@richardjmurphy on the Worstall report into the FTT

Obviously, clearly, Ritchie wasn\’t going to like it. But I do think he could have tried a bit harder in being coherent as he spluttered his way through a rejection of it.

Second, Worstall argues that the tax will not raise revenue. This argument is wholly premised on the claim he makes that the proposed EU charge will be levied at 0.1%.

No, it isn\’t.

Worstall never mentions the lower rate in his report. He entirely ignores the fact that most of the tax will be charged at a rate one tenth of that he uses for the purposes of his analysis. This is like considering the impact of having an income tax at a rate of 20% and using a rate of 200% for the purposes of the analysis. Unsurprisingly you would get a result from such an analysis somewhat bigger than most other commentators would predict. To put it another way, you’d just be wrong, as Worstall so very obviously is in this report by making such an elementary error.

No, my entire premise is the report by the EU Commission into the effects of an FTT of the type and at the rate that the EU Commission itself is proposing.

In fact, I am not even pretending to have done an analysis: I state specifically that I\’m quoting the EU Commission. So don\’t play the raw prawn with some perceived error in my calculation method: there isn\’t one. Not no error, no calculation method. I am directly quoting from the EU Commission\’s official report so take it up with them boyo.

Third Worstall assume that marginal rates of tax in Europe are between 40% and 50%. That’s not true. Average overall rates in Europe are less than 40% based on research I will publish very soon and since most tax systems are regressive at the higher end where the impact of this tax is likely to be rates should be lower than he forecasts. That’s lazy on his part.

No, I do not. I assume, and state that I assume, that 40-50% of any change in GDP becomes a change in tax revenues. If GDP rises by 1% then tax revenues rise by 0.4 to 0.5% of GDP, falls ditto. This isn\’t actually all that difficult a concept, some dingbat who wrote a report for PCS used the same assumption:

A lack of tax revenue did not cause the current financial crisis. The lack of tax revenue caused by the
current financial crisis is, however, the problem facing any future government of the UK. This can
easily be demonstrated. Budgeted UK government tax revenue and spending from 2002 to 2009 is
shown in Figure 1.

What is clear is that the current crisis in government financing is not a spending related issue: it is a
revenue related issue. It is the collapse in income that has created the problems facing society.

A fall in GDP reduces tax revenues. If a retired accountant from Wandsworth is allowed to use the assumption I\’m sure that a pedantic former UKIP press officer is allowed to do so.

Or if we want to get all formal, we could call it the:

The tax revenue elasticity — defined as the percentage change in tax revenues due to a percentage
change in GDP

Useful concept and one quite well known in neo-classical economics:  one well known in The Treasury too.

As is his claim that the tax could not happen because it is illegal in the EU. Well of course it is: there is no law that permits it right now so the law will have to be changed if we want a financial transaction tax. That’s that objection overcome.

No, I do not say that an FTT would be illegal. What I actually say is, having quoted the EU\’s own legal opinion on the subject:

An FTT on FX in the EU would be illegal and it is doubtful that anyone wants to go through the process of revising the basic treaty to change this. It is worth noting that the EU’s later and most recent proposal for an FTT specifically excludes the possibility of an FTT on spot FX trades.

Indeed, if his own argument that corporations can’t ever pay tax is right (with which I do not agree, for reasons noted, below) but about which he is adamant then by simply using the same incidence argument the entire benefit of this tax when collected cannot be for the benefit of any government as he argues but is instead passed on to people – an argument people like Worstall always ignore when discussing incidence. He gives no consideration to the benefit that they might derive as a result, or the dynamic consequence of it, for example on new investment, spending, resources for regions, the reduction of burden on indebted governments so they can provide essential services, and so on. It’s just all a cost according to Worstall, meaning his analysis is totally distorted. But he can’t make such a one-sided argument. If redistribution increases resources available to those who really need them in society, especially at a time when those with wealth are saving and so increasing the impact of the recession through the paradox of thrift, then his argument fails miserably. I contend it does.

Yes, very good. Delighted to talk about the incidence of public spending any time you like. That isn\’t what is under discussion here, which is the incidence of the taxation required to fund said spending.

As incidentally do his own arguments on incidence. He can’t both argue that corporations if charged to this tax will relocate transactions to avoid it and at the same time say that the incidence is never on corporations, as he does. Firstly, if the incidence is never on corporations they would take no action to avoid the tax.

I don\’t actually say that corporations would relocate. In fact I\’m pretty certain that they won\’t: I am certain that the activities which currently take place within one corporate veil will relocate, most probably now under some other corporate veil. Say, from GreedyBankers Ltd to GreedyBankers Pty.

