Ritchie on the Tobin Tax

The joy of this is that he just doesn\’t realise where he\’s cocked up.

The second is that, despite the arguments presented by many economists that these taxes will simply be passed on to consumers, they will in fact very largely be paid by the banks themselves.

So all the economists are wrong about the incidence and Ritchie is right. So far so normal.

Most especially that is because much of their cost will be borne by bankers of whom there will be many fewer with many of those remaining being paid less than now.

Eh? So the incidence won\’t be on the banks, it will be on the workers?

And even better, the incidence will be on the banks because the incidence will be upon the workers?

Sirious? Rilly?

It\’s the usual damn ignorance of what the economists are talking about. Tax incidence can be on, in theory, the company, the consumers, the workers or the shareholders. We eliminate the company because a tax means that someone\’s, some live human being\’s pocket, is lightened by a tax.

We are thus left with incidence being upon the workers, the consumers or the shareholders. Ritchie is now insisting that because incidence is on the workers that means that it\’s the banks paying it.

Note also how he\’s twisted himself here. When I say something like \”the incidence of corporation tax is mainly on the workers in the form of lower wages\” he insists that it cannot be. But now, because it\’s convenient to his argument, a tax upon financial transactions falls mainly upon the workers.

BTW, has anyone actually seen any evidence of this? Other than Ritchie\’s musings?


36 thoughts on “Ritchie on the Tobin Tax”

  1. I suspect that, given that the significant reduction in volume of trading that is one of the few aims of the Tobin Tax that would be likely to be successfully achieved (some will move out of Tobin jurisdictions but much will evaporate) that a number of bankers would be out of work. There being less work to do and the computers often being better at it than the bankers.

    It all depends how you define “bank”, doesn’t it?

    If “bank” = “evil capitalist scum exploiting downtrodden workers” = enemy & bankers = enemy. Therefore “bankers” = “bank”, for some sense of moral and economic confusion.

    Add in his habitual taxonomic infelicities (or distortion – I’ve haven’t worked out whether he is a machiavellian amoral spin-meister or merely utterly deluded) and you can see where his inconsistencies lead to confusion.

  2. I am a little confused, and I think Ritchie is too, as to precisely what he is trying to achieve. Is he trying to take the money out of the banks’ corporate profits, or is he trying to stop it getting paid to bank workers as large salaries and bonuses? He doesn’t seem to know.

  3. Ah. So surely then he’s accepting that tax incidence falls on the workers as well as on the corporate profits. In which case, how does he feel about taxing all these other businesses he wants to tax? Isn’t he claiming with those it will only fall on the fat cat capitalists, and not the employees?

  4. So surely then …

    You are making a wholly unwarranted assumption about self-consistency in the babblings of retired accountants.

  5. like most people, he does not distinguish between bankers and banks.

    if this tax did translate into lower salaries for grotesquely highly paid bankers, I’d be all for it. That form of incidence upon “workers” is A OK.

  6. Ian B

    no, I said if the incidence of an FTT turned out to be born solely by very highly paid bankers being paid somewhat less, I’d support it.

    Regrettably, I doubt that is the case. It would be very nice to have a means of raising tax revenues that only hurts very highly paid bankers. This is how the FTT is being sold. See most recent Tim Hartford column on topic.

  7. Luis Enrique. Even if it were the case that the tax fell on highly paid bankers it would still be indefensible, a tax aimed at one group of people because we don’t like them is an instrument of oppression. They used to do that to the Jews once.

  8. Thornavis,

    in the land of the sane, taxes are evaluated by considering their incidence and efficiency costs. A tax that raised money solely by reducing the salaries of very highly paid bankers would be preferred to other taxes which impinge upon the less well paid.

    a Nazi reference! nice

    (Implicitly, I don’t think taxing bankers would have serious efficiency costs either)

  9. So, now we’ve decided we want bankers to pay higher taxes, what part of their economic behaviour are we trying to reduce? Do we want them to consume less, or save less?

