Ritchie\’s High Horse!

E&Y and Lehman show that he\’s been right all along of course. Thus accounting and auditing should be changed to suit his interests.

Slightly sad that he sets off with this:

…and it was used thereafter without further question arising to deliberately misrepresent the true nature of the balance sheet of the entity.

That sounds shocking expect for one thing – this is what happens day in, day out, the whole world over.

This is what securitisation was about.

….

Derivative trading is often intended to achieve such goals…

Oh, and there\’s me thinking that securitisation was about, well securitising. Passing on bundles of loans from originators to long term holders. And that derivatives trading was about the management of risk. Hedging oil prices for airlines, that sort of thing.

There\’s a certain difference between \”something naughty has been done\” and \”because something naughty has been done everything I don\’t like is wrong and naughty\”.

Ritchie really does seem to be stuck on the second here.

Ritchie, Ritchie….

The UK has £28 billion of unpaid tax debt. I estimate tax avoidance (legal but unacceptable abuse of tax law) to run at £25 billion a year and tax evasion (fraudulent law-breaking) at £70 billion. Tackling these issues could close the fiscal deficit.

The joy of this is that he doesn\’t even realise that he\’s just proved that tax rates don\’t need to rise.

On the incidence of corporation tax

One for Ritchie and points left.

A central tenet of public finance, however, is that the entity that has the legal obligation to pay a tax is not necessarily the one that bears the burden. For example, payroll taxes are levied on firms, but we know that they are mostly borne by workers. Raise payroll taxes, and firms cut wages. Lower payroll taxes, and most firms will pass on a pay rise.

The GST is another case in which the burden of a tax doesn’t fall on the entity that pays the tax bill. Although the law says that the tax is levied on those who supply goods and services, it is customers who end up bearing most of the burden.

Which brings us to company taxes. For decades, economists have argued over how the burden of company taxes are shared between investors, employees and customers. In the short-term, it is difficult to change prices and wages, so a higher company tax rate will be paid in the first instance by shareholders.

But over time, the burden is likely to shift. Investors are a footloose bunch, with the ability to shift their money into sectors like real estate where they can avoid company taxes. For an open economy like Australia’s, higher corporate income taxes will lead investors to buy foreign shares instead (which is why small countries have been cutting company tax rates over recent decades). To keep their investors, companies may respond to the tax rise by raising revenue and cutting costs.

What will a company tax rise do to prices? While the evidence is thin, theory suggests that companies will be most likely to put up prices on consumers when they do not face competition from importers. So an Australian shoe manufacturer (do we have any left?) may be unable to shift the burden to consumers. But a fast food outlet will have greater capacity to raise prices.

In the case of wages, the empirical evidence is stronger. In a recent review of the literature, William Gentry (Williams College) concludes that most of the impact of a corporate income tax rise falls on workers. Increase company taxes by 10 percentage points, and wages fall by 6-10 percent.

Please note \”a central tenet\”. This is not some right wing or neo-liberal invention. It\’s a basic truth about how the world operates.

That linked paper?

Office of Tax Analysis
US Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Abstract:

Who ultimately bears the burden of the corporate income tax plays an important role in the distributional analysis of tax policy. Distributional tables often assume that the incidence of the corporate income tax falls on the owners of capital but there is considerable uncertainty amongst economists about who bears the burden of the corporate income tax. This paper reviews the evidence on the incidence of the corporate income tax, especially in light of recent empirical studies that focus on the relationship between the corporate income tax and wages. While further research is necessary to draw definitive conclusions, these studies suggest that labor may bear a substantial burden from the corporate income tax. These empirical results are consistent with computable general equilibrium models based on an open economy in which a single country sets its tax policy independently of other countries; in these models, assumptions that capital is mobile and consumers are willing to substitute tradable goods produced in different countries imply that labor can bear more of the incidence of the corporate tax than capital bears. Evidence on the degree of capital mobility across countries and the sensitivity of corporate investment to changes in tax policy also corroborate the possibility that the corporate income tax lowers wages by reducing the productivity of the work force. In addition to changes in productivity associated with changes in capital intensity, labor may also bear part of the corporate income tax if wages are determined in a bargaining framework since the corporate income tax may change the equilibrium wage bargain. Overall, the recent empirical evidence, the open economy computable general equilibrium models of tax incidence, and the sensitivity of the amount of capital investment within a country suggest reconsidering the assumption that the corporate income tax falls on the owners of capital; labor may bear a substantial portion of the burden from the corporate income tax.

