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.