    Is it right to only look one level deep at tax incidence?

  10. Ian B,

    no, you’d also have to consider whether reducing the income of very highly paid bankers would reduce the supply of something valuable from the economy. i.e. the efficiency cost.

    [I’d argue it would not – both because I don’t think the quantity and quality of banking supplied by the economy would fall, and also because I think much of the financial sector consists of a giant rent extraction machine, and a generator of monopoly profits. I’m not going to attempt to justify those claims here].

  11. Silly! Bankers aren’t “workers”, they just work hard. Except the imaginary ones, who sit smoking cigars in their club all day.

  12. Luis, I agree that much of the financial sector are earning rents. That’s what you get with nationalised money. Nonetheless, rentiers then do something with the rents they collect; they consume or they save. So which of them do we want them doing less of?

  13. Ian B

    everybody does something with their income, so it’s not whether we want bankers to consumer or save less in isolation, its whether we want bankers or somebody else to consume or save less, for a given quantity of tax revenue gathered.

  14. Luis Enrique. It wasn’t a Nazi reference, Jews were subjected to punitive taxation by many states, including the Romans. You described bankers as grotesquely highly paid which implies a moral dimension to the tax aside from any concern about avoiding taxing poorer groups and that’s what I was objecting to.

  15. That’s the point Luis. It doesn’t matter where you tax the economy, the incidence is going to end up the same. This is why for instance the post-keynesian nonsense about people with a “high propensity to consume” is, er, nonsense. What about the next spending round? The stimulus is back in the general pool of money.

    What matters is productivity. Rent seekers harm the economy because they are being paid for not producing. If you object to their rent, prevent them collecting it. If you let them collect it, then tax it, you hand it to the government, who will then use it to hire more people who do not produce.[1] The net result is that you’ve now gone from the economy supporting one unproductive banker to supporting one unproductive banker and one unproductive ‘crat or stimulus recipient. The unproductive proportion of the economy has grown at the expense of productive workers who did not receive the rentier’s consumption in the next spending round.

    So, bad idea taxing them. Doesn’t solve the rent problem. Worsens it.

    [1] Many government workers are productive, e.g. doctors and nurses. But the more money you give the government, the more people it will hire who are unproductive, particularly during a recession when they hire people just to “give them a job”.

  16. Ian B,

    first, you are flat out wrong about this “It doesn’t matter where you tax the economy, the incidence is going to end up the same” – different taxes impact different people in different ways.

    second, I think you are talking about whether it’s a good idea to raise more tax revenue or not; I was talking about if you want to raise tax revenues, where’s the best place to raise it from.

  17. Thornavis

    if you anybody is going to read the words: “They used to do that to the Jews once” and not take that as a Nazi reference, you are an imbecile.

  18. ” EU politicians plot to block UK ‘Tobin tax’ veto”

    A group of European politicians is plotting to impose the financial transaction tax (FTT) in a way that Britain would be powerless to veto, a British MEP has warned.

  19. Luis, I’m talking about the fact that a quite different picture emerges if you move beyond “first order” tax incidence. A major part of the argument for a tobin tax is that the bankers are a free lunch for the taxman. They aren’t. Nobody is.

  20. Unimportant Quibbler

    Luis Enrique: for persecution of the Jews, yes, that’s a standard Nazi reference. For special taxation – no. It’s not even a veiled Nazi reference, although I can understand that it might sound like one if you’re not familiar with Jewish history.

    Look on the bright side: on this glorious blog, you were engaging in discussion with people who aren’t treating you as ignorant, and assumed you would know about the economic history of the Jews in Europe. Y’know, cos everyone knows that stuff.

    Of course in reality not everybody got to study it at school or fitting it into their General Knowledge Banks later. But special taxation status for the Jews has been about for a long time: my schoolboy knowledge (we studied it in Classics) was that the Romans imposed the repressive Fiscus Judaicus after the Roman-Jewish War known to Jews as the “Great Revolt”, and many countries continued to collect such taxes through medieval times and into the early modern era.

