Thursday 18 August 2011

My Tupp'orth On The Tobin Tax

I'd agree with the prevailing view that the Tobin Tax on financial transactions is a very bad idea indeed, and not just for the reasons given by the usual cheer leaders such as City AM, but because the results of such a tax are so wildly unpredictable. It's simply not clear whether the tax would actually raise any new net revenues (i.e. you have to deduct all the other taxes we would lose if financial activity moves abroad).

FWIW, my opinion on the City of London is much the same as my opinion on British pirates of old - as long as they are plundering foreigners and bringing the spoils back home, that's all good stuff, but what they seem to have spent the last ten or fifteen years doing is bleeding the UK dry, but hey, I digress. And of course, Merkel and Sarkozy are fighting a desperate rearguard action to 'save the Eurozone' (for reasons which escape me) and couldn't care less about the City of London or UK tax revenues, if they seriously imagine that they can trick the City of London into bailing out the Eurozone, then they are seriously deluded. According to this fag packet (via Tim Worstall), UK-based banks would end up paying about three-quarters of all revenues. Yeah right.

Then again, it's safe to assume that while the Eurozone itself might have been dreamed up by Eurocrats, the likes of Goldman Sachs were goading them along, because something that artificial is going to require constant tinkering to keep it spluttering along, and Goldman Sachs are the only people who can provide that specialised kind of tinkering in return for billions and billions of dollars in 'advisory fees' and all the money they can make taking and placing bets on the inevitable wild fluctuations where they have inside knowledge.

So quite who is robbing from whom here is unclear, to say the least.

Nonetheless, we know that a tax on transactions is the worst kind of tax, and this goes for a Tobin Tax as much as any other transaction tax. The whole idea behind free-market capitalism is that people specialise a bit and trade with other people, and each of these trades generates a small producer/consumer surplus and signals information to others as to where to direct their efforts or how best to spend their money and so on.

The effort that goes into making all these little trades then cascades 'downstream' to generate profits and ultimately rents. It's easier and more reliable collecting water (tax) from the river (the profits or rents) just before it flows into the sea that it is to try and collect it from lots of little streams (individual transactions).

To give some examples:

Air Passenger Duty is the worst kind of tax on air travel; a per plane tax would be better; but best of all would be for the government to auction off landing slots at airports.

VAT on mobile phone bills is the worst kind of tax on telecomm companies; corporation tax isn't quite so bad because it's levied on the net result of a vast number of individual decisions; and best of all was raising money by auctioning off the 3G licences.

Stamp Duty and Capital Gains Tax on buying and selling shares are worse than income tax on dividends; but this in turn can be avoided by the company by simply not declaring dividends; so even less bad is corporation tax on the profits.

Stamp Duty Land Tax and Capital Gains Tax on buying and selling land and buildings are the worst way of taxing land rental values (they discourage efficient allocation); Council Tax is OK; and Business Rates is even better (but could be improved if the rental value of the buildings were exempted and only the site value taxed).

So, if you want to get more tax money out of banks, a Tobin Tax on financial transactions is the worst kind of tax. Banks will simply route a lot of their transactions abroad and/or put up the charges for customers a bit. It won't raise much money and it won't be the banks who bear the cost. Corporation tax on underlying profits is sort of OK, even though the whole aim of the UK government is to reduces taxes on banks and increase them on everybody else.

The best kind of tax on banks must be a bank asset tax, which we already have in the UK, albeit at a very modest rate of 0.05%.

For sure, if you tax something that's not in fixed supply (like land) you'll get less of it, but that's a good thing in this context - we wouldn't have had a credit bubble, and to the extent that banks really do have surplus deposits, they'd have lent them to businesses rather than using them to try and drive up house prices.

Remember also that loans create deposits and not the other way round, and the house price bubble got going at a time when banks were lending out on wafer thin margins, or even at a loss to try and 'grab market share'. That's exactly the sort of lending that wouldn't take place if the rate of the bank asset tax were increased to a proper figure, like 1% or 2% per annum - banks would have to stick to higher margin lending like lending to businesses or indeed on credit cards, both of which are much better for the economy.

19 comments:

Antisthenes said...

The Tobin tax was tried by Sweden and was an unmitigated disaster. It failed to raise the expected revenue by 4/5ths and sent financial transactions off shore. They dropped it after 5 years. So if it is introduced in the UK expect 4/5ths of the one million workers in finance to lose their jobs and the flight of the financial sector to more benign financial regimes. For France and Germany it will be a victory as they will get their revenge as it will destroy London as a financial center having long been a source of envy for them.

Robin Smith said...

Agreed. It would stop transactions. And they Would start charging more per transaction or charge for deposits etc instead. But this is what its supporters want.

Its a silly protectionist tariff just like vat

The simple question to ask supporters is 'who is collecting the rent now and who will be collecting it after?'

Trouble is the blinding obvious is non sequitur to them because most who support it seek rent themselves. Hypocrites.

