Ritchie on the FTT

He says, again, that he\’s cracked it.

A Robin Hood Tax – a financial transaction tax – is back on the agenda thanks to the EU, and rightly so.

I wrote about this in 2010 in a joint publication called ‘Taxing Banks‘. In it I set out the data supporting such a tax, estimated how much it would raise and suggested – contrary to the claim of bankers – that the charge would not end up falling on bank customers but on the banks themselves.

Just to remind you, here\’s the entirety of his logic:

Before making recommendations it is important to address a contentious issue, which is whether a bank, as a
limited liability corporation can ever pay tax itself, or whether it acts as a mere conduit to transfer tax liability
to others.
Those who subscribe to the idea that banks (and other limited liability entities) do not pay tax refer to the
theory of tax incidence to support their views. This theory suggests that as legal liability entities are not real
people, and just agents for them, and only real people can actually pay tax, the burden of any tax imposed on
such an entity is always passed on to others and this has to be determined before the consequence of any tax
charge can be determined.
There can be little doubt that the theory of tax incidence has technical validity in economic theory. If, as that
theory assumes, corporations are run for their shareholders, and all consequences of corporate behaviour flow
to those who engage with the entity in one form or another – this being a view that essentially sees the limited
liability entity as little more than a bundle of contractual arrangements – then it follows, as the theory
suggests, that if a tax burden on a limited entity cannot be passed on by it to its customers by way of higher
prices to its suppliers by way of lower prices or its employees by way of lower wages then the shareholders will
suffer the burden of the tax, either through reduced earnings paid by way of dividend or through lower
retained earnings, the latter being assumed to be reflected directly in the price of equity in the company.
Unfortunately the impact of tax incidence in practice is less predictable then economic theory suggests likely
to be the case. Corporations can readily change where, when and at what rate they pay tax. They do this by
relocating transactions and whole businesses, by tax avoiding and by tax arbitraging. If they were not liable for
the taxes they pay there would be little logic to any of these actions and it is reasonable to assume they are
rational. In addition, when it appears that banks can to some degree choose the incidence of any tax imposed
on them (as the current reaction bonus taxes on bankers in the UK shows7) there is no reliable basis on which
to estimate or predict tax incidence resulting from any given change in policy.
Additionally, it may be a logical error to assume that corporations are mere agents and act as a bundle of
contracts. The reality is that corporations are synergistic entities that appear to create worth in their own
right. Indeed, if they did not there is no logical reason for them to exist. This does, however, suggest that it is
possible for the incidence of a tax to fall upon the corporation itself.
In that case the only rational thing to do is assume that banks are, at least in some cases, as noted in this
report, the taxpayer who does bear the burden of the tax charged to them. It is therefore reasonable to think
that additional taxes charged to banks might result in those banks making contribution to the governments
that have suffered the cost of repairing the banking system. This is assumed in this report unless noted
otherwise.

This is what the TUC, TJN, Christian Aid etc rely upon as their evidence that yes, really, banks will be the people who pay the tax.

Economic theory says that companies cannot pay the tax. Ritchie says that they can and that\’s it, settled. Never mind what the OECD has said about it, the IMF, even the EU report notes that banks themselves will not bear the incidence of the tax. Never mind that we\’ve actually known that companies do not bear the incidence of taxes since 1899, when Seligman wrote on the subject.

Ritchie declares that this is all a logical error and therefore, dangnammit, don\’t listen to them over there.

And people wonder why I snarl about him so much.

26 comments on “Ritchie on the FTT

  1. What did the Mirrlees Review think about a Tobin Tax? This:

    “The Tobin tax has gained renewed support in the wake of the recent financial crisis, though not, it seems, because of any convincing evidence that its existence would have reined in the growth of banks’ balance sheets or dealt with the kind of asset market inflation that spawned the crisis. It is now seen more as a means to obtain additional tax revenue from the financial sector. But it is important to be clear on where the incidence will lie. There is no particular reason to believe that the owners of financial sector companies would bear the burden of a tax on foreign exchange transactions. It might well be passed on to consumers in the form of higher import prices. More general financial sector transactions taxes would likely be passed on to savers in the form of lower returns. [....] But, in general, there is a weak economic case for taxing transactions rather than the income from, or consumption of, the asset or good that is changing hands.”

    So who should we believe?

  2. I think he is saying that it is difficult to determine who will end up paying the tax, because bank’s actions can affect who pays the tax. Therefore ‘banks’ (I am guessing he actually means shareholders) may end up paying it. Therefore it is a good thing.
    So he believes that a management team, who essentially report to shareholders, and who have bank shares and options, will choose to arrange the bank’s affairs so as to load the costs of the tax onto shareholders.
    It’s written as if he didn’t even believe it himself when he wrote it.

  3. Or that the bankas will have to cut salaries and bonuses to cover the costs.

    Either way, you are not entirely correct, Worstall, because you are basing your evidence where there isn’t any, within the narrow scopes as explained in Murphy’s document – and staged introduction of different FTTs to suit the strength of the economy. He acknowledges that the wider transaction tax on equities and such could have an impact on a diverse section of the economy. But if targeted correctly, how can you possibly say that a desirable impact, i.e less pissing the public’s money up the wall by unaccountable wankers that you so happily support, will not occur.

