This is interesting, eh?
One of the most prominent claims made by proponents of a Tobin tax is that the
incidence of the tax would be extremely progressive, primarily affecting wealthy
institutions and individuals (Tax Research LLP 2010; Kapoor 2010). However,
such analyses make the common error of confusing who would actually pay the
tax with the issue of where the incidence of tax would lie.
Note that this new report is written by the same institute that wrote the back up stuff for Oxfam\’s latest. So they\’re not some bunch of outraged righties at all.
But still Ritchie is wrong….
They go on to bemoan that there are no good empirical studies about who really would bear the incidence of such a transactions tax and thus look to who bears the incidence of a corporation tax as a guide:
Diamond and Mirrlees (1971), Harberger (1995), Randolph (2006), Gravelle and
Smetters (2006) and Felix (2007) adapt Harberger’s model to an open economy.
Diamond and Mirrlees (1971) argue that, in a small open economy, capital taxes
are inefficient because, in the end, labour bears the entire burden. The reason is
that as soon as the economy becomes open, a tax on capital encourages capital
to flee abroad until the point at which the after-tax return of capital equals the
world return. In the domestic economy, this outflow of capital lowers the marginal
product of labour and therefore decreases wages.
Harberger modified his model in 1995 to include open economy features. He
measures the open economy incidence of the CIT by analysing a general
equilibrium model of domestic and foreign economies, each with five sectors. The
corporate sector that produces internationally tradeable goods is further
subdivided into two subsectors. One of those subsectors produces goods that are
perfect substitutes for the goods produced by the corresponding foreign sector.
The second corporate subsector produces goods that are imperfect substitutes for
goods produced by the corresponding foreign sector. When goods are produced
in both corporate tradeable goods subsectors, the domestic and foreign wages
are determined fully by the effects that the tax has on production costs within the
first subsector. In the domestic economy, the CIT drives a wedge into the cost of
production in the corporate sectors. Because the domestic economy cannot affect
the world price of output in the first sector, the domestic wage must decrease in
order to offset the increased corporate cost of capital. He finds that the burden of
a CIT increase is fully shifted to labour, which may bear a burden 2 to 2.5 times
bigger than the revenues generated by such an increase.
Randolph (2006) also uses a general equilibrium model to examine the long-run
incidence of a CIT in an open economy. His model consists of two countries,
which are identical except for size. For each economy, production is divided into
five sectors. The first three sectors are corporate, the last two are non-corporate.
Labour is homogeneous and perfectly mobile within each country, but cannot
move between countries. Thus, the wage rate is the same for every sector within
a country, but can differ between countries. Individuals do not vary their amount of
labour supplied to the market. With this model he shows that domestic owners of
capital can escape most of the CIT burden when capital is reallocated abroad in
response to the tax.
However, capital owners worldwide do not escape the tax. Reallocation of capital
abroad drives down the personal return to investment so that capital owners
worldwide bear approximately the full burden of the domestic CIT. Foreign
workers benefit because an increased foreign stock of capital raises their
productivity and their wages. Domestic workers lose because their productivity
falls and they cannot emigrate to take advantage of higher foreign wages. He
argues that when capital is perfectly mobile and the tax does not affect the world
prices of traded goods, domestic labour bears slightly more than 70 per cent of
the long-run burden of the CIT. The domestic owners of capital bear slightly more
than 30 per cent of the burden. Domestic landowners receive a small benefit. At
the same time, the foreign owners of capital bear slightly more than 70 per cent of
the burden, but their burden is exactly offset by the benefits received by foreign
workers and landowners. When capital is less mobile internationally, domestic
labour’s burden is lower and domestic capital’s burden is higher. Gravelle and
Smetters (2006) similarly assume that capital is fixed and focus on product
substitutability. They find that if the products are not perfect substitutes, labour
bears less than 70 per cent of the tax burden. Its burden is also reduced by a low
savings elasticity and the ability of the country to affect world prices.
Finally, Felix (2007) uses an empirical approach (panel regression with random
effects) to measure the first order effect of openness on the incidence of CIT. He
uses cross-country panel data from the Luxembourg Income Study, which covers
30 countries over five waves from 1979 to 2002. The results suggest that a 1 per
cent increase in CIT results in a 0.5–0.7 per cent decrease in gross annual
wages. Including an interaction term between openness and the CIT variables
makes the negative effect on wages much higher: a 1 percentage point increase
in the corporate tax rate lowers wages by 0.7–1.2 per cent. On average this
means that an increase of CIT from 20 per cent to 21 per cent in 2000 in the USA
would decrease total wages by US$43.5 billion, while the revenues would be
US$10.4 billion. In other words, the marginal burden on labour would be 4.5 times
the additional revenue generated by the CIT increase.
And will you look at that! In an open economy the burden upon the workers of the tax is several times larger than the actual amount of tax raised!
Ritchie is still wrong!
Doesn\’t that just blow to pieces his entire campaign to make corporations \”pay more tax\”?
And do note, that first paper, Diamond and Mirrlees: that\’s by two Nobel Laureates, that is. Not by a retired accountant from Wandsworth.
Oh, and one of the main findings of this paper is that such a Robin Hood Tax or FTT would not reduce price volatility. Indeed, it would almost certainly raise it.
So, think back to Timmy\’s all along critique of an FTT or the Robin Hood Tax. It wouldn\’t be the banks that pay it, it would be consumers, and the burden paid by consumers could be higher than the amount raised in the tax.
And here we have a paper which agrees with Timmy, not Ritchie. With the added joy that is tells Ritchie he\’s made \”the common error of confusing who would actually pay the tax with the issue of where the incidence of tax would lie.\”
This is the academic equivalent of stating that our retired accountant from Wandsworth is a poopy pants.
And it\’s out and out lefties writing the report.
What joy, eh?