So the truth is vastly more complicated than he suggests and the mainly very old papers (1970s and 1980s) that he quotes in favour of his argument may have been selected for exactly the same reason.

Oh, clap, clap, clap, that\’s very good indeed. Using old evidence is being selective now is it? Not that some questions actually get answered and so we stop asking them? This from the man who insists that the entire economy should be run on the back of a book published in 1936?

I’ve addressed this issue many times before, and the extraordinary and I think near fraudulent evidence some supposed economists put forward to argue that it is always labour that pays the price of any tax but let me summarise my reasoning again.

I do not say, I have not said and would not say that labour always pays the price of any tax. I do say that human beings do, but that\’s rather different. It\’s possible for them to bear the burden of a tax as owners of capital, as labour selling their labour or even as consumers upon their consumption. Tax incidence is the study of who and how for which tax in what circumstances.

Perhaps Ritchie doesn\’t get the point because he\’s so grievously misunderstood the point in the first place?

Second, as I have argued, there is good reason to think in the case of financial transaction taxes that this incidence may indeed fall on labour – but not generic labour as Worstall argues, but the very particular labour of bankers who will suffer a loss of bonuses and maybe employment as a result.

No, go back to the EU Commission\’s own report. If GDP falls a a result of the tax then that is a reduction in the consumption possibilities of all.

I do agree that you have argued that way: but you do have to check your theorising against reality occasionally. As the EU did and you haven\’t.

Third, if banks were split, as I and many others suggest, the chance that dealing on own account (which explains a substantial part of the transactions that will give rise to a financial transaction tax being paid) will not be capable of being passed on to ordinary customers in the way Worstall manages, constraining these transactions within investment banks in the main and therefore meaning most of the incidence will remain within the quite limited sphere of activity that these banks will influence, including their shareholders.

I make very clear the point that these taxes are not being \”passed on\”. It just isn\’t tryingto make the oiks pay what goverment rightly thinks bankers should. It is that behaviour changes so that other things change in hte economy and this impacts people in ways that the original proposers of the tax might not like. As in, for example, making capital more expensive for companies, leading to lower usage of capital by companies and thus lower wages for all.

Next, to assume that the liquidity that financial markets often suggest exists is a good thing is a wholly mistaken assumption on Worstall’s part. If there was less liquidity in these markets there would, very obviously, be much less volatility than we are witnessing at present,

No, that\’s the thing you have to prove, not simply assert. And I even quote a good paper which rounds up the various opinions on both sides of this point: a paper which concludes that lowering liqudity would increase volatility.

As important, this liquidity is illusory: when the markets really needed liquidity in 2008 it famously dried up, almost completely.

Indeed it did and we pumped hundreds of billions of £ into the system to deal with that lack of liqudity. Rather showing that liquidity is something of a good thing to have really.

The cost of capital may or may not increase as a result but the quality of return to investors will undoubtedly rise as a consequence, and that is what matters.

What on earth does \”quality of return\” mean? Something to do with a brand of chocolates perhaps?

And this too is a characteristic of the failure of another Worstall’s assumptions – which is that any fall in GDP must be a bad thing. I do suspect and even hope that an FTT will reduce GDP in the short term. I have every wish that the not just useless but also harmful activities of many involved in anti-social gambling at public expense be eliminated. Reducing GDP for this reason would be as welcome as a fall in GDP resulting from the ending of pollution or the ending of divorce – both of which add to misery and GDP at the same time.

But neither the EU nor I are arguing that we are measuring the fall in GDP that is a shrinking of the banking sector. We are looking purely at the higher cost of capital for companies and then looking at the effects that has on investment (you know, in those real businesses etc) and thus GDP.

We then get the Murph\’s insistence that the financial sector can squeeze out other activities. I\’m sure it can too: but we then get that gloriously characteristic leap of faith, from in theory this can happen to I insist this is already happening and thus must be stopped. Without any of the empirical evidence gathering necessary to make that leap:

This logic is similar to that of the supposed ‘squeezing out’ of the private sector by the state so beloved by the right wing, even if without apparent evidential support in that case whereas in this case the support for the claim that key resources (and most especially mathematically literate graduates) are denied to productive industry as a result of the destructive impact of banking is overwhelming.

People have spend decades of their lives studying that public sector crowding out. Putting numbers to it, running regressions and all that economicy, sciency, stuff that the Murph doesn\’t do. That finance crowds out is something you must prove, not simply surmise then assume.

