The right wing libertarian Lib Dem economist Giles Wilkes has responded to a blog here.
I’ll try to ignore the patronising bits and try to find arguments, such as:
I am utterly convinced that the 50bps stamp duty in the UK (a) falls on pensioners and (b) increases cost of capital for companies, for example. Abolishing it would improve welfare, and not introduce dangerous destabilizing speculation.
Only in saying that he depends upon an Institute for Fiscal Studies report that assumed that the efficient market hypothesis was valid — a somewhat big leap of faith these days — but to which he obviously subscribes.
And then I can’t ignore the patronising bits. He says:
So the point should be to move the debate over to where it is conducted along grown-up evidence based lines, as I think Lord Turner is capable of. Not everyone involved in this debate is so capable. So instead of:
“How much shall we take from Evil People to do Good Things, given that there are No Bad Consequences and that the people who disagree with me are clearly evil and corrupt or stupid?”
we move to:
“Transaction taxes can raise money and lower liquidity. At what level could they be set so that the liquidity lost is not harmful or if harmful is made up for by the money raised?”
Much more boring. Not sure it will attract the quantity of luvvies that the Robin Hood Tax campaign has
I’ve offered evidence based thinking. He’s ignored it — as if by pretending the counter argument does not exist he’ll win. But having used this ruse and abuse to further his cause as to the social worth of socially useless activity in the City (Lord Turner’s words — not mine) he goes on to say:
Incidentally it would also help if some of the people in the debate recognised that Corporations are not People. The tax on Corporates then fall on employees, shareholders, and so on. Read Tim’s post on this.
Intriguing that the unholy alliance between the Lib Dems and the far right marches ever onward, but he also ignores the fact that I have engaged extensively with Tim Worstall on this issue — using a degree of respect in that exchange which appears beyond Giles’ capability. But in doing so both Worstall and Giles did, again, miss the elephant in the room — and again, I am sure, quite deliberately so. I summarise that elephant in a comment on Giles’ blog where I say:
But let’s get to the real nub — since you clearly can’t / won’t address the issues on liquidity — and deal with incidence
As you know I have discussed this at length with Tim and he could not disprove the arguments I presented — indeed — he agreed they were logical is my assumptions held — he just disagreed with the logic
So why don’t you address incidence instead and answer these questions:
a) On whom does the incidence of churning costs fall in pension funds?
b) Does stamp duty reduce churning?
c) If so is stamp duty beneficial in welfare terms assuming your answer to (a) is pensioners?
Then answer the same question on where the incidence of the costs of City trading in forex, derivatives, etc fall and then suggest why that incidence is beneficial
Then follow through and suggest why reducing the incidence of those charges would harm society
Arguing about the incidence of the tax — as you on the right like to do (sorry, but true — that’s an accurate description of your position on this) is a mere side show
Address the issue of the incidence of the charges the tax is designed to reduce — that’s the elephant in the room
If you can do that then there is a grown up debate — but right now you’re wanting to squabble in the wings
It’s not you as a result whose got the high ground — you’ve not even entered the arena of discussion until you do this
For right wingers to use the incidence argument as proof that financial transaction taxes are harmful is absurd whilst they refuse to consider who bears the cost of supporting the City and its economically useless activities (again, not my words, that’s Lord Turner again). This tax is designed to reduce the incidence of the charges for useless activity — which will always be several times greater than the incidence of any tax.
If that incidence of useless charging to pension funds and others is reduced the benefit to society is high — and the fact that the incidence of the tax appears to be on pensioners is irrelevant — they will be better off from reduced charges for management of their funds.
This is the basis of the claim we ‘luvvies’ make.
Now it’s time for the ‘nasties’ to justify why they are demanding continuing opportunity to abuse al the rest of us.
So I want reasoned answers to questions from Giles Wilkes on the real incidence issue — about why we should support City abuse from excessive trading.
I’m not expecting to get them. There’s good reason: Lord Turner is right. But no doubt Giles can try.
