In which we test some statements by Richard Murphy

So, there was a report about a leaked report about the Robin Hood Tax idea of a financial transactions tax. At which point our favourite retired accountant said:

All of which says three things:

1) Those who have argued on this site and elsewhere that those of us who have argued for these taxes don’t know what we’re talking about are wrong – we clearly do – enough to convince he IMF and others;

2) Those who says these taxes won’t work are wrong.

3) Those who say these taxes will have serious impact outside banking are wrong.

I refer to my arguments in Taxing Banks on incidence. I suspect the IMF is now beginning to buy them – not least because it is becoming increasingly obvious that those who argued against such claims did so because a) the incidence of the change would actually fall ion them and b) their self interest was the sole basis of their argument.

Gosh, how the mighty do blog! Influencing the IMF with the purity of his arguments no less!

So, that leaked report which the report was about got leaked again to this blog.imfrobindocument

Hmm, dunno Whether that upload will work properly or not but still….

This paper reviews existing theory and
evidence on the efficacy of an FTT in fulfilling those tasks, on its potential impact, and on key
issues to be faced in designing taxes of this kind.

Righty ho, it\’s a review paper. X said this, Y that, John Lee said Boom Boom and Howlin\’ Wolf \”Wang Dang Doodle\”.

In other words, what is it that everyone else has said about such taxes in the past?

Numerous civil society
organizations (CSOs), including the Leading Group on Innovative Financing for
Development, also support adoption of some form of a global FTT.

Indeed….the Tax Justice Network, of which Ritchie is a part (indeed, I think he was a founder) is part of that Leading Group.

Supporters of FTTs generally wish to use them to achieve one or more of the following
goals: (1) raising revenue from the financial sector to help pay for the costs of the recent
financial crisis or for global development; and (2) reducing financial market risk and waste
and helping to prevent asset price bubbles. This report evaluates the efficacy of FTTs in
accomplishing these alternative goals. Though FTTs appear to conform to the tax policy
precept of levying a low rate on a broad base, they conflict with the precept that, because
gross transaction taxes distort production, they should therefore be avoided when more
efficient tax instruments are available. This report therefore describes income and
consumption tax reforms that address these two objectives.

Agreed, that is what they want to achieve and agreed, that is indeed the standard objection to such taxes.

The trend in share transaction taxes over the past several decades has been downward. The
United States eliminated its stock transaction tax as early as 1966. Germany eliminated its
stock transaction tax in 1991 and its capital duty in 1992. Japan eliminated its share
transaction tax in 1999. Australia eliminated its federal stamp duty on share transfers in 2001.
Italy sharply reduced its capital and transaction duties in 2000, and France eliminated its
share transaction tax in 2009. Paramount to this trend are concerns about raising businesses’
cost of capital and impairing the development and competitiveness of domestic financial
markets, given increased cross-border mobility of capital.

Interesting, no? This is an old idea, possibly found wanting and thus one in decline.

One of the earliest and most
illustrious proponents of a securities transaction tax on stocks was Keynes, who
highlighted the key tension in the FTT debate: the desire to curb speculative bubbles
vs. the desire not to impair the financing of real enterprise. The development of
liquid financial markets enables entrepreneurs to raise capital and diversify their risk,
greatly expanding a society’s capacity to undertake large-scale investment; it also
enables savers to increase their returns and diversify their risk. Simultaneously,
however, the availability of a liquid market can decouple investment from an
assessment of fundamental asset yields and focus it on (short-term) capital gains.
Thus, near-term returns can be driven not by fundamentals but by “what average
opinion believes average opinion” of the future price to be—that is, by speculation
(Keynes, 1936).

Indeed, that is the major point at issue. Bubbles can be bad and perhaps curbing them is worth the pain. But it is also true that raising capital easily is good and perhaps the pain of interfering with that will be worse than having bubbles? You can make up your own minds on that: me, I take bubble prone but being able to raise capital as being better: certainly, over the long term, as the difference between, say, South and North Korea shows us. Stability really ain\’t all it\’s cracked up to be.

Rather than quote more great chunks, have a read. Yes, an FTT would raise the cost of capital to companies by reducing the price of their shares. Not hugely, but some.

A discussion of whether volatility is an issue follows. Following that Austrian paper, the idea is put forward that \”excessive\” liqudity increases price volatility. Thus a transactions tax, by reducing that excessive liquidity, could reduce price volatility.

Nice idea but no:

Since theoretical models cannot resolve the impact of STTs on short-term volatility, the
question of their effect is left to empirical investigation. Several empirical studies examine
the impact of exogenous changes in STTs and other types of transaction costs on financial
markets. Almost invariably, these studies consider short-term price volatility, rather than
long-term asset mispricing, and most show either no effect of transaction costs on volatility
or a positive effect.22 Roll (1989), studying the relationship between transaction costs and
volatility across 23 countries, finds no consistent relationship. Baltagi, and others (2006) also
find no impact of China’s STT increase on volatility. Several studies do find a positive
relationship between transaction costs (including STTs) and volatility. Jones and
Seguin (1997) find that U.S. stock commission deregulation, which led to a decline in
transaction costs, led to decreased price volatility. Hau (2006) finds that this relationship
holds for the French equities market as well, where tick-size reduction led to a fall in
volatility. Green and others (2000) find that increases the U.K. stamp duty generally lead to
higher short-term price volatility.

So we can reject that one of Ritchie\’s surmises.

