2010 March » Tax Research UK

Prove City trading is of benefit or shut up

Mar 192010

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 ‚Äòluvvies’ make.

Now it’s time for the ‚Äònasties’ 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.

Darling to use revenues to cut debt

Economics 2 Responses »

Mar 192010

FT Alphaville ¬ª Darling to use revenues to cut debt.

Alistair Darling plans to use a revenue windfall to trim projected UK borrowing by £5bn to £10bn in next week’s Budget, making debt reduction a priority as he tries to put public finances on a sounder footing.

[O]fficial data on Thursday showed that receipts had not fallen as much as the chancellor feared in December. Public spending is on course to end the year close to target, meaning that the government will be in the red by about £170bn.

That’s a sop to the market that may be politically necessary for the moment, and highly timely.

But to think that deficit cutting is the priority is a massivce mistake.

Employment is the priority. The deficit wiull look after itself when people are in work as Keynes said.

And as for the EU’s demand the deficit be 3% of GDP – that’s just bankers being *ankers. This is a wholly arbitrary rule of complete inconsequence made in different circumstances that they want to enforce to increase unemployment, suppress wages, increase the divides in society and to undermne democracy.

So they should be ignored – along with their friends in the rating agencies.

Keep spending, I say.

To Washington….

Country-by-country, Secrecy jurisdictions, Tax Havens Comments Off

Mar 182010

I’m at the start of a pretty frantic round trip to Washington to meet the IMF with the Task Force on Financial Integrity and Economic Development .

The discussion will be highly focussed on what additional statistical data is needed to monitor the world’s illicit financial flows.

I do, of course, want the data that country-by-country reporting could provide on world trade flows and transfer pricing abuse.

But there’s another issue of importance too. A lot of work is going on seeking to track flows out of tax havens / secrecy jurisdictions to make sure they are properly taxed. There is another side to this coin though. We need to know where they come from too. And we don’t, which is why, as the IMF has now noticed, there are potentially $18 trillion dollars in small island states alone that they cannot account for.

One hopes that at long last they’re now open to dialogue on this issue.

The Swiss still dream of flat withholding taxes

Banking, Switzerland, Tax evasion 1 Response »

Mar 182010

CS sees withholding tax on Germans’ accounts-paper | Reuters .

Reuters report that:

The chief of Credit Suisse’s private bank is proposing a withholding tax on bank accounts held by Germans in Switzerland to help ease strained ties with Berlin, a newspaper reported on Monday.

I have already discussed the absurdity of this idea but the Swiss are clearly still hanging on to it.

But what’s really funny is the justification for it:

Such a withholding tax could mean outflows in the short term but would not greatly harm his bank’s fortunes, Walter Berchtold told Germany’s Handelsblatt.

“Long-term I’m very optimistic, because our business doesn’t rely on untaxed funds,” he said.

Well that must make it the only bank in Switzerland that doesn’t since even Swiss officials seem happy to accept that half all money in the place is illicit.

It really is time the Swiss accepted that those facilitating fraud don’t set agendas and that the whole Swiss economy is structured for just that purpose.

FSA on defensive over Lehman failings

Accounting, Auditing, Banking, Regulation 4 Responses »

Mar 182010

FT.com / UK – FSA on defensive over Lehman failings.

Good to know I got yesterday’s musings on Lehamn right.

As the FT reports:

UK financial regulators said they had no reason to question the so-called “accounting gimmick” used by Lehman Brothers to flatter its results because the investment bank’s UK subsidiary’s reports accurately reflected the transactions.

Why – because they were correctly reportted on balance sheet under UK GAAP here.

But as they also note:

In the UK, the bank was able to get a legal opinion certifying that the transactions qualified as sales . Lawyers not connected to the transactions said the UK’s definition of sale is slightly less restrictive than the relevant law in the US.

The legal opinion made no difference to the Lehman UK subsidiary’s accounts to the FSA because they were made under UK accounting rules, which require both repos and sales to be reported on the balance sheet, the FSA said. But when the UK accounts were consolidated back to the US, under US accounting standards, known as GAAP, the transactions disappeared off Lehman’s balance sheet, the Valukas report said.