This isn\’t the sort of thing that is overturned by a retired accountant scribbling on the back of an envelope.

This is disgusting, should be a special tax on it!

Will you look at this eh?

Across the partnership, sales increase by 7.5 per cent… to take pre-tax profit to £155m. This was down on last year\’s £282m,

So, item one, a fall in profits.

staff will share £151m as a bonus

Bonuses amount to an eyewatering 97.5% of profits. That\’s item two. Item two and a half is that this is a rise in bonuses….yes, bonuses have risen even as profits have fallen.

And item three, how did these profits come about?

He put the company\’s success in 2009, especially during the second half, down to consumers having more disposable income – through lower interest rates and VAT

Yes, that\’s right, it\’s a subsidy from the taxpayer to the company.

These staff are pocketing what is rightfully the State\’s money. This simply cannot be allowed to go on. A special national insurance tax must be imposed upon these scavengers of what is properly the property of the taxpayer. They must be made to pay for the aid they\’ve received…the tax that they are simply pocketing.

R. Murphy Esq is no doubt currently penning a report on the TUC\’s dime insisting that Alistair Darling correct this matter on March 24th. And bugger the law, the tax must be retrospective.

Hmm? What\’s that? He\’s not?

Why?

What was that? It\’s John Lewis we\’re talking about, not a bank? That doesn\’t matter though, surely? The evil is in bonuses, they\’re a temptation to screw the customer aren\’t they? A bonus for a shop hand incentivises them to encourage excessive consumption just as much as a bankers\’ bonus encourages excessive risk taking, doesn\’t it? Encourages excessive debt….go on, stick it on your store card!…Bonuses at near 100% of profits, this is the same isn\’t it? Bonuses paid only because of taxpayer support for the business, this is the same, no?

Oh, you say it\’s not the same? So, umm, all this about bankers\’ bonuses, taxes on, was nothing to do with bonuses, taxpayer support or anything like that? It was simply a partisan let\’s bash the bankers?

Oh, what a disappointment. I was sure they were telling us that bonuses themselves are a bad idea, that sharing the profits of the business with the staff is what led to incidents of kitten burning and baby eating.

Ritchie\’s got a new report out

And it\’s a corker.

Three major points.

1) It\’s written for the main union representing HMRC staff. And it says that there should be more HMRC staff. Funny that, quite amazing how he gets to that position really. If we didn\’t know that Ritchie is entirely incapable of such behaviour we might begin to wonder whether he\’s whoring his good name around.

2) We\’ve got yet another estimate from him of the tax gap. Now it\’s £120 billion a year….something of an increase on his earlier estimates of £25 billion, no? The method used is quite gorgeous as well.  HMRC thinks that the tax gap on VAT is around 14%. Thus 14% of all taxes must be being avoided/evaded and 14% of all taxes is £120 billion.

I might have missed a number or two there but that is his argument.

3) There is some very good news though. By Ritchie\’s estimates of tax that should be but isn\’t paid there is no need for tax rises. For the structural deficit (as opposed to the current cyclical one) is estimated by most at being around the £100 billion level. So, all we have to do is hire a few more union members, collect the taxes already due and we\’ve covered it.

There should therefore be no tax rises. For of course in our current situation no one wants the fiscal contraction of a rise in tax rates and by the time we might be able to think of such things there\’ll be no need, for both the structural and cyclical deficits will be closed.

This is always the propblem with writing reports that lead to a pre-determined conclusion (that policy based eveidence making thing). The implications of your conclusions might not be what you\’d want to point to under less, how shall we put this, \”directed\” circumstances.

Ritchieism of the day

It’s time professional people changed their tune: their duty is to support tax systems – not undermine them.

Rilly?

Just to take an extreme example: the duty of a barrister when defending someone accused of tax offences is to go all Soviet on them? Yes, yes, you\’re right, my client is a horrible person who should be locked up forever because of his attempt to undermine the State?

There\’s no room at all for a professional\’s duty to defend us from the State and its tax system?

I\’ve said before that I think Ritchie\’s a Royalist and this is further proof.

Ritchie discovers another piece of the economics puzzle

I don’t find this surprising at all. If people maximise it is their overall well-being that they seek to enhance.

If he\’d actually paid attention to his economics courses at Southampton all those years ago he would have known this.

People maximise utility, not income, leisure, work, sleep, sex or any other one thing.