    Worstall. You let the fallacy of your models run away with you without looking at the impact. You just believe in it all too much. Worse than Murphy, son, much much more destructive.

  4. Genuine question, because the IFS paper and other stuff I have read about tax incidence haven’t really answered it (I don’t speak economics so my terminology may be unclear): why isn’t ‘tax incidence’ seen as evidence of market failure?

    As a lay-person I (and most non-econ0mists, I think) would expect that the market (if functioning as I understand it is meant to) would work to keep the costs to consumers/users of a service as low as possible in order to be as competitive as possible – meaning that the incidence of a new tax such as this would fall on the profit margins or remuneration of the highest-earners within the company affected (as these are both variables that could be changed to ensure competitiveness, yes?) rather than the consumers. Does that make sense as a question?

    Why is this not believed to be the case?

    Tim adds: Yes, makes perfect sense as a question.

    Two answers:

    1) With taxes on companies. It just cannot ever be the company that pays the tax. Any tax results in some real, live, human being having less money. Might be shareholders, might be the workers, might be ths customers, but it’s some group of human beings when you tax a company.

    2) Which groups of human beings? This applies to all taxes, not just those nominally on companies. It depends: it depends on the elactisity of supply and demand.

    That is, we’ve just changed the price because of the tax, yes? We’re agreed there? Elasticity refers to how much of a change in demand (or supply) we see because of a change in the price. Does a 10% price change lead to a 50% change in demand or supply? Or a 1%?

    The less elastic whatever it is, the more the tax falls upon that less elastic thing.

    For example, taxes on fags. So, we increase that tax. Suppply of fags is fairly elastic. The fag companies can make something else (cigars?), advertise less, just make fewer fags in fact and still make good profits. Smokers, demand, is higly inelastic. People who smoke tend to really, you know, smoke. So not that many are dissuaded from smoking by the higher price. So, profits to the fag companies might go down a bit, but most of the extra tax money comes out of the pockets of the smokers.

    OK, different example, taxes on profits of companies. So, this reduces the return to the investors in the company: obviously, the profits are taxed. What happens next? Well, there are other countries where they can invest without this tax. Where returns (everything else equal) are higher. So they bugger off. This means less investment in UK companies. All else equal, lower investment means lower productivity. Lower productivity means lower wages. So, some part of that tax on profits is actually paid by hte workers in lower wages (note, all workers in the country, not just in one company). Some is paid by investors: how much of each depends upon how mobile capital is: which is our elasticity again under a different name.

    The FTT, one of the ways that the workers end up paying it is that it makes capital more expnsive for companies, meaning less investment and thus lower wages. Another is that less liquidity in hte financial markets will widen spreads. Thus every financial transaction costs more and this simply swallows more of the value in the economy.

    As to your point about markets: this isn’t evidence of markets not working: markets working is how this all comes about.

  5. Worstall, because you are basing your evidence where there isn’t any, within the narrow scopes as explained in Murphy’s document

    I rather like this description of Murphy’s document. Apparently there is something Arnauld and Tim can agree on.

  6. That’s just unbelievable. He really does think that there is an inextricable essence of a corporation. The man is just spouting a naïve interpretation of a modernistic form of Aristotelianism.

  7. “Or that the bankas will have to cut salaries and bonuses to cover the costs”…

    Ah, that’s what it’s really about. Economic theory does indeed suggest that taxes levied on legal entities tend to be paid by their workers in the form of lower wages.

    Arnald, if you think that imposing what amounts to an indirect tax on bank business will be paid by either their shareholders or their executive management (the ones who get the big bonuses and telephone-digit salaries), you really don’t understand the situation. It won’t. It will be paid by customers, who will pay for it through lower returns on their savings – as if those aren’t bad enough already. And it will be paid by ordinary bank staff – you know, the ones you see in bank branches – in the form of lower wages. Yup, that’s a really progressive form of taxation, isn’t it?

    Leaving RM’s grasp of economics aside for the moment, for me the stupidest thing about the whole FTT proposal is that it probably won’t make any money and could actually COST money to implement. It is a purely politicial scheme designed to distract attention from EU politicians’ mishandling of the Euro crisis. And even if it does, through some miracle, manage to actually generate net tax revenue, it will mean in effect that the UK is bailing out the Eurozone – which we decided not to join, remember? Really democratic.

  8. Like bert, I’m far from an being an economist but if you’ll excuse that I’d like to play with Murphy’s logic for a moment.
    If, as he says, companies (banks in this case) are more than “mere agents and …. a bundle of
    contracts.” & are indeed “synergistic entities” then it would be reasonable to assume that such an entity would act in its own self interest. Thus it would not only seek to increase profits & reduce outgoings such as wages & taxes but would also seek to reduce the outgoings to shareholders by way of dividends. Essentially banks would be a sink of wealth & this wealth would have been accumulating since banking began.
    So where is it?