“The balance sheet effect referred to in the Lehman report only occurred in the consolidated accounts which were prepared under US GAAP,” Mr Sants [of the FSA] said.

“This is a matter for US financial reporting standards, not . . . for UK supervision,” he said. “This is arbitrage between US accounting rules and UK law.”

This is exactly as I suggsted.

But Hector Sants is wrong because if accounts can be abused in this way of course it is an issue for UK regulators.

So this should be high on the FSA agenda when its continued existence is confirmed after the election.

An assault on unions is an attack on democracy itself

TUC Comments Off

Mar 182010

An assault on unions is an attack on democracy itself | Seumas Milne | Comment is free | The Guardian .

Not surprisingly, many trade unionists are sceptical about whether they should continue to affiliate to and fund a party that privatises their jobs, condemns them when they go on strike and blocks employment rights in Europe.

But unions remain not just the only real mechanism for employee protection and a collective voice at work. They are also an essential vehicle to break the elite circle and open up representation in political life. The assault on them is an attack on democracy itself.

That about sums it up.

Spending out of recession works.

Economics 6 Responses »

Mar 182010

Unemployment is down.

The evidence that spending out of recession works is unambiguous and clear.

So why are people will talking about cuts when it is growth that will repay the debts – growth that the private sector cannot and will not generate?

It’s time to agree Compass and the Green New Deal got this right.

Liquidity cannot be assumed to be good

Banking, Economics 11 Responses »

Mar 182010

One of the arguments some have used against Robin Hood Taxes is that they reduce liquidity. A leading critic has, for example has been the Lib Dem former City trader Giles Wilkes.

Liquidity is defined as the existence of a market of such size that no one transaction can influence price.

The idea that such markets are good is based on the extraordinarily flawed logic of perfect competition inherent in standard micro-economic theory – a theory that requires assumptions to made that mean it has no relationship of any sort with the real world. It follows in my opinion that the idea that liquidity per se is good is also, similarly flawed.

Last night Lord Turner of the UK’s Financial Services Authority made a speech on the future of banking. As is his now accustomed way it was controversial. As the Guardian has noted he appeared to suggest capital controls might be of benefit – something with which I agree. He explicitly suggested the costs of some form of bank borrowing should be increased by requiring that banks hold more capital in relation to their lending to some portfolios.

But he also, and I think wisely, returned to his theme of ‚Äòsocially useless’ activity by banks – admittedly clarifying on the way that he thought ‚Äòsocially’ in this case equated with ‚Äòeconomically’ saying:

There are no easy answers ‚Ä¶ but some combination of new macro-prudential tools is likely to be required." He added: "A crucial starting point ‚Ä¶ is to recognise that different categories of credit perform different economic functions, and that the impact of credit restrictions on economic value added and social welfare will vary according to which category of credit is restricted.

As the Guardian also notes:

In his lecture, he asked whether the increased trading activity in the financial sector in the last 30 years had delivered economic value by reducing transaction costs and making markets more liquid. Admitting that he did not know, he said: "We certainly need to have the debate rather than accepting as given the dominant argument of the last 30 years, which has asserted that increased liquidity, supported by increased position-taking, is axiomatically beneficial."

This requires no interpretation. He is saying that it is not clear that liquidity per sae is beneficial.

Quite so.

It’s time those who claim such things prove their case. Rhetorical assertion based on flawed assumptions is not proof – it is flawed rhetoric.

And so far the evidence is that market growth to sustain liquidity has benefitted no one bar bankers – as I argued in Taxing Banks.

These people have to engage with the argument now if they want to prove their case. And that includes an assessment of the incidence of the costs their activities impose on society, an issue of much greater importance than that of the incidence of the taxes that we propose to curtail them – which I have argued falls on banks and bankers.

Prem Sikka agrees GAAP is CRAP

Accounting Comments Off

Mar 172010

Prem Sikka is in the Guardian saying:

The Lehman insolvency examiner’s report once again shows that the public should be sceptical of the audited accounts published by giant corporations. Accountants disarm journalists, critics, regulators and the general public by claiming that the accounts are fairly presented in accordance with some generally accepted accounting principles (GAAP), but the Lehman report shows that they are based in carefully rejigged accounting practices (CRAP).

He’s expanded on my theme.

Good man.