So I\’m asked to comment on the FTT

Dear Tim,

I would like to draw your attention to a debate on EU Financial Transactions Tax, which is currently starting on Debating Europe, a platform for discussion supported by the European Parliament.

Feel free to contribute your thoughts and/or share the following link amongst your network:
Best regards,

Alessandra Baldissin

So I do:

A Financial Transactions Tax, the Robin Hood Tax, apologies to those who haven\’t been thinking, but this is an entirely insane idea. No, really, flat out and clear lunacy.

There are all sorts of technical points that can be made, that one on currency trading would probably be illegal under current EU laws (it would interfere with the free movement of capital), that speculation itself reduces price volatility, not increases it, that passing tax revenues to the unelected has never proven historically sound, even the effects of those FTTs that do exist (the UK one on share transactions is known to reduce pensions and raise the cost of capital to companies, neither being desirable outcomes).

But the largest and most important point is that of \”tax incidence\”. If you don\’t know what this means then you\’re not competent to be taking part in this debate. But because I\’m a nice guy I\’ll explain it for any politicians or other ignorants who happen to pass by.

Who hands over the cheque for a tax is often not the person who is really carrying the economic burden of a tax. Studying who really does carry that economic burden is known as the study of tax incidence. Economists have been doing this for a long time: we\’ve known since 1899 (Seligman) that it absolutely is not a company which pays corporate taxation for example. For a company is only a legal fiction: a tax must, in the end, mean some lesser amount of money in the pocket of some live human being.

So, we\’ve known for over a century that whoever ends up paying the FTT it absolutely will not be the banks. Banks are, as you may have noticed, companies, and companies cannot and do not pay taxes.

So, everyone shouting that \”the banks must pay\” and that an FTT will make them pay is either deluded or ignorant. Or a politician, but I repeat myself.

So who will actually pay this tax, carry the economic burden? We\’re left with three possible groups: the shareholders in the banks, the workers in the banks or the consumers of the products of the banks. Rather than take you through all of the various arguments I\’ll just recommend that you read the various IMF, OECD and EU reports on this idea. All of them make exactly the same point. The people who will pay this tax will be the consumers of financial products.

That\’s you and me, that\’s us, the average man and woman in the street. The banks don\’t end up paying this tax, it\’s not even the bankers, it\’s us.

Two further technical points: Sir James Mirrlees (you know, Nobel Laureate, man who knows what he\’s talking about on tax) tells us that we should not use transactions taxes when there are other methods of achieving the same goals. This is because transactions taxes cascade through the economy and in doing so multiply. Joe Stiglitz (another NL, worth listening to on matters economic) has shown that the incidence of a tax can be higher than 100% (he was talking specifically about the corporate income tax but that\’s quite similar to this FTT). That is, that the amount that you and I have to pay is greater than the amount of money actually collected in tax revenue.

And yes, it\’s a trivially easy process to show that this is likely to be true of an FTT.

So, the Financial Transactions Tax. It\’s not banks who pay it, it\’s the citizenry. We will almost certainly end up paying more than the tax will actually raise. It\’s an absolutely terrible tax except for one unfortunate point.

The politicians will tell us that it\’s the banks being taxed and we\’ll often believe them even as they pick our own pockets for that money.

Bad economics and great politics. No wonder politicians love the idea.

Dunno if they\’ll publish it of course. Or whether it having been published it will stay so.

20 thoughts on “So I\’m asked to comment on the FTT”

  1. The strange thing about Tim’s argument is he’s complaining that the incidence won’t fall on the banks, but on the ordinary folks, which is true. Yet Tim consistently supports the bonkers nonsense of Pigovian taxation of “externalities” which, er, fall directly on ordinary folks in the same way.

    This is because transactions taxes cascade through the economy and in doing so multiply.

    This would also appear to be total cobblers, and I have a marvellous proof of that, but there isn’t room in this margin to write it down, sadly.

    (Generally, there are no multipliers, other than the trivial one caused by GDP having to be measured over some time period during which multiple transactional cycles will have occurred in the economy and which is inevitable in any statistic integrated over time).