All of that blackboard economics that he so derides is based upon this point. And he would have found his attempts to understand that blackboard economics greatly improved if he\’d bothered to learn it while he was being taught it rather than trying to rediscover it (with the inevitable charging off down blind alleys that such autodidacticism involves) from first principles.

The myth of profit maximisation is just that: a myth. It’s one perpetuated by big business as an argument for unbridled growth. But no one in their right minds thinks it enhances well being.

For example, he could avoid making that mistake.

The first statement comes from a survey of small business owners. They do indeed, like all other people, seek to maximise utility. Big business does not seek to maximise utility….\’coz it\’s not a person, see? The people within it do, but not the business itself. So we cannot take the known and well described motivations of individuals and apply the same motivations to something that is not a person.

We can, if we\’re being careful about it, say that big business is a group of people: but then we have to ascribe the motivations of groups of people to it, not individuals.

Domicile matters

Contrary to those who claim that domicile is some strange beast grafted onto the UK tax system,. it\’s actually quite an important part of the Common Law:

But at the heart of last week’s hearing is the issue of where the Turkish Cypriot tycoon was domiciled when he died.

Erkin and his family insist that Ramadan Guney’s heart always remained in Northern Cyprus. If that argument succeeds, Ms Holliday is likely to go without a penny.

At an earlier hearing in April last year, Judge Lindsey Kushner QC handed Ms Holliday a crucial victory when she ruled that Mr Guney’s emotional attachment to the cemetery, which he bought in 1985, his choice of burial place and his love for their son, meant he had made England his home.

It ain\’t just about income tax you know…..

Richard Murphy\’s campaign against this is therefore part of a pattern. He really does seem to hate the way in which the Common Law has built up a series of ways of doing and deciding things. He campaigns against tax avoidance: and yet the Common Law states that everyone has the right so as to organise their affairs to minimise their tax bill. He campaigns for a \”general anti-avoidance principle\” which is entirely at odds with the Common Law point that the law is indeed the law. Do what it says and you\’re fine: peeps can\’t come along later and say \”ah, well, yes, but that\’s not what we meant\”.

I\’ve even seen him implying that he likes retrospective laws. Again contrary to the Common Law idea that you can only be charged, tried and punished for something which was in fact a crime when you did it. (One example of this is his insistence that banks should only be allowed to carry forward losses for a couple of years, rather than until they\’re exhausted by being offset against profits. This is of course to change the law after the losses have happened.)

Now I agree that there are other ways of doing this, plenty of countries don\’t have or haven\’t had this slow accretion of logic and legal rulings for the last 800/900 years. But of the various ways in which this necessary task of building a legal system can be done I think we rather got this one right.

And one of the reasons I think we did get it right was that one of the guiding principles underlying it all is that the law is there not just to enable the rulers to rule as they would wish. But to protect the citizenry and the rights of the citizenry against rulers who would rule as they would wish.

We actually had at least one Civil War over this very point. Plus a Revolution (1688 might be better described as a coup d\’etat though).

Which leads to what I think is a very amusing point. Murphy\’s view of the State is essentially that of Charles I. That State should be able to get on with whatever the State wants to get on with and bugger the rights of the individual. Or indeed, the settled habits of the law. He\’s a Royalist, even if a Republican.

Which is a very strange set of views for a Quaker to hold really.

Tax incidence

Bad news for those saying that it\’ll just be the banks paying any further taxes on the banking system:

In a report on the White House\’s plan to impose a 0.15pc fee on liabilities of banks with more than $50bn in assets in order to recoup money lost through the $700bn Troubled Assets Relief Programme, the Congressional Budget Office (CBO) said the impact on banks would be \”small\”.

\”The cost of the proposed fee would ultimately be borne to varying degrees by an institution\’s customers, employees and investors, but the precise incidence among those groups is uncertain,\” said the CBO in a letter to Senator Charles Grassley, a leading member of the Senate finance committee.

The CBO went on to say that customers could face higher rates for borrowing and increased charges, while investors could face lower share prices. It added that employees may receive less compensation as banks attempt to pass on the fee.

Now note that this isn\’t the same as the Robin Hood Tax. It isn\’t a transaction fee: it doesn\’t get paid when liabilities change….just on the total amount extant at one particular moment in the year (presumably, when the bank publishes its annual balance sheet).

Just as a little bonus, guess who gets this entirely wrong in his report?

