I wrote a series of tweets last night on the break down of the old tax consensus that was the foundation of much of post war prosperity in the UK. I put them on the blog, here. It may be worth explaining why I wrote them. On Saturday night I began another of my not infrequent disagreements with Prof Judith Freedman at the Oxford Centre for Business Taxation. This was the exchange: 
The article Judith Freedman referred to is here. So why did I think it boringly predictable? The list is long.
You could start with the patronising tone: that's the Oxford Centre for Business Taxation all over. I have academics queuing up to tell me how offensive they find its tone to be. Civil society is treated, as in the article, as a bunch of simpletons to whom a few academic home truths need to be recounted.
Second, there's the fact that the argument is, after the patronisation, decontextualised. The possibility that a financial transactions tax (FTT) was proposed precisely because it may reduce the risk that is imposed on society by financial markets is ignored in the discussion. It is assumed that the only purpose of the tax is to raise revenue. This is a typical neoliberal perversion on taxation. It is assumed by neoliberals that whatever the market might want to do is right and therefore any use of tax to alter those outcomes is wrong. Here, the argument is made by simply ignoring the possibility it might exist.
Third, the fact that the incidence of the tax may well be on bankers and their bonuses is ignored; a disingenuous claim (admittedly stated with less stridence that usual) is made that unspecified final consumers may suffer is offered instead. This is not a technical argument. Technical arguments would consider possibilities and state them all: this is deliberate one-sided suggestion that the mainstream reader may suffer alone and is therefore mistaken in their simplistic belief in the tax which the assured technocrat author is telling them, in thinly veiled code, might hit their pension. Actually, I strongly believe the reverse is the truth. An FTT will hit the churning which currently denudes many pensions of any increase in value. The fact that this argument is not considered makes clear there is nothing technical about this article.
And then the straw man is offered. Although an FTT is not a tax on wealth as it is a tax on trading it is suggested that a wealth tax be introduced instead. But I know this is a straw man because in the Mirrlees review, an Oxford Centre for Business Taxation production by proxy, the following is said of wealth taxes:
Levying a tax on the stock of wealth is not appealing.
In substance that sentence is the entire consideration of the issue as far as consideration of wealth tax goes, and it's very clearly not technical; it's subjective opinion, even in the form of its drafting. From then on Mirrlees only considers taxes on wealth transfers, which are not the same thing. That's why I can say this is a straw man argument: the author must have known that if the idea was adopted by the charities and NGOs proposing the FTT it could also be dismissed on the same 'technical' basis used for the FTT.
So my argument is? It is simply that then neoliberal view: a deeply subjective view based on a view of the human being as a rational being in which markets always provide best solutions, not because they actually do, but because of the assumptions made by theoreticians that are intended to guarantee this outcome in their limited world view based solely on their belief in a mathematical reduction of human behaviour. There is nothing technical about this apart from the faux maths involved, it is a subjective choice that is offered and one that happens to neatly coincide with the neoliberal inclinations of the sponsors of such bodies as the Oxford Centre for Business Taxation, all of which are antithetical to the world view of the likes of Oxfam and the Robin Hood Tax campaign with its 'irrational' concern for redistribution of wealth, the externalities of markets and social justice, all of which are dismissed as irrelevant, or simply hysterical.
How do I know that? This was Judith Freedman's reaction to what I wrote:
Oh dear: poor little subjective me with my concerns for human well-being that are leaving me overwrought. She followed up with this:
That got the patronising in.
Unless, of course, she really does not know where it comes from. But in that case she Oxford need to wonder why she has a chair.
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I agree with you on this Richard. The guy from OCBT who wrote the article is operating from the assumption that an economy with no taxation (and hence no government) would be maximally efficient and induce no ‘distortions’, whereas in fact experience of the real world suggests that such an economy would be more like Somalia than anywhere one might actually wish to live. The more I think about it, the more I realise that the assumption that all taxes induce ‘distortions’ has an implicit libertarian – indeed far-right anarchist – assumption operating behind it. Thus, the mentality of the OCBT – indeed anyone who starts from that premise – is basically the same as far-right libertarians like the Institute for Economic Affairs and Ayn Rand. Far from being ‘non-political’ they are actually much MORE political than Oxfam or any of the other charities that support FTT.
Whereas the Rpbin Hood approach starts from the premise that a society in which huge swathes of wealth and power are controlled by the top 1% is both grotesquely unfair and shockingly inefficient. Far from inducing a distortion, taxes like FTT are actually attempting to correct huge and dangerous imbalances in the global economy. This is probably obvious to anyone who hasn’t been brainwashed into neoclassical economics.
Glad you agree: that is my belief too
I believe that these claims by the like of OCBT are both disingenuous and dangerous to most in society
“Civil society is treated, as in the article, as a bunch of simpletons ”
This sums up the neo-lib stance and the unctuous tone of condescension that flows from the greasy pores of the present Government (and politicians in general, in my view). Judging by the ‘tone’ of Judith Freeman’s tweets, the approach is to humiliate and make any dissenting voice sound off-kilter…..a version of Cameron’s vile ‘calm down dear…’
The problem is once again, you are letting your beliefs get in the way of reality.