    Tim adds: “The strange thing about Tim’s argument is he’s complaining that the incidence won’t fall on the banks, but on the ordinary folks, which is true. Yet Tim consistently supports the bonkers nonsense of Pigovian taxation of “externalities” which, er, fall directly on ordinary folks in the same way.”

    Yes, obviously and clearly. Because it’s the behaviour of the ordinary folks that we want to influence, to get them to use lower carbon methods of doing whatever, that we add the Pigou Tax. It’s doing exactly what we want it to then.

  2. But, er, you don’t want to influence bank customers, upon whose behalf the banks do Bad Things, then Tim?

    And who is this “we” of whom you speak?

  3. The Robin Hood Tax is also [resented as one that can raise lots of money for politicians to give to their friends without really hurting anybody. The reality is that the things it tries to tax – high frequency trading and FX will simply move out of its range and destroy the financial service industry where they do try and apply it, thus raising zero tax but losing lots of income and other tax. Even worse, the one thing that can not easily move – interbank lending – will become prohibitively expensive (try compounding up 0.05% overnight on your liquid balances for a year) with huge consequences for liquidity in the economy as a whole. So net result is kill liquidity, kill jobs and raise no money. Genius. This is all akin to the Mugabe tactic of printing moeny then blaming the white farmers for the economy’s problems.

  4. Ian B,

    I think the point that Tim is trying to make is that if we want to reduce some activity then it is correct to apply a pigou tax on that activity but if we do not want to reduce said activity then we do not want to impose said tax.

    Clearly the stated motive for a Co2 tax is to a) reduce the consumption of Co2 and b) make those who consume CO2 (or the products produced by the use of CO2) to bear the burden for externalitites that said consumption is supposedly. (One can discuss forever whether reducing the consumption of Co2 is desirable or not but that is another point.)

    The stated motive for the tobin-tax on financial transactions is not to reduce the number of financial transactions (on the contrary the claim is often that the number of financial transactions will remain the same but that volatility will somehow be reduced) but it instead to make sure that the evil speculators (whoever or whatever they are) as well as thebanks and the bankers handling the trading do not make excessive profits

  5. The thing that pisses me is touched on over there in the comments. That the RHT is only going to work if adopted world wide.
    If we’re stupid enough to let these arsewipes into the positions of power that lets them come up this sort of nonsense we’ve only ourselves to blame but what gives them the neck to compel other countries to force their citizens to pay unwanted & unnecessary taxes? And it will be compel if they get their way, won’t it? The big, spendthrift economies throwing their weight about.

  6. “But the largest and most important point is that of “tax incidence”. If you don’t know what this means then you’re not competent to be taking part in this debate.”

    I find your comment highly offensive and grossly wrong! Also you seem to have gone from that comment and jumped straight into advanced complex economic theory, can you not water it down a bit? Perhaps give some examples using apples and pears?

    Tim adds: Sure. We’ll have a tax on the production of cider. As you know, cider and perry are close substitutes. If you don’t, cider is booze made from apples, perry is booze made from pears. Both are drunk in pints, both are close substitutes for beer.

    Excellent. Now, who actually pays that tax on the production of cider? Who really loses money from their pockets?

    Hmm, cider has now gone up in price relative to perry. So, in the first look at it, we’ll say that it is producers of cider who pay the new tax. Because, you know, they’ve got to pay the new tax to produce cider. Then we’ll say that, well, costs for all cider producers have gone up. So the price of cider will rise. So consumers of cider will also pay part of the tax. Because they’ll get charged more to pay for the costs of the tax.

    But cider and perry are close substitutes. The average drinker doesn’t mind too much which they drink (hey, it’s booze!) so the new higher cider price will mean some people drink perry instead. If they don’t start making any more perry this will mean the price of perry rises as well. This is good for those who make perry, bad for those who drink it.

    Now, how much all of these things happens depends on “elasticity”. How many people will turn to perry as a result of the price rise in cider?

    But we can say that some of the people who pay this new tax on cider production will be the people who already drink perry. The incidence of the cider production tax is upon, in part, perry drinkers.

    Tax incidence explained as apples and pears. You asked, you got.