In addition, whilst financial transaction taxes should only eliminate
marginal trades but leave markets intact with ample liquidity, the proposed rate of the US levy at 15 basis
points is well above margins on many of the trades noted in this report and is consequently likely to be
harmful to the operation of some markets.

Yes, that\’s Our Ritchie, revealing his misunderstandings once again. He\’s referred to the annual charge on liabilities as if it\’s a tax on transactions. Aren\’t we lucky to have such a genius reorganising the globe\’s financial markets for us?

But even if it isn\’t the same as the RHT we\’ve still got exactly the same problem. Who carries the economic burden of the tax?

Ritchie, academia and corporate taxes.

If anyone\’s at a loose end tonight would they fancy going along to the House of Commons? There\’s an interesting question that should be asked.

R. Murphy Esq will be speaking:

I am speaking at a meeting tonight in the House of Commons organised by the University and Colleges Union.

The aim is to abolish university fees and make big bad business pay for universities. The basis of the plan is here:

A report released today by UCU recommends raising the level of corporation tax in the UK to the G7 countries\’ average to raise enough money to abolish all university tuition fees.

It\’s going to be extraordinarily interesting to see Ritchie arguing for lower corporation tax, that\’s for sure.

For of course the level of corporation tax is not the same as the marginal rate of corporation tax. There\’s waaaay to much to be argued over allowances, depreciation, the tax base itself and so on. The best way of cutting through that Gordian knot is by measuring the corporation tax collected as a percentage of GDP. That\’s how we can measure the level taking account of all such things.

Here\’s the OECD report.

You will note that the UK collects more of GDP in corporate taxation than the OECD average, the EU 19 average and the EU 15 average.

In fact, if you do the simple average for the G 7 countries, it is 3.5% or thereabouts while the UK  is at 4%.

Thus if we are to get the level of corporate taxation to the G7 average then we should lighten it by 12.5%.

Hey, sounds good to me.

Added, of course, to the joy of seeing Ritchie argue for a reduction in tax levels there\’s a further point. The academics who have thought this up believe that such a lowering will increase revenue collected. Clearly they believe we\’re to the right of the maximum revenue point of the Laffer Curve then.

Dear Mr Murphy

Julian Cook, an economist at Madeley-Finnegan, said: \”Lord Ashcroft is one of around 60 million people in Britain who want to pay less tax.

\”He does this by hiring an accountant who reduces his tax bill by as much as is legally possible, sends him an invoice and then everyone goes about their day. As you can see it\’s all incredibly evil.\”

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.

More on Ritchie\’s sources

Although relatively few in number, large international banks dominate the global FX
market. The ‘economic footprint’ of the CTDL would, in the first instance, fall upon
these large financial institutions that are members of the CLS Bank and the Real Time
Gross Settlement systems (RTGS). There is little doubt that they could comfortably
absorb the levy given the size of their profits, however, they will as far as possible pass
on these costs to their wide range of clients in the form of a slightly higher spread. The
CLS Bank estimates that it settles an average of 200,000 separate transactions (about
half of the global total) every day, which gives some sense of the number of ultimate
participants in the global FX market. The impact of the CTDL on a specific currency
would therefore be dispersed widely throughout the global financial system, with
minimal impact on any one institution.
In further addressing this point we will use the example of a 0.005% CTDL on sterling.
As discussed, the CLS bank processes an average of 200,000 FX transactions every
day. In line with the global picture, we assume that 17.5% of these have sterling on one
side of the trade, which gives 34,000 sterling transactions in the CLS system per day.
However, the CLS Bank settles only around half of all FX transactions, which suggests a
global figure of 68,000 sterling trades per day. Over a year, therefore, we can estimate
the total number of sterling transactions as being somewhere in the order of 17.7
million carried out by tens of thousands of participants. For the 17.7 million ultimate
transactions, the impact of the CTDL would be in the region of $117 per trade, on an
average trade size of a little over $2 million.
For corporations, however, the situation is clearly different. The UK exports somewhere
in the region of $380 billion worth of goods and services per year. Based on the profit
margins of UK companies from 1990 to 2002, we assume an average margin of 10%.30
Ten per cent of $380 billion is $38 billion, which we take as a rough estimate of the
annual profit of the UK’s export sector.

From \”Taking the Next Step\”.

You note that they say that spreads would widen? And that this would determine what the actual incidence of the tax is?

And further, that they then, when talking about the incidence, only talk about the tax itself and not about the effect of the spreads?

