Ritchie Today!

The MD of the IMF says that a transactions tax won\’t really work. For it\’s all too easy to create derivatives to get to the same risk profile and end product, derivatives that won\’t be subject to the tax.

Ritchie says:

Second, derivative dealing not subject to financial transaction taxes by banks can easily be subject to those taxes – simply do it on gross turnover.

Blimey, he\’s forgotten one of the basic things about the tax that he himself is proposing.

The \”gross turnover\” of a derivatives contract is the premium paid or received on said derivative. That\’s what turns up in the bank\’s books, at least, what we normally think of as turnover in an accounting sense.

But the transactions tax that Ritchie is pushing isn\’t levied on this definition of turnover. It needs to be levied on the full nominal sum of the derivative.

Imagine: you do an options deal on $1 million worth of wheat. The tax, as described, needs to be on that $1 million value. Turnover however, as entered into the books of the broker, bank, whatever, isn\’t $1 million. It\’s about $5,000 (just as an example), the amount that\’s actually paid over to purchase the option.*

So, if Ritchie is going to tax gross turnover then a) the tax won\’t raise anywhere near the amount he currently assumes and b) he\’s actively promoting, through his tax policies, the use of derivatives. For we\’d all far rather pay tax on $5,000 rather than tax on $1 million and it\’s easy enough to create derivatives that give us the exposure to $1 million while only paying $5,000. Which is Strauss Kahn\’s point.

Is there anybody who tries to turn up to an intellectual fight quite so badly armed as Our Ritchie?

*I can imagine, just about, a definition of gross turnover which means that $ 1 million. But I can also think of any number of ways of disguising that as well, so the point still stands.