  7. @Clever:

    I find your comment highly offensive

    Indeed, however this is a blog which Tim runs with his own agenda (pro-libertarian), on his own time and with his own money (although some of contribute to beer and stakes occasionally).

    If you feel the right to be highly offended then this blog probably isn’t for you, although if you stick around you might learn something.

    But whatever you do, “Harden the fuck up!”

    You’ll need it for the difficult times ahead.

  8. I have no time for “learning” who needs to be informed when you are acting in favour of the greater good?

    In fact take a look around you, politicians, prime ministers , leaders , activists and heads of vitally important institutions, how many of these people actually have the relevant qualifications AND real world experience, competence proven with time and results…hmmm?

    No we do not need that, we have career politicians, talking monkeys who replace there lack of skill with easy to suck on ideas for a nation of suckers to suckle away and on the side lines we have self appointed activists who are also very very important people!

    When you spend your entire life telling others what to do, having it put to you that you don’t know enough is an insult…

    I guess ~ Thanks again for your work Tim.

  9. Ummm, clever, not sure where that came from. Most of us here would be rather happy for you to learn something new, it’s why I keep coming back anyway.

    JG’s point (and Andrew’s), is simply that taking offense at someone’s argument is not going to get us anywhere. I note you still haven’t explained *why* you think that comment was offensive and wrong. Tim’s point was merely that you really ought to understand how taxes work before setting up new ones.

  10. Im sorry for the confusion to be honest with you I was taking the piss, taking the piss out of every person I have spoken to who supports this tax, they have understood nothing about economics and even apples and pears go over there heads but then…the claim of “greater good” comes out and magically overshadows all else.

    “”The tax is justified,” he said. “Financial wealth, unequally distributed as it is, must be taxed. There is no risk, no risk at all, that such a tax would adversely affect the financing of the economy

    “It would be like saying 40 years ago that a tax on consumption would hurt consumption,” Jouyet added. “But today VAT remains one of the main forms of taxation. The tax on airline tickets generated the same fear but there have never been more global travelers than today. I’m extremely in favour of this tax. We have the means of imposing this tax.”

    And on and on this madness goes but will the French, so confident in the efficiency of this tax impose it, setting an example for the rest of the world to follow?

    No no no, we have many more months of hearing them trying to bully other nations into it before they would dare make it a reality in France, I am frankly sick of the mistruth and out right lies being used to get people on side for this tax, between this and the current handling of the issues in Europe, Europe is shaping up to be a financial slaughter house.

  11. I think Tim’s exasperation is that so many commenters, bloggers (especially those of a leftist stance) make grand pronouncements on economics when plainly they don’t understand what they’re talking about.

    Richie is the normal punching bag for this, but the best example was Gordon Brown. His arrogance, in not acknowledging his shortcomings in understanding economics, has led the country into the sorry state it is in now..

  12. Na a political system which allows totally uninformed unskilled people who can actually be compared to incompetent bloggers, the political system that allows people like this to get the most important jobs in the country is what has led to the sorry state we see now.

    You cant blame an individual politician because most of them are like it, its the entire system.

    In other news a gathering between Euro-zone ministers turned out to be as much of a waste of time as the rest of there time in office, Euro leaders have finally “understood” that there are problems despite being warned of there approach for over a decade, they are also faced with the dilemma of not being able to so easily steal everything directly out of the public’s purse, one said:

    We need to commit money to avoid bringing the system into difficulty …

    Another said:

    It was unlikely to be possible to push that onto taxpayers, and especially not if the burden is imposed mainly on the triple-A countries.

    Then whilst struck with a dazzling sense of inspiration one said:

    In these countries, there is a desire for a transaction tax because (people haven’t yet cracked on to how badly it screws them all over) a transaction tax would ( destroy) use the liquidity which is on the market for stability – you should trust us, we not only created we actually managed the Euro.

  13. Pingback: Protesilaos Stavrou on EU affairs » Blog Archive » Financial Transaction Tax: Bad economics – Cheap Politics

  14. Pingback: Protesilaos Stavrou on current issues » Blog Archive » Financial Transaction Tax: Bad economics – Cheap Politics

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