak even for those who agree with redistribution as a reasonable objective.

    However, it seems Ritchie is not arguing the bank tax thing from the perspective of redistribution (at least he isn’t in his latest post). He is arguing it from the sheer, bloody-minded fact he doesn’t like banks and banking and bankers. Period.

    And if he wants to have less of something he doesn’t like, then yes, I would think that short of outlawing the practice, taxing it isn’t a bad way of ending up with less of it. It works in the frame of reference of his own goals and preferences.

    Not goals and preferences I share by the way. I don’t think countries with a poor financial infrastructure are any better for it.

    But on his own terms, his prescription would work.

    And I assume he wouldn’t mind me arguing for taxes to reduce his enjoyment of the socially useless things he likes. Cakes maybe?

  5. These taxes have been presented in other contexts as rents captures. True or false? If they are rents captures, then the cost cannot be passed on to the end customer because of competitive forces.

  6. Gosh, well Murphy’s just shut down every single science with his latest comment: all empirical work is dependent on the assumptions you make, so what’s the point in doing it. We might as well just theorise away without worrying about things like the real world.

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