So has Worstall made a case that FTT’s fail? No, not at all! Far from it in fact. What he has done is instead assembled a polemic, based on a mistaken assumption of the tax rate to be used and then, relying on just one quote from the EU has said, by applying inappropriate tax rates for the EU zone and assumptions on corporate behaviour for which there is no evidential support in the real world coupled with myths that because there is no law allowing an FTT at present they must be illegal, claimed that they therefore cannot work. And very amusingly he has then claimed that his resulting logic is unassailable.

With the very greatest of respect to Tim, that’s just not true at all. As I have shown, the whole edifice on which he mounts his argument is flawed, his choice of evidence is flawed, his data is wrong and the resulting claim is just a piece of wishful thinking no doubt designed to keep those who fund him and the Institute of Economic Affairs very happy. But that’s not the same as making an irrefutable case. That he has utterly failed to do – not least because of Worstall’s own refusal to consistently apply his own logic, which means, as I show here, that his resulting logic is so partial it is obviously wrong.

As you can see, I\’ve not done those things of which I am accused.

Financial Transaction Taxes are according to Tim Worstall feasible. On that we agree.


But most importantly, they’ll also work. On that we don’t agree,

No, we don\’t disagree there either. The disagreement is on what they\’ll work to do.

I say, quoting my sources and pointing to empirical evidence, that an FTT will reduce GDP, cost those who will ultimately pay it more than the revenues raised, increase volatility in the financial markets and that  one particular variant of it, on spot FX, would be illegal under the basic treaty forming the European Union.

These things are all still true….meaning that an FTT will work to do all sorts of things that we would rather desire do not happen.

So let\’s not have the tax, eh?


23 thoughts on “@richardjmurphy on the Worstall report into the FTT”

  1. Perhaps what he’s groping for is an argument that whilst the cost of capital for companies may rise, if FTT imposed, if you think higher taxes allow more public spending (fewer cuts, less depressed economy), help with the public finance crises, and perhaps deliver a more stable financial system doing less damage to the rest of the economy (a giant leap, I grant you), then viewed as a whole, corporations may actually benefit from the FTT and investment may even rise as corporations find themselves operating in a healthier EU economy, albeit with a higher cost of capital. I actually think there is a coherent argument to be made along those lines. If the EC report excludes that channel – just looks at higher cost of capital holding all else constant, and concludes investment will fall, then I think it’s going wrong.

    There is a parallel with tax rates and the informal sector – lots of analysis suggests higher taxes would mean a larger informal sector (to avoid taxes) but empirical results actually go in opposite direction, because higher taxes tend to have better governments, better run market economies and more reasons to be in the formal sector, so if you only look at half the story, you go wrong.

  2. Luis Enrique,
    Yes that might be true if one believed that taxes would rise post FTT. But since the consensus (including RM and TW) seems to be that GDP and taxes would fall with FTT, then the rest of the argument falls away.

  3. Gary,

    You’ve misunderstood me – if those predictions that GDP hence tax revenues would fall with FTT are based on analysis that only looks at the increased cost of capital and does not account for potential improvement to economic environment achieved by higher tax revenues, then those predictions could be wrong.

    Think about it as a dynamic problem. Say everybody agrees that in the first period, when FTT is imposed, tax revenues will rise (because investment has not yet responded to higher cost of capital – the prediction of lower GDP is something that will materialise over time) – the prediction that tax revenues will subsequently fall depends on what happens next, in t+1. If you just account for higher cost of capital, but don’t account for what those taxes raised in the first period buy you, your analysis is incomplete.

  4. LE,
    Fair enough. So in order to find an argument for RM, we first need to assume he is wrong about the tax bit. I can see where you are heading…

  5. “With the greatest of respect to Tim…” LOL!

    What respect is that, then? Haven’t seen any myself, nor any towards anyone critical of his views.

  6. The whole point of an FTT is for the unelected European Master-race to garner a huge slug of income to spend on their grand designs. They are thus so blinded to the prospect of unacccountable riches (appropriate for unaccountable bureaucrats) that they will deny all analysis that suggests it will not achieve the noble aims claimed for it. Tim is thus providing an important role in pointing out not only will it not actually raise much money but also it will have a myriad of unpleasant and (we trust) unintended consequences. You simply can not believe that you can extract literally billions in tax from th economy without having any impact on it. And , no, reducing speculation is not the only impact. It’s exactly like the AGW scam, politicians see an “easy” source of income for them to spend on their friends and lobbyists (and generally feel good about themselves) with no apparent downside. Except we cripple our own economy while Asia gets on with eating our lunch. Learn from mistakes anyone?

