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.

On Ritchie and comments

As you know, we cannot comment upon Ritchie\’s vapourings directly.

So we\’re doing so over at Giles\’ place.

Sample comment from the blog host himself:

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.

Oh, but he did and does.

Yes, he really does.

Candidly, the theoretical economists can make al the assumptions they like to prove their case – the reality is that the world does not support their argument because in the real world the assumptions they make are simply untrue – and that’s bad economics, bad science and bad argument. It’s also a lousy basis for recommending policy.

Well, yes, obviously

Millions of savers are losing money as they are caught between poor returns and a rising cost of living, figures show.

If returns are below inflation then of course you\’re losing money.

Which brings us to our favourite retired accountant. He\’s been advocating for years that we should all be investing in \”green bonds\” to provide for our retirement. These would pay 3% he says.

More recently he\’s been agreeing that we should have a higher inflation target: 4% instead of the current 2%.

That is, setting up the system so that any and everyone who saves for a pension loses money while doing so.

Great, eh?

Today\’s Ritchies!

Whose sticky little fingers are all over mis-accounting in Greece? All the usual suspects, bar, it seems Barclays (what did they do to miss out?):

Wall Street’s role in the unfolding Greek debt crisis will be probed by  Eurostat, the EU’s statistical office, which has requested information from Athens about currency swaps. The transactions, undertaken from 2001 to 2008, may have allowed the Greek government to conceal billions of euros of new debt from regulators. Goldman Sachs, Morgan Stanley, Deutsche Bank and other investment banks arranged complex transactions that enabled Athens to raise cash for budget spending without having to classify as public debt.

Time to call the banks to account then: is there any point pretending that they serve any social function under their existing management any more?

Yup.

Government lies, cheats, conceals and deceives.

This is all the banks\’ fault. Thus government should have more power over banks.

Most importantly, what it fails to note is that accounts are always political statements. No one can pretend otherwise. Capital is treated as meritorious, for example; labour is a cost to be minimised. Spending on replacing labour with plant and machinery is treated as creating an asset of value – the labour is just a loss offset.

What?

Umm, look, when a company employs labour it does just that, employs it. Rents it. Neither the labour nor the labourers are owned by the company: if it were they would not be labourers for hire, they would be slaves.

A machine however, is indeed owned by the company.

Which is why one is treated as an asset of the company and the other not.

Try running this the other way around. We\’re going to say that the labourers are indeed an asset of the company (rather than their agreement to work for the company in return for wages being an asset). We really want our accounting system to be based on such slavery?

More on Ritchie\’s report

I will give him this: he\’s raised an interesting point:

My research shows that this may be the wrong question. The most important question is not the incidence of the tax on these transactions, but the incidence of the cost of these transactions. If, as the opponents of the tax argue, the tax charge will fall on ordinary people then it follows that the excessive charges made by banks to fuel their own profits and to pay the wholly unreasonable rewards of bankers also fall on ordinary people. That is something of an own-goal on their part. It is also somewhat simplistic.

He\’s right of course: profits do come from somewhere.

However, he\’s made the assumption that bank profits come from transactions which are either zero sum or even negative sum. Thus the fact that bankers get paid well and make profits must mean that consumers have lost something in the transaction.

Entirely ignoring the possibility that even though the bankers are well paid and that banks make profits, consumers are better off in total because the transactions themselves are positive sum.

And we do tend to think that voluntary transactions are positive sum: that\’s why people undertake them after all.

So, while it\’s a nice try I\’m afraid it\’s a fail. I would point this out to him but unfortuantely I cannot:

Note: This post is open for comments. Comments will only be accepted if they contribute positively to debate on this issue. Those that do not will be deleted.

What a report, eh?

Ritchie flags up this in the FT.

The report, entitled Taxing Banks, proposes a global 0.005 per cent tax on currency exchanges and derivatives.

The report, authored by the Trades Union Congress, Christian Aid, Tax Justice Network, Tax Research UK and the Task Force on Financial Integrity and Economic Development,

A hugely impressive list I think you\’ll agree.

Well, except…..

TUC: advisor on international tax issues: Richard Murphy.

Christian Aid. Advisor on international tax issues: Richard Murphy.

Tax Justice Network: main bod: Richard Murphy.

Tax Research UK: this is Richard Murphy.

TFFIED: not Richard Murphy directly, but their reports on international taxation all quote, draw upon and use the methodologies of the TUC, Christian Aid, Tax Justice Network and Tax Research UK. That is, Richard Murphy.

In short, the whole alphabet soup is a self-referential cobweb with, at the centre, a retired accountant whose speciality in the trade was advising self employed actors, musicians and artists on their personal tax returns.

Now I entirely agree that it\’s possible for people to flower, grow and learn: I\’ve no qualifications or work experience that justify my own propensity to adjudge matters economic. But if we\’re talking about changing the taxation system for the entire financial world, shouldn\’t we be looking for a slightly wider base, a slightly less individual source of information?