FT.com / Companies / Banks - RBS pays more than 100 staff a £1m bonus.
The FT notes:
Royal Bank of Scotland admitted on Thursday that more than 100 of its investment bankers will take home bonuses of at least £1m for 2009, a year in which the government-owned bank posted a net loss of £3.6bn.
RBS is one of the biggest players in the socially useless fianncial markers. Those who partake are amongst the recipients of these bonuses.
So please don't now tell me there's no case for a financial transaction tax of the sort proposed by the TUC, Tax Justice Network, Christian Aid and others in 'Taxing Banks' where we firmly predict that one of the benefits of such a tax will be a significant fall in trading volumes and consequent demand for bankers - with their pay tumbling as a result.
I'm well aware conventional economists do not agree - and they have provided not a shred of evidence, let alone logic, to support their case as yet. They simply say the cost will be passed on to others - but when the customer for more than 40% of all trades in this market is another bank and the number of customers overall is tiny there is no logic in that claim - the consumer is identifiable and able to resist the charge.
I stand by my claim - one of the great benefits of financial transaction taxes will be that they will significantly cut bakers' pay. And that's universally considered a good thing by all but bankers and those in awe of them.
Rather oddly, you can't imagine why they would be so vehement in their opposition unless I was right, can you?
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“I’m well aware conventional economists do not agree – and they have provided not a shred of evidence, let alone logic, to support their case as yet. They simply say the cost will be passed on to others – but when the customer for more than 40% of all trades in this market is another bank and the number of customers overall is tiny there is no logic in that claim – the consumer is identifiable and able to resist the charge.”
You’re still not grasping the point about tax incidence. It isn’t that people attempt to pass on a tax charge. It’s not about intent, people trying to stick others with the bill.
It’s that changes in behaviour caused by the imposition of the tax have effects on other people.
Follow this logical chain for a moment. Tax is added to transactions. Transaction volume falls (you should agree with this so far as your report actually notes it). OK, what do we know about markets that have lower liqudity? The have wider margins, larger differences between bid and ask.
We very much do see this in financial markets. Shares with large trading volumes have lower spreads than shares with low trading volumes. Currencies with low trading volumes have higher spreads than those with large volumes. Futures, derivatives and so on. Non-standard transactions have wider margins than standard exchange traded ones. This link between volume and spreads/margins is both noticeable and entirely uncontroversial.
So, our tax reduces volumes and increases spreads. So, any and every user of these products ends up paying the larger spreads. Every farmer transferring the risk of his wheat crop via a future pays it, every remittance sent through the FX markets, every pension fund that’s invested in any financial product at all, yes, even people buying euros to pay for beer on holiday.
Sure, each and every one of these users is paying a tiny sum….that 0.5% to 0.005% tax….plus however much the margins have widened. As in my earlier comment, we don’t know how much those margins will widen but we’re, unless you’ve got some startling new result, certain that those margins will widen.
And thus the economic burden of the tax hits each and every user of any financial product at all.
No, not because the banks of the bankers are trying to stick people with the tax. But because the reduction in liqudity makes the use of the markets more expensive for everyone.
Depending upon how much the margins increase that burden of the tax could be higher, possibly many times higher, than the amount actually raised by the tax.
The only way this could not be true is by making the assertion that margins will not increase as a result of the tax. Now you can assert that if you like but it would be an hilariously odd thing to try and assert. And as ever, it would be one of those extraordinary claims that would require extraordinary evidence.
So, allow me to ask a question. Do you think that the imposition of an FTT will widen margins in the financial markets or not?
@Tim Worstall
Yes of course margins will widen.
I WANT THEM TO WIDEN
Sorry to have to shout it out – but you don’t seem to have noticed that is one of the intentions of the tax. We want reduce volumes, we want to put sand in the motion, we want trading to be more expensive.
And my point is this: your argument is disingenuous. It is absurd to say that all the trading in these markets is for social benefit. It is not. The consequence you claim can only result if there are no externalities from these trades. But there are massive externalities from them. Eliminating them is a price worth paying, many times even even if incidence passed as you claim.