    Have a read of http://en.wikipedia.org/wiki/Taxation_of_the_Jews – it’s genuinely interesting (if depressing) stuff.

  21. Unimportant Quibbler

    By the way, the discussion between Ian B, Thornavis and Luis is also really interesting stuff on both the economic and moral fronts, particularly when you’re not talking past each other. Do keep going chaps!

  22. Luis, I assumed it was a medieval reference.

    If the Nazis did use the tax system to oppress Jews (rather than confiscation under the threat of concentration camps and gas chambers, which isn’t a tax) then I haven’t heard of it.

    There was a “flight tax” on the capital of people who fled the country (something else that Murphy wants, I think), but although many of the people fleeing were of course Jewish, that wan’t a specifically a tax on Jews.

  23. Luis Enrique. I may be an imbecile but I don’t think anyone who wasn’t ultra touchy would necessarily think that a reference to taxing the Jews in the context of taxing bankers was primarily a Nazi one. It was historical, Jews were seen as socially damaging in a similar way to bankers and singled out for punitive taxation. I wasn’t implying anti-semitism on your part if that’s what you were thinking but pointing out that the sort of people who like punitive taxation often pick on minorities as easy targets. Actually I did briefly consider a note to the effect that I wasn’t invoking Godwin’s law but decided it wasn’t necessary, obviously I was wrong.

  24. blimey, I stand corrected re: taxing Jews. Thanks for the link, Quibbler.

    Ian B, sorry if I misunderstood you. If by looking past first-order incidence (crudely, who pays) you mean thinking about what the tax does to the economy more generally, that’s what I meant by efficiency arguments.

    I think a tax that did just impinge upon banker bonuses wouldn’t do much harm efficiency wise.

    It is true that all taxes leave less money for other things. Taxes are the way of paying for government. If everybody spent more money on hamburgers, you’d expect the non-hamburger economy to shrink and the hamburger sector to grow. If you spend more money on government, you have less money left over for not-government stuff. So you are right, no tax is a free lunch in the sense that every tax is taking some money “out” of the private sector economy, but I find that way of thinking confusing … for example, spending on hamburgers definitely reduces the amount of money left over for non-hamburgers, but spending on hamburgers turns into wages and income for farmers etc. that circulates and is spent on non-hamburgers, and the same is true of taxes, that turns into wages and income for paper clip manufacturers, which is then spent in the private sector. Once you start thinking about using debt to pay for government or hamburgers, it gets even more confusing. Money circulates, and personally I find thinking about taking money “out” of this or that sector confusing. I find it easier to think about real economic activity, how large the pie is, and how the pie is split between private and state sectors. I’d expect higher taxes to grow the state slice and shrink the private, but even that isn’t certain (govt spending could complement private). It is certainly not true that more government shrinks the total pie.

    absolute the best thing to read on this – the relationship between the state and the economy – recommended very highly – is this book by big shot economists Besley and Perrson


    these slides, a non-technical summary of the book, are really worth a quick look at


  25. Richard. Thanks for that, at least someone understood my intention. I don’t suppose Luis Enrique will believe me but I wasn’t thinking of the Nazi’s at all, their persecution of the Jews was of a wholly different order.

  26. yes I should say sorry to you too Thornavis, I had no idea about taxing Jews thing. Imbecile myself.

  27. Unimportant Quibbler. Sorry cross posting central at the moment, I’ve repeated your, better made, points. I don’t think I will keep it going as I seem to have a knack for unintentional stirring up of hornets nests, I shall retire to the garden instead.

  28. Unimportant Quibbler

    Luis: “Once you start thinking about using debt to pay for government or hamburgers, it gets even more confusing. Money circulates, and personally I find thinking about taking money “out” of this or that sector confusing. I find it easier to think about real economic activity, how large the pie is, and how the pie is split between private and state sectors.”

    This is one of those things I find hardest to visualise about economic models.

    For one thing, to what extent is the velocity of money actually a factor in the size of the pie?