A very neat point about long term price volatility:

Though transactions costs may play a role in determining market cycles, they are clearly not
a decisive factor. Bubbles and crashes are common in real estate markets, where transaction
costs (including taxes) are extremely high compared to securities transaction costs, generally
on the order of several percentage points. This suggests that a low-rate STT will not prevent
asset bubbles.

So, an FTT will not reduce either long or short term price volatility.

A large part of the burden of an STT would fall on owners of traded securities, at the time the
tax was introduced, as the value of stocks, bonds and derivatives subject to the STT fell by
the present value of the expected future STT liabilities on those securities. Like any tax on
capital income, the distribution of this effect would likely be highly progressive: Highincome
individuals possess a disproportionate share of financial assets, and so would suffer
from the initial fall in taxed securities prices.

Ooooh, my, maybe Ritchie is right about incidence?

In the long
run, capital owners would therefore not bear the burden of the STT; it would fall on workers,
who as a result of the smaller capital stock would be less productive and receive lower
wages. If, however, the capital supply is less than perfectly elastic, the STT will lower the
return on capital, and capital owners will share the burden of the tax with workers.

Ah, no, he\’s not. He\’s been looking only at the short run effects and of course, when we\’re considering anything other than a one off tax we need to look at the long run effects. So the IMF has indeed considered R. Murphy\’s views on incidence and decided that they\’re wrong.

Diamond and Mirrlees (1971) show that, where optimal taxes on final products
(i.e., consumer goods) are available, taxes on intermediate transactions (e.g., business
purchases of inputs) should be avoided because they distort production decisions and thus
lead to an inefficient allocation of resources.

\’N it\’s wrong in theory too.

The next section details better methods of achieving the same goal: the financial sector contribution which is already being put into place. Charge a levy on

balance sheet debt (net of insured
deposits and equity),

Something which Ritchie has told us just won\’t do.

And from the conclusions:

Empirical research on securities transaction taxes shows that they have the following effects
on securities trading: (1) They reduce security values and raise the cost of capital for issuers,
particularly issuers of frequently traded securities. (2) They reduce trading volume,
particularly in shorter-term transactions, which in turn reduces liquidity and may slow price
discovery. (3) They do not reduce short-term price volatility. And (4) they displace securities
trades from taxed to untaxed venues, including foreign financial markets.

So not all that good then.

In the short-run, imposition of an STT would burden current securities owners, as securities
values decline. The incidence of this effect would be quite progressive. In the longer-run, the
burden of an STT shifts to all capital owners, if the supply of capital is relatively inelastic.
The more elastic the supply of capital, the more the long-run burden of an STT would fall on
labor, as the capital stock and labor productivity shrank.

And, as ever, it\’s the workers who would pay.

If the goal is simply to raise revenues from the financial sector, however, a FAT
or improved VAT tax on financial services would do so in a more efficient manner than an
STT.

And there\’s a better way or two of doing it anyway.

So, we\’ll take that as a \”No\” to a financial transactions tax from the IMF shall we?

And further, no, Ritchie hasn\’t convinced the IMF that he knows what he\’s talking about, nor that the taxes will work, not even that there will be no serious impact outside banking and, yes, the IMF is absolutely certain that Ritchie is wrong about the incidence of such a tax in the long term.

Oh, and, finally, that to actually achieve the goals which Ritchie has set himself there\’s a better way of doing it anyway.

Which, I think we all knew, for as we also all know, Richard really doesn\’t understand the economics of taxation while the IMF does have a clue.

6 thoughts on “In which we test some statements by Richard Murphy”

  1. As a relative layman on economics (i.e. I did try to pay attention during that particular module, unlike Mr Murphy), I can’t see how an STT could ever prevent a bubble. Would it not simply alter, by a negligible amount, the circumference of said bubble?

  2. I continue to think that secretly you love Murphy, such is your obsession with him. But more prosaically, you seem to have written a lot of thumb-sucking tosh here.

    The IMF: “The more elastic the supply of capital, the more the long-run burden of an STT would fall on labor, as the capital stock and labor productivity shrank.”

    err, well, for starters you and the IMF are hanging off some quite heroic assumptions here. Is it really more capital that we all need, in order for “labour” to stop cowering in its cave and stride out into the fresh air, beating its chest? Interesting that bond yields are so low then, isn’t it? Not only that, but you conclude from this that

    “As ever, it’s the workers who would pay.”

    Hmm really. So just who are these “workers” at, let’s say, Goldman Sachs (for it is these kind of people we are talking about here.)? Pray do tell. Taxing them really would be a blow to the labour movement.

    And finally, you have already seen how your incidence argument, overall, is a complete hoax. You know, as the New York Times explained, it is a trick to get people to lower taxes on corporations (and/or on “capital”) down to zero. And then rich folks will transfer their own incomes into those zero-rated-for-tax vehicles and hey presto! Everyone else will pay their taxes for them! Bravo. But please stop bringing up this incidence argument. It is a hoax.

  3. Nick: It is indisputable that a greater capital stock increases the productivity of labour, and that the productivity of labour is the single biggest determinant of wages. Therefore anything which slows the growth of capital will slow the growth of wages. Please stop bringing up the ‘trickle-down’ argument. It is a straw man.

    As for incidence, taxes on corporations must fall partly on wages. What is so difficult to understand about that? Just look at National Insurance.

  4. Pingback: On the IMF report on a financial transactions tax

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