But as I have argued, there is no reason why it should. Since most of these trades are sub zero sum there will first of all be a net rise in welfare from a reduction in trading and second the undoubted fall in trading volume will make the incidence largely fall on banks and bankers – which is just as we want.
No one has refuted that logic. They have just asserted it’s wrong, you included but it can’t be, can it, if trade volumes fall. Surely you agree? You really can’t have it both ways.
Nor incidentally can you ignore my other questions you have still not answered:
1) Why won’t you agree with me on unitary taxation and that therefore country-by-country reporting is required?
2) How will you tax capital if not by corporation tax?
3) If any incidence of corporation tax falls on capital now (and most argue some does) don’t you agree abolishing it will increase incidence on labour?
It’s time you answered some real questions Tim and stopped nit picking on incidence – which is of minor theoretical concern.
No answers and it’s a sure sign you’re losing. You’ve offered none to date.
Richard
Right, so, we agree, margins will widen. Can you thus provide me with an estimate how how much you think margins will widen? That will then tell us what the economic burden (as opposed to the revenue collection) of the tax will be.
“It is absurd to say that all the trading in these markets is for social benefit. ”
I’ve never said it is. Indeed, I would think it absurd if I ever tried to assert such a thing.
“undoubted fall in trading volume will make the incidence largely fall on banks and bankers – which is just as we want. ”
This is rather the point that I’m trying to explore. If margins widen, which you’ve already agreed they will, then incidence will absolutely fall on every user of the financial markets. That’s all of us by the way. We might, I agree, also see some incidence upon bankers and their pay but there’s two things here. That *might* is extremely important. I cannot think of a model or chain of events that will see a business with increasing margins facing pressure on employees pay. We normally think these things work the other way. Increasing margins leads to higher profits and thus more that can be paid.
The second is, as I showed eariler, that the incidence, the economic burden, of a tax can be much greater than the amount raised by the tax. So even if these things which you deem desirable do happen we still need to try and find out at what cost they happen. Which is why I go on about this incidence issue.
Anyway, now that we agree that margins will widen have you made an estimate of by how much they will widen? That would then enable us, with your already extant estimations of volume changes, to work out what the total incidence of the tax is.
On your questions 1), 2) and 3)….I’d like to get this particular point cleared up before we go off into other issues I we could?
@Tim Worstall
The FTT issue has been resolved by me elsewhere here
Might is not an issue
All economics is might
Your problem is you can only think in linear terms – it’s the problem of believing in revealed preferences I suspect
And so what if the burden of a tax is bigger than revenue raised – I’ve given ample reasons why we might desire this and net benefit society. It’s all in the externalities – and we’re down to judgement again here, but society has decided, rightly or wrongly – I say rightly – that these external costs are far too high now
So that issue is resolved too since data is not available and never will be (which is why you ask for it – it’s just your excuse for keeping the status quo) is not needed now – the decision has been made
Now on to 1, 2 and 3 then
“The FTT issue has been resolved by me elsewhere here”
No, not yet.
“Your problem is you can only think in linear terms – it’s the problem of believing in revealed preferences I suspect”
You appear not to understand what revealed preferences mean. It’s a pretty simple idea. We should look at what people do to reveal what they actually believe and desire rather than what they say.
“And so what if the burden of a tax is bigger than revenue raised”
Then it’s an inefficient tax, isn’t it?
“So that issue is resolved too since data is not available and never will be ”
That’s what we’re trying to get to, isn’t it? The data?
“the decision has been made”
I must have missed that then. When did the FTT become law? I was under the impression that it’s still a proposal. One that we were chewing over to see whether we would make the decision to implement it or not?
Tim
Revealed preference is indicative of linear thinking – that’s all I meant
I haven’t agreed the burden of the tax is bigger than the revenue raised – you said that – I argue it is not, very clearly, in the report I have written. But equally I recognise it has costs, as I should, The point I was making here is that even if you argue the costs are bigger it does not matter – it remains an efficient tax because this is not a tax that will be imposed as far as I am concerned just to raise revenue but to tackle the massive externalities that banking has imposed on society. I know that this is being ignored by some who want this tax – but not by me
No I’m not expecting to get data: I know it is not available and I know you know that too and your’re using it as an excuse for inaction. I don’t accept that excuse
The decision is that action will be taken on banks – I think that is resolved. Whether that is an FTT or in ineffective levy is not resolved. I apologise if I implied more
Is there anything else to discuss. You appear out of arguments.