This really ain\’t good work you know.

Ritchie\’s ideas on the FX market.

At the heart of R. Murphy\’s ideas about the financial transactions tax is the thought that the tax will widen margins in the foreign exchange (forex/FX) business, well, actually all markets. Wider margins will lead to lower liquidity and thus lower profits for banks and thus lower pay for bankers.

This is one of the source documents he uses to reach that conclusion. The IFSL 2009 September newsletter/report.

From 2001 to 2007, spreads in foreign exchange
markets contracted, meaning banks were making less margin. Spreads have
widened since the start of the credit crisis, due to increased volatility, a fall in
the number of dealer desks and increased concerns about counterparty risk.
This has resulted in boosting global banks’ revenue from foreign exchange
dealing.

No, really, that\’s one of his source documents. Lower liquidity *raises* the amount that banks make from such trading. Yet Ritchie assumes that such wider margins as a result of lower liquidity will *decrease* the amount made and thus put pressure on bankers incomes.

It takes a special talent to entirely reverse the logic of your sources really.

Ritchie\’s comments are open again

So, I\’m trying to, politely, get him to see my point:

“I’m well aware conventional economists do not agree – and they have provided not a shred of evidence, let alone logic, to support their case as yet. They simply say the cost will be passed on to others – but when the customer for more than 40% of all trades in this market is another bank and the number of customers overall is tiny there is no logic in that claim – the consumer is identifiable and able to resist the charge.”

You’re still not grasping the point about tax incidence. It isn’t that people attempt to pass on a tax charge. It’s not about intent, people trying to stick others with the bill.

It’s that changes in behaviour caused by the imposition of the tax have effects on other people.

Follow this logical chain for a moment. Tax is added to transactions. Transaction volume falls (you should agree with this so far as your report actually notes it). OK, what do we know about markets that have lower liquidity? They have wider margins, larger differences between bid and ask.

We very much do see this in financial markets. Shares with large trading volumes have lower spreads than shares with low trading volumes. Currencies with low trading volumes have higher spreads than those with large volumes. Futures, derivatives and so on. Non-standard transactions have wider margins than standard exchange traded ones. This link between volume and spreads/margins is both noticeable and entirely uncontroversial.

So, our tax reduces volumes and increases spreads. So, any and every user of these products ends up paying the larger spreads. Every farmer transferring the risk of his wheat crop via a future pays it, every remittance sent through the FX markets, every pension fund that’s invested in any financial product at all, yes, even people buying euros to pay for beer on holiday.

Sure, each and every one of these users is paying a tiny sum….that 0.5% to 0.005% tax….plus however much the margins have widened. As in my earlier comment, we don’t know how much those margins will widen but we’re, unless you’ve got some startling new result, certain that those margins will widen.

And thus the economic burden of the tax hits each and every user of any financial product at all.

No, not because the banks of the bankers are trying to stick people with the tax. But because the reduction in liqudity makes the use of the markets more expensive for everyone.

Depending upon how much the margins increase that burden of the tax could be higher, possibly many times higher, than the amount actually raised by the tax.

The only way this could not be true is by making the assertion that margins will not increase as a result of the tax. Now you can assert that if you like but it would be an hilariously odd thing to try and assert. And as ever, it would be one of those extraordinary claims that would require extraordinary evidence.

So, allow me to ask a question. Do you think that the imposition of an FTT will widen margins in the financial markets or not?

Ritchie changes his mind!

There\’s been something nagging me about R. Murphy\’s latest little essay for the TUC. It doesn\’t seem to mention his last little essay for the TUC.

Back in November he said that there should be a 0.05% tax on all interbank and CHAPS transfers.

I was among those who started shouting that he\’s just closed down the interbank markets in their entirety. Of course, I was told not to be silly, nothing of the sort and anyway, what\’s the point of interbank markets and Worstall, you eat boiled babies, don\’t you, yes, don\’t you!

Then there\’s his new report for the TUC about a financial transactions tax.

And I cannot find anywhere in it that tax on cash/bank transfers.

Which leaves us with a number of possible answers to the question why not?

My two favourites are, at present, that he\’s simply forgotten all about it or that an adult read the first report and promptly demanded that he stop being so silly.

I\’d much prefer it to be the latter: it would indicate that there is indeed an adult overseeing his reports, something hitherto unsuspected.