Mark Wadsworth said...

Anti: "For France and Germany it will be a victory as they will get their revenge as it will destroy London as a financial center"

Yes of course, this is the point which City AM and other financial service cheer leaders keep making, and it is a very valid point.

RS: "who is collecting the rent now and who will be collecting it after?"

As Anti points out, all that France & Germany care about is that the City of London doesn't get it. The fact that Switzerland or New York will get it instead is of no concern to them.

Lola said...

"Remember also that loans create deposits and not the other way round" Remind me how?

Lola said...

...but what they seem to have spent the last ten or fifteen years doing is bleeding the UK dry...

Yes, but. Your next paragraph explains why this was - because they were encouraged to do so by governments and a regulatory structure specifically set up to enforce the practice. If you corporatise something and guarantee it special priviliges the participants will act rationally and take the bunce. See also unemployment and unemployment benefits.

Mark Wadsworth said...

L, see items 6 to 9 here.

This is quite true and observable in practice. I sold my house for rather more than I paid for it, was given a cheque, which I promptly deposited back into the banking system. If my buyer hadn't been prepared to take out that huge mortgage, I wouldn't have been able to make the huge deposit, would I?

Deniro said...

Loans Create deposits.

I do follow your logic. Interestingly if a bank repeats this process untill its loan book is the max its reserve policy allows (bassel one tenth ) then it has created 10 X what it has in reserve (unloaned out / liquid deposit) which was the myth you set out to disprove. Interesting.


Tobin Tax


Once implace would they want to vary it for different investments, like a 1980s soviet central command economy.

Mark Wadsworth said...

Den, you have to be very careful with the one-to-ten ratio. See items 3 and 4 of previous link.

i) In Ye Olden Tymes (textbook FRB), this meant that the goldsmith had to keep physical gold (assets)worth one tenth of his liabilities (deposits) in the safe. So he always has physical gold to repay depositors.

ii) In the shiny new Basel world, it means that share capital (non-repayable liability) has to be one-tenth of total assets. So a fall in the value of assets of up to one-tenth only hits shareholders.

So i) and ii) are a mirror image of each other (but come to much the same thing in practice).

Antisthenes said...

@MW

Correct me if I am wrong here. As I see it share capital will have been long gone and been replaced by a different asset probably government bonds. So if those assets fall in value it will still be the depositors who suffer not the shareholders?

Mark Wadsworth said...

Anti, I can't possibly answer that question because it doesn't make sense.

Remember, a bank has assets and liabilities.

Assets are money it has lent to people, buildings, computers, government bonds and coins and notes in the safe.

Liabilities are deposits, bonds it has issued (repayable) and share capital/retained profits (non-repayable).

The share capital/retained profits is merely a balancing figure of assets minus repayable liabilities. It is not anything in and of itself. If the value of assets falls far enough, share capital is worth £nothing.

James Higham said...

I don't think Merkel is serious about this. I think her handlers have other plans. DDUA.

Lola said...

MW 11.21. Ah yes. I forgot you were talking about the real world, as opposed to the really real world where loans could only be made on the basis of real savings....

Which brings us back to the problems of FRB and why a bank assets tax would be a Good Thing.

Mark Wadsworth said...

JH, me neither, but "the markets" seem a tad worried.

L, UK banking sector pays about £60 billion a year in corp tax, PAYE and so on, allegedly.

My cunning plan is to scrap PAYE and corp tax, but these jokers aren't going to get off scot free, so they will be liable to a 2% or 3% bank assets tax, which would bring in maybe £30 billion or £40 billion and dampen the worst excesses. As luck would have it, the revenue-maximising rate is probably also the damage-minimising rate and hence benefit-maximising rate.

DNAse said...

Re: Loans/deposits I reckon Steve Keen has a good analysis of this.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

Re: Tobin tax. Are we talking eurozone or EU with no opt out for the UK? Or is it simply a question that much of the city's business is with the eurozone?

Derek said...

Yep, DNAse. You're right. Steve Keen is the Main Man on this sort of thing. Definitely worth checking out that link.

Slightly off-topic but I've been following his current undergrad lectures on "debunking" various mainstream economic ideas which he has been recording and putting online via his blog. Very interesting stuff. The lectures demonstrate BIG holes in the foundations of neoclassical microeconomics. Doesn't affect Ricardian analysis though...

Mark Wadsworth said...

DNA, Steve Keen is all right, but as far as banking and ventral banking goes, the Modern Monetary Theory chaps boil it all down to something even simpler. Their starting point is "most of what they tell you is lies" which is a good starting point.

DNAse said...

Derek, likewise. He really doesn't like neo-classical economics! I don't take it all as wrote but his recent supply/demand analysis was a real eye-opener.

Bayard said...

"ventral banking"

Is that where the greedy bastards scoff the lot?

Anonymous said...

Thanks for the discussion above chaps. Yep, I have Keen's updated book on order for September.

MikeW