  9. This Richard Murphy character – does he actually have any training or background in economics at all?

    Genuine question – much of what Tim pulls apart on here from him does read like the submissions of a rather poor A-level student.

  10. @bloke in spain – lovely piece of logic but the wealth is taken by the lizard people who secretly run the world…………………………… what? It’s not like that’s any less sensible than Richie’s blathering.

    @Andy – Richie is often referred to in this parish as Our Favourite Retired Accountant, I think he has a tax qualification as well but never seems to apply that.

  11. Andy, Richard has said in the past that economics was part of his undergrad degree, but he dropped it after the first year because it was so obviously nonsense. He is an ACA.

  12. Gary,

    you have in one sentence explained Tim’s point in this article. Clearly, RM feels able to dismiss established economic theory because it is “so obviously nonsense” – and being an FCA (not ACA), his own opinions are of course much better.

  13. Frances,
    No credit due; I’m quoting the great man himself (from memory).

    What’s the difference between ACA and FCA?

  14. There already is a transaction tax on equities – it’s called stamp duty. High turnover traders don’t pay it – either because they enjoy the market maker exemption or because they use CFDs. Long ago, the government promised they would abolish it if the market moved to dematerialised share registration. The market did so. We still have stamp duty.

  15. PS ACA = Associate of Institute of Chartered Accountants in England and Wales; FCA = Fellow of same, notionally a superior qualification. In the good old days, you just got promoted from one to the other on the basis of time served; now, you have to show that you’ve maintained or improved your professional knowledge, although it’s not an enormously high hurdle.

  16. “Or that the bankas will have to cut salaries and bonuses to cover the costs.”

    Aye, that’s really likely to happen………

  17. Andy, please stop insulting poor A-level students. (Not that I have any better analogy to offer, in my opinion RM is incomparable.)

  18. bert (#5):
    “why isn’t ‘tax incidence’ seen as evidence of market failure”

    Others might correct me, but it looks to me like the other way round – the fact that a tax increase gets passed on to the customers is a sign that the market has been working.

    If a new tax on banks comes along, and the banks are able to ‘absorb’ it (i.e. it reduces their profits), that shows that there had been someslack in the system, so they hadn’t been competing hard enough before the tax came along.

    Similarly if the new tax leads to cuts in staff costs (as an immediate reaction, rather than over time as a result of reduced capital), that shows that they could have cut staff costs before, if they had been trying hard enough.

  19. Gary (#14):

    When you qualify as a Chartered Accountant you become an ACA (Associate; not a very good description, since you’re actually an ordinary member with full voting rights).

    After 10 years you can become an FCA (Fellow).

    All you need is to have been a member for 10 years, avoid any disciplinary hearings finding against you, and sign to say that you’ve done the CPD (Continuous Professional Development; attending update courses, that type of thing).

    Since you have to do CPD every year anyway, and sign every year to say that you’ve done so, that isn’t an additional requirement for the FCA.

    It’s rather like the Accountants’ equivalent of the Oxford MA. Nice to have, but all it shows is that you’ve served your time and kept your nose clean.

  20. I am not an economist but I am a graduate mathematician and I do not see any sign of a logical argument in this stream of consciousness, in short I don’t understand what Mr Murphy is trying to say. You cannot base an argument on premises that are pre-faced with caveats like ‘It may be a logical error’. Why may it be ‘a logical error’? How is it a ‘logical error’? What do you mean?
    Even if we accept the meaning of the next sentence that ‘corporations are synergistic entities that appear to create worth in their own right’ (why ‘appear’, do they or don’t they?) how do we logically step to the statement that ‘This does suggest that it is possible for the incidence of a tax to fall upon the corporation itself’?
    Can someone explain to me the economic rule that would allow me step from ‘synergistic entities that create worth’ to ‘tax to fall upon the corporation itself’ because it doesn’t make sense to me.

    Tim adds: There isn’t such a logical or economic rule.

  21. In my simple mind, I do not understand all the fuss.

    Tax is tax, transfering money from one part of the economy to the other, non productive side.

    Profits made by company’s, or banks or whatever, don’t magically disappear in some other world where only rich shareholders live, it is still part of the economy. And that part of the economy will always make better use of it than governments.

    So whether its tobin tax or whatever, it does make us all poorer in the end.

    All this does is complicate things so that people don’t realise how much they are taxed. It all ends up in the same place.

  22. “All this does is complicate things so that people don’t realise how much they are taxed. It all ends up in the same place.”

    Which is of course the entire point of the exercise.

  23. presumably he means that the tax will be paid by bank shareholders and bankers (via reduced bonuses) …. if the tax is imposed, it will be interesting to see whether bank dividends or banker’s bonuses fall.

  24. It would be ok if Richard Murphy were a lone moron spouting this nonce sense Speakers’ Corner style, but the problem is he has an army of morons who fawn over his every word, sheltered from reality by his interesting interpretation of free debate.

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