Ritchie gets worse

The major cost of trading in this market, which is largely undertaken between a very limited range of banks –
often, as noted on a pure inter-bank basis – or with a limited range of large commercial counterparties
operating what are, in effect, their own in house banks usually called treasury departments, is labour. Those
employed in this sector are relatively small in number and often very highly remunerated: the exact target of
many recent policies seeking to curtail excessive pay in the banking sector. If there are smaller volumes of
transactions and smaller profits made as a result both the number employed in the activity and the average
pay of those remaining in it are likely to fall to compensate for two things: firstly reduced volumes and
secondly the fact that out of margins on the remaining trades undertaken a tax of up to (on the basis
estimated here) one third of the margin might be paid. The impact of a fall in value and volume of 25%
followed by the loss of margin out of the remaining trade of up to 33% means that in combination cost
reductions of up to 50% will be required in this sector.

He thinks that a transaction tax will reduce margins.

Umm, no, we think that a transaction tax will, as he notes himself, reduce volumes. Liquidity. We know what happens when liquidity dries up in a market. Margins rise. In fact, we know what used to be true in financial markets when there was less liqudity. Margins were higher.

We think that more competition reduces margins….less competition means higher margins. Competition and liquidity are pretty much the same thing.

Jebus, and the TUC are proposing to change the taxation of the world\’s financial system on the basis of this gibbering?

What\’s worse, he entirely garbles the tax incidence argument. As and when margins increase then all those still trading such things pay more for their trading. And the more they pay for their trading is the incidence of the tax. It\’s bugger all to do with bankers getting lower pay.

I seriously and really don\’t believe it. Adam Lent must be horrified (assuming he\’s understood the point). Murphy has entirely garbled the tax incidence argument, so much so that this paper should generate loud guffaws among the economists who read it. And they\’ve paid Ritchie money to do this.

Really not the TUC\’s proudest hour. They had a technical paper written for them by someone who does not understand the technical issues he\’s writing about.

Yet even more on Ritchie\’s report on taxing the banks.

As the report notes, the short term alternative of an insurance charge that some promote as an alternative to
financial transaction taxes does not have any of the benefits flowing from adoption of these taxes as noted
above, nor can it raise equivalent revenues. In addition, whilst financial transaction taxes should only eliminate
marginal trades but leave markets intact with ample liquidity, the proposed rate of the US levy at 15 basis
points is well above margins on many of the trades noted in this report and is consequently likely to be
harmful to the operation of some markets.

Oh dear. He seems to think that the insurance levy has anything at all to do with margins on trades.

This is very much arse about tit.

The idea of the insurance levy is that liabilities of banks get taxed. Or rather, pay an insurance fee. So if Bank of Worstall owes $100 billion to other people then Bank of Worstall would pay that 0.015% in an insurance fee.

Size matters as it were. And importantly, those liabilities that are also covered by other insurance schemes, say, deposit insurance up to some fixed level as we\’ve got in the US and UK would be deducted from liabilities before the fee is calculated. So a bank that relies mostly or purely upon individual depositors, who we can assume will mostly be covered by other schemes, will not be paying the further levy while whose relying upon wholesale money markets, which are not covered by other schemes, will be.

All quite sensible really.

However, this is the bit that Ritchie seems not to get. It\’s a fee upon liabilities in aggregate. Not a fee on each liability. To explain: if Bank of Worstall borrows $50 billion from Bank of Ritchie for a week and then pays it back, then borrows $50 billion from Bank of Murphy, pays it back and so on for a year, Bank of Worstall is not paying the fee on 52 times $50 billion. It\’s paying it on the $50 billion.

So the levy has nothing at all to do with margins on what the money is put to use doing. If Bank of Worstall wishes to trade five times an hour in FX with the $50 billion at 0.005 % margins or simply lend the whole lot to GM at 15%, the levy makes no difference to that decision at all.

By stating that the levy will close down low margin areas of business Murphy has shown that he doesn\’t understand the basics of what is being suggested. It\’s not levied each time the structure of liabilities changes, it\’s levied on the average amount over the year.

And for today, Ritchie says!

On credit card interest rates:

In the meantime they ignore the real issue of incidence concerning banks – which is that the cost of rebuilding their balance sheets is falling on these least able to pay.

The time for regulation of interest rates has arrived, and is long overdue.

So, both banks and governments underprice risk in the past, leading to the system nearly falling over. Now that risk is being priced more appropriately, this is also wrong.

And, of course, government must have more power.