    For another, what happens if we put money to one side, and just consider it a useful system by which “productiveness” (goods produced, services rendered) can be bartered in a more sophisticated way than non-monetary societies could? That’s essentially what people mean when they say they’re “focusing on the real economy”.

    In Luis’ example, we can zoom in on a rise in hamburger production. Whether it’s mandated by an accidentally-placed large order from MacBurgers Ltd (the kind of sticky fingers that City traders seem to get from time to time), a rational response to increased demand, or by force of government order, such a rise necessitates scarce resources (ingredients, labour, energy, timeslots available in industrial ovens) to be devoted to hamburgers that [c/w?/sh??*]ould otherwise have been expended on the production of other things. So in some sense a bigger “pie” in the hamburger industry, less elsewhere. But to decide how much bigger, we need some way of comparing the value of two different baskets of goods and services. I’m guessing Marxists might opt for units of labour, and greenies ultimately for energy, but it seems to me we’re ultimately back to the question of “money” again, in its guise as a measure (unit of account).

    Besides which, money has some features that barter doesn’t (makes it much easier to store value and hence opens up options in borrowing/saving) so “just look at the real economy, ignore the money” risks us failing to understand what actions the actors will take. For instance, the food factory owners might like to take out a loan to install new ovens to cope with their new, hamburger-fuelled rise in throughput. That’s a decision with tangible, physical consequences in the “real economy” but whether it will happen or not depends on the very financial factors we’ve been desperately trying to ignore.

    Now, I feel uncomfortable when I hear people talking about things like “putting money into” some part of the economy (lefties waffling about austerity “taking money out of the economy” spring to mind) but I can’t see a way out of having to ponder flows of money, mindboggling and paper-shuffly as they might appear.

    * could- for sure, hamburgers are not the only burger; would?- probably but it’d be interesting to know what factors lie behind whether the resources would really have been used in some other way, or whether they’d just have sat unused; should?? – well, what “should” be produced, and moreover who has the right to decide, is and always has been The Big Question – so no answers expected on a postcard.

  29. UQ

    I share your confusion. I supposed the first thing is to stop trying to trace the path of individual pound notes (where velocity would certainly be an issue) and think clearly about total flows of money within a specified unit of time. Say, annually. So individuals receive flows in (income) and flows out (spending, saving) and receive goods in and assets owned.

    If you increase a tax, that is going to reduce flows in for some people (the taxed) and increase flows in for others (the exchequer) and second round reduce flows in for some other people (hamburger vendors?). Here too trying to keep pace of it all is confusing (lower handburger sales mean lower taxes on hamburger profits) but even if you cannot track all the knock-on effects in your minds eye, you know that at the end of it all, the flows in, and flows out, by various economic agents, within a time period, will have changed.

    I think lefties are right to think about austerity has taking money “out” of the economy … the government cuts, and various actors (workers, contracting firms etc.) see their flows in cut, and there is no offsetting reduction in taxes either (they are up) and there are second round effects, and the net effect of it all may well be an all-round reduction (relative to the counterfactual) – maybe one in which the deficit is smaller, maybe not

  30. Dear, oh dear. Major discussion on a completely undefined premise. Define “banker”, please.

    The vast majority of people who work for banks – bank clerks, credit controllers and the like – are not highly paid and are simply doing “an honest day’s work for an honest day’s pay”. They get annual bonuses. Any loss of profits caused by FTT would be likely to filter through into lower bonuses and possibly lower wage levels for those people. So would exceptional taxation aimed at recipients of exorbitant bank bonuses. There’s always collateral damage, however carefully crafted the tax. Think before you tax…..

  31. The vast majority of people who work for banks are not highly paid and are simply doing “an honest day’s work for an honest day’s pay”

    And are much less likely than the casino bankers to be able to point to a series of profitable deals and say “Look, that was me, bonus please or I jump.”

  32. Sorry, I made a bit of a mistake in there. Investment bankers have never been known to say “please” unless in front of clients. Or “thank you”, either.

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