How about 1, 2 and 3 now?
Richard
“I know that this is being ignored by some who want this tax – but not by me”
My interest in the beginning of all this was to try and evaluate the Robin Hood Tax proposals. Which are now largely based upon your calculations. As they deny, emphatically, that there will be any costs caqrried by consumers of financial products….something you say will happen….then excellent, I’ve managed to prove the basic point I set out to. That the RHT people simply are not being honest…or perhaps they’re ignorant.
As to my being out of arguments, no, you’re simply ignoring the ones I’m making. An FTT will reduce liquidity. Reduced liquidity will increase margins. Increased margins will increase the cost of financial markets to consumers.
Thus the incidence of the tax will be upon consumers of financial markets.
Further, depending upon how large the increase in margins is the burden of the tax could be vastly greater than the revenues raised.
Richard, much as I sympathise with the efforts of yourself and others to reform the UK financial system, I cannot support this tax in its present form. In my opinion it is the wrong solution to the wrong problem. Last week on the RHT website I outlined eight significant problems with this tax. So far I have yet to receive a response to any of those points, let alone a compelling counter-argument. Instead, supporters of this RHT keep posting contradictory and self-defeating arguments. Nor am I convinced by your arguments here.
In the article above you say:
“They simply say the cost will be passed on to others – but when the customer for more than 40% of all trades in this market is another bank and the number of customers overall is tiny there is no logic in that claim – the consumer is identifiable and able to resist the charge.”
But how is this compatible with this phrase in comment #2 above?
“…the undoubted fall in trading volume will make the incidence largely fall on banks and bankers – which is just as we want.”
Are you claiming that if RHT were introduced, the only transactions taking place (or at least the vast majority) will be those between banks?
Let’s get this right. If banks are trading with banks, they are betting against each other. This is a zero sum game. So the entire banking industry cannot make a net profit from this. Therefore the profits that they currently report must come from elsewhere: i.e. external customers. They cannot be from deals or bets with other banks.
Yet if RHT is used to reduce the number of transactions taking place, it is not the external deals that will disappear. It will be the deals between banks. These deals between banks are the ones that are optional or discretionary. The external deals are essential because without them companies can’t export, farmers can’t insure their crops with options, and manufacturers can’t guarantee future prices from their suppliers. So the costs of this tax will be borne by the consumer.
Secondly, any assertion that banks will be forced to absorb this tax and not pass it on to customers assumes that the banking sector is highly competitive. Yet if it was that competitive, it wouldn’t be able to make the vast profits it currently does. It is the lack of genuine competition that keeps bank profits high and will ensure that the costs will be passed on.
My third problem with this tax is that I can’t see how you can stop banks, or whole trading exchanges from going offshore. just as much of the betting industry has done. Betting exchanges and financial exchanges work in much the same way and require the same basic technology. If the betting industry can move, so can the financial sector. RHT and the Tobin Tax are no different in essence from the old 9% UK betting tax. That tax didn’t survive the advent of online gambling, so how can RHT?
Fundamentally, though, I disagree with the prevailing wisdom that a reduction in the number of financial transactions is a good thing. It is not. Price accuracy and stability in any market increases as the number of buyers and sellers increases, not decreases. Reducing the number of both leaves the market price more vulnerable to price manipulation from a small number of powerful participants. In the short term making currency transactions more expensive may bring about a stable exchange rate. Eventually though, monetary pressures will build up and the market will realise that the exchange rate is unsustainable. Then a large (profitable) correction will occur. That is essentially what happened with the pound in the ERM in 1992. So the fluctuations in exchange rates will be less frequent, but larger and more economically damaging. That is hardly economic progress.
@Cantab83
I have no response to make bare these
a) I am not formally linked to the RHT campaign. The propoals in Taxing Banks are different
b) You say “Fundamentally, though, I disagree with the prevailing wisdom that a reduction in the number of financial transactions is a good thing. ” You may, of course. But even the FSA does not agree with you. I don’t think I need to on that basis either
Richard