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Richard
First, many thanks for the kind words and the link.
Secondly, could you point me to the evidence based part of your report that shows how stamp duties do not fall on pensioners and companies trying to raise tax? I would be much obliged – since I only have the IFS
http://www.ifs.org.uk/comms/comm89.pdf
to help me here.
All the best
G
I agree that’s all there is
And it’s flawed
But if it’s true it’s also true that the whole cost of the churning falls on pensioners too
Justify that and all the rest of the charging that falls on ordinary people – to no benefit to them, and which the tax would save them from
Don’t as ever duck the issue
Because that’s all you do
And when you do tackle the issue my incidence argument is logical, and I think, right
R
(sorry, had to break that one off early)
The reason I ask is that cost of share dealing sans stamp might be 10bps. The IFS reckons:
“Most empirical estimates of the long-run elasticity of turnover with respect to transaction costs are between —1 and —1.5,11 implying that a 10% fall in transaction costs would lead to a 10—15% rise in turnover. The only published estimate for the UK that we are aware of is —1.65,12 but this is now rather out of date.”
So for a market that did NOT have stamp duty, the imposition of 50bps would be an increase of quite a few percent – over 100 – in transaction costs, implying a very great decrease in volumes – not just the 25% that your worthy report attempts. Did you have some different evidence?
Best
G
@Richard Murphy
You see, that sort of bad temper (‘It’s all you ever do’) is one reason why I am not sure devoting such time to the answer is worth it. As Tim observes, he is often wrong, but then corrects himself. Contrast that with ‘flawed’ arguments backed with such aggression. Though I agree too that Tim’s style towards you could be improved.
Thanks for allowing the IFS link to be put on. Your many readers can then read both your work and theirs and work out which has logic and evidence on their side. It may be yours, it may be theirs. Who knows?
Incidentally, I appreciate churn takes place. But it doesn’t cost 50 bps per trade, and the idea that by PUTTING AN EXTRA 50BPS on you will somehow manage to (a) extract huge amounts from the transaction and yet (b) somehow not hurt the buy side of the transaction, still seems loopy to me. Just my opinion.
have a pleasant weekend Richard
@Richard Murphy
If I understand correctly, Stamp Duty applies to all share deals, but “churning” refers only to proportion of them – those share deals that you believe serve only to provide commissions for banks. Pension funds buy and sell shares for perfectly legitimate reasons all the time.
Richard, what estimate are you using for the proportion of share trades that qualify as “churning”? I’d be interested to see the source.
Presumably the net cost to pensioners looks something like this:
(stampduty)*(all share trades)-(dealer commissions)*(reduction in churning)
so the ratio churning/all trades is an important part of your story. That, and the size of the reduction in churning. I called your idea that stamp duty benefits pensioners ‘hilarious’ at Gile’s place because I thought it very unlikely this net cost would come out negative (i.e. a benefit) but perhaps I will stand corrected, if you can furnish me with some evidence based estimate of the quantities of interest here.
I don’t really understand the incentives fund managers have to indulge in churning. I understand that it generates dealer commissions either for the bank the fund manager works for, or if the fund manager deals externally, they benefit from some back-scratching arrangement. But in so doing, their funds suffer a lower performance thanks to all those pointless dealing fees. If that doesn’t stop them from churning, why would stamp duty? After all, the fund managers don’t pay it – if they don’t care about the performance of their funds, why should they care about paying stamp duty on their “churning” deals?
@Giles
Giles
Drop your won aggressive abuse and it would help your relationships – read your own comments before making suggestion here I recommend
And who said anyone is suggesting an additional stamp duty in the ? No one is. So why set up yet another false straw man? The only loopiness is yours
Now please answer the questions or it will be clear you are just an apologist for the City
So far you have done exactly what I predicted you’d do – and have ducked the questions and any debate
I think any reader could happily conclude in that case who is winning the debate – as much as most will conclude my own comments are appropriate response to your desire to patronise
Richard
PS why do Sachs, Stiglitz, Baker et al think you’re wrong re volumes?
@Luis Enrique
Isn’t it obvious why they churn?
The pressure remains to deliver short term portfolio returns – and the short term is very short – so churn is encouraged
There is a disconnect between manager returns and pension fund objectives
And increasing costs may discourage this improving the goal congruence, I suggest
And those I talk to agree
And rationally doesn’t that makes sense?
Richard
Richard
You see, it’s language like that – ‘apologist for the City’ ….
I still don’t see where your evidence is that the 50bps on stamp duty is not born by the buyers. You say “go look at my evidence based piece of research”, but none of the evidence addresses that issue. It is just an idea you have for how you hope it might work, what you think people’e motivations might be. You still want the magic situation of (a) lots of revenues and (b) none of it coming from anyone but the baddies.
The extra 50bps I mean refers to the non-stamp situations – the extra jurisdictions the Robin Hood people would want to pay this, and the comparison with the UK if it did nOT have this. Sorry, I should have made this clear.
Out of interest, do Sachs and Stiglitz support a 50bps charge on equity trading? I ask out of innocent curiosity. I can imagine some support for a much smaller charge on FX trades, or an occasional massive one like Brazil’s.
I will not make any assertions about who is winning this debate. You clearly cannot be convinced to back down from the argument that you can raise billions in transaction costs and not hit the buy side. Amazing.
@Richard Murphy
Richard,
perhaps I shouldn’t have raised the question of motivation… what I was really after was some numbers. I had hoped, what with your emphasis on evidence based policy, you mights have some to hand.
At least you could tell us what estimates you are using internally to base your argument on (that stamp duty as proved beneficial via its reduction in the ‘incidence’ of churning on pensioners). What rough numbers do you believe, even if you cannot immediately provide evidence (see comment #5).
I’m intrigued by your idea that frequent trading delivers short term portfolio returns. How does that work. Say a period is 3 months. If frequent trading improves your returns on that time horizon (despite paying all those dealer fees) what happens in the next period … does your portfolio give up its gains? So over a 6 month horizon, churning does’t help. If the gains are not given up, then churning leads to more durable gains, in which case one might question whether it’s churning at all, or merely good investing.
It is not clear to me how stamp duty aligns manager returns with pension fund objectives.
By the way, in case my irritation spills over, I will end my contribution here. The argument you are hoping to win is: stamp duties or their like, despite charging 50bps, actually save both buyers (investors) and sellers (users of capital) money, by eliminating overtrading, what you call churning.
You have it seems three routes: the argument from logic, the argument from evidence, and the argument from authority.
The logic argument just fails without evidence. The system as a whole gives money to the government: to assert that it will remove it from just one section of the whole nexus without evidence is extraordinary, and goes against the recent trend of lower commissions but still higher dealing profits for banks etc we have seen in 20 years.
The argument from evidence: you are asked for this and refuse to give any, or you graciously admit to ‘flaws’, which may be translated as ‘no evidence’. In the meantime, two very respected bodies, at least, Oxera and IFS, believe otherwise, and use evidence in their methods over time.
Finally, the argument from authority: you invoke economists who you claim agree with you, but again there seems no proof that they believe this of equity trading. For FX trading I think there is a long and much more respectable tradition of calling for transaction taxes, and I happily acknowledge that. I suspect that and other matters is what Lord Turner draws on, not stamp duties.
As for the ad hominem stuff: you have called me a libertarian, and an apologist for the City. I hope I don’t need to prove that point any more!
Now, a pleasant weekend!
I think its well established that most retail punters spread bet and use contracts for difference to get exposure to shares, especially if they are looking to trade in and out. So I assume stamp duty is paid by “buy and hold” investors, whereas speculators don’t pay any tax at all. Which seems illogical in the extreme but a good example of how the market evolves (quite literally) to exploit weaknesses (in this case stamp duty).