  7. It doesn’t matter that UK GDP and UK tax revenue will be reduced. It creates a nice little EU slush fund to be used however the U wants

  8. It’s very unfair of you Tim, using these strange and cruel concepts like “evidence” and “testing against reality”. It’s just not on.

  9. Indeed, Tim, you are so faithful in sticking to the figures in the Commission’s impact assessment you understate your case. They have modelled the effect on the economy of a 0.1% FTT on securities transactions. However the design of the tax means most transactions will be at 0.2% (because there will be two financial institution counterparties). And cascade effects mean in practice the tax could be an order of magnitude higher. The Commission’s own elasticities mean that these effects won’t increase the revenues the tax collects, but they will greatly increase the GDP hit (I believe HM Treasury reckons by 3-6 times).

  10. @Tax Research UK Spokesperson

    As with all left-wing proto fascist organizations, you believe in freedom of speech provided that it is the right kind. You can censor all of the comments you like on your own website, but here we do not.

    Comments closed?

    I don’t fucking think so matey!

  11. John Galt,
    I put the “Tax Research” comment up as a parody (Tim could probably verify if it matters).

    Just to save the real Tax Research the trouble you understand.

  12. Back to the topic in hand – There is so much wrong with Ritchies bullshit critique of the FTT argument that it’s difficult to know where to begin.

    It’s almost as if he has said “FTT’s are a good tool for bashing the bankers therefore I will retrofit my own reality to allow them to exist”.

    What the fuck is he smoking?

    Fact 1. The EU admits that the FTT will raise only small revenues unless it is implemented globally as companies will take avoiding activity.

    Fact 2. The EU admits that avoidance activity will move transactions out of the area covered by the FTT, thus reducing GDP.

    Fact 3. Empirical evidence shows that when GDP is reduced tax revenues are in turn reduced by a proportional amount.

    Any objective assessment of the FTT would reject it on the basis that the net result is a reduction in overall tax revenues due to the impact on GDP.

    Sweden has implemented this in the past and seen all of the effects described, this was why their FTT was repealed.

  13. 1. Prove it.
    2. If you’re such a “leftie”, why you adherence to extremist economic ideology that is a proven failure.
    3. Sirrsly
    4. Prove it.

    Murphy’s conjecture is based on human interactions. Like commenter Galt (ssssss) you are plainly wanking in a book.

  14. Arnald I propose a simple test to ‘prove’ whether one is a leftie:

    1) Do you say you want the UK to be more like Social Democratic countries such as Sweden/Norway/NL, etc?

    2) Do you understand what that involves in terms of tax (structure and rate) and policy (economic and welfare)?

    3) Are you prepared to enact those policies even if they attack the sacred cows of the british left?

    The bogus left – of which RM is a leading member – pass test 1). They fail tests 2) and 3).

    A ‘proper leftie’ passes all three tests. But it must be *all* three.

    And what about you Arnald? Do you really know whats involved to become a Social Democratic state like Sweden? Do you want that for us and are you prepared to follow it through to its logical conclusion?

    If history is any guide you will dissapear for a few weeks right about now…

  15. Mr Enrique writes: “higher taxes tend to have better governments, better run market economies and more reasons to be in the formal sector, so if you only look at half the story, you go wrong”.

    Unconvincing, without some sort of qualifier. The appallingly high taxes in say, Italy are often part and parcel of massive tax avoidance and corruption; ditto, the UK economy in the post-war period when “unearned income” (ie, capital gains etc) were almost totally confiscated.

    Yes I know that people mention Sweden but then again, even that country has had to change tack rather a lot since it underwent its own banking crisis of the 1990s.

  16. Jonathan Pearce,

    As I recall, the dataset that finding comes from is global, not just OECD. I don’t think this empirical regularity needs much qualifying. So what if Italy is an outlier?

  17. Arnald, Murphy uses all the psychological sophistication of a 5-year-old child to try to sell authoritarian bullshit. I’ll believe he knows anything about human interaction when he stops calling people autistic for disagreeing with him.

    As for the rest of your post, I can’t even work out who it’s aimed at.

  18. Luis,

    Is that because having a completely disfunctional government is heavily correlated (even causal) with not collecting any tax?

    Therefore, assuming no causal link between tax rates and good government, you would still show a statistically significant correlation over the whole plot? Even before you add in authoritarian regimes sustained by commodity revenues, therefore low tax.

  19. SE,

    but you have suggested a causal link between good government and tax rates – you have said bad governments have low effective tax rates.

    The point is that if you just look a one margin (how higher taxes make the informal sector look more attractive) you get the wrong prediction, because you need to look at the whole picture, however you want to paint it.

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