“financial transactions tax (FTT) was proposed precisely because it may reduce the risk that is imposed on society by financial markets”
An FTT will increase bid/offer spreads on trades and thus by definition reduce liquidity. This in practice means that intraday volatility may be reduced, but long term volatility will be increased. I’m not going to get into the technical details, but anyone who has ever run a VAR model will know this.
“An FTT will hit the churning which currently denudes many pensions of any increase in value.”
Pension funds do not “churn”. HFT trading algos might (and they would simply move abroad and avoid the tax), but pension funds do not. Pension funds on the whole change their portfolios only very slowly. An FTT will hit pensions though, directly through trades done but more importantly on the major liquidity they provide to the market through repo activity – they would now get charged to offer the markets that service, which also adds value to those pensions. Those costs would directly be passed on to consumers.
In general terms, almost all the extra costs of an FTT would be passed down to the end user. Mortgages would be hardest hit, as so many individual transactions make up the funding and hedging for a mortgage on the bank’s side, but nearly everything would increase in price to a greater or lesser extent. There is simply no way to stop it, and to suggest otherwise is simply foolish.
Even the EU don’t think an FTT will raise much tax, acknowledge that the costs will be bourne by consumers, and could damage GDP.
a) Pension funds do churn, albeit not as fast as others
b) If they changed their behaviour then their tax charge would be tiny – and that would be a good outcome
c) If repo went it would be replaced and pension funds should not be a source of liquidity anyway
d) Liquidity disappeared when it was needed: it is faux liquidity in that case
e) For the reasons noted above there is no reason to believe that this tax will fall upon consumers, but will almost certainly fall very heavily upon traders
f) If banks actually went into the business of providing straightforward mortgages then there is absolutely no reason for your argument to hold true: this trading is of no productive benefit whatsoever
g) To be polite, your arguments are an excuse for exploitation, and as such can be quite simply dismissed
a) Pension funds don’t churn much at all. I advise a few fairly typical ones and the asset turnover is so slow as to be negligable. You can get data for most pension funds and their top 10 holdings freely, and these holdings barely change over time.
c) Repo is incredibly important to the functioning of financial markets. Regardless, removing pension funds from the repo market would significantly reduce pension fund returns.
d) Liquidity is a function of the price of assets. The normal bid/offer for government bonds is less than a basis point for G7 countries, out to about 5bp for better quality EM bonds. Adding 10bp to *each side* of a transaction will make markets significantly more illiquid, and the costs will be direclty felt by investors (such as pension funds) not the banks – who will simply add the cost of the tax into their bid/offer spreads.
e) An FTT will directly fall on the end user for the reasons outlined above. The costs will be passed on in it’s entirety to the customer, and the bank will bear none of the costs. An FTT might well make high frequency type trading non-viable, which you might view as a postive, but it doesn’t change th fact that costs will not be bourne by the banks.
f) Clearly you don’t understand how a mortgage works from the bank side. let me give you a quick example of how the costs would be passed down from bank to customer.
Let’s take a typical mortgage transaction – a 25 year floating mortgage.
The borrower pays some fixed spread over the base rate for 25 years.
Mortgage banking’s primary function is maturity transformation. The bank lends for 25 years but cannot borrow for that period in the money markets, and it doesn’t have the money necessary to simply lend that kind of money from it’s own balance sheet.
Th first thing a bank will do is hedge the interest rate risk with an interest rate swap (derivative). The FTT of 0.01% has a negligable effect on the cost here.
To fund the mortgage, the bank then has to go into the money markets and borrows. This is usually done in very short dates – 1 day out to about 1 week, but for the purposes of this example lets use 3 months. Money markets are simply not liquid past about 1 year.
Every 3 months, the bank now has to borrow money in the money markets to cover the amount it has loaned out through the mortgage. Every time it does this transaction it gets taxed 0.10%. This tax simply gets passed down to the mortgage borrower, as the combined taxes dwarf the profits the bank is making on such a transaction, even before taking into account credit/default risk.
At my last job (a large commercial and investment bank) we did a study on the efects this would have on the mortgage market. We estimated that such an FTT would add 2-2.5% onto the cost of a mortgage, depending on the size of a bank’s balance sheet, length of loan and taking int account some ammortisation of the taxes due. It would also wipe out small mortgage lenders, concentrating the mortgage market in the hands of only the largest banks.
If nothing else, only a handful of large banks are actively involved in trading. The commercial banking sector is much larger, and the mortgage market would be devasted by an FTT – before taking into account the lower liquidity money markets would have as repo financing activity drops.
g) I’m not sure what you are talking about when you say “exploitation”. It is simply wrong to say an FTT will not be passed to the consumer – even the EU acknowledge that. You can simply assert I am wrong, but I have significantly more experience when it comes to financial markets than you (and you have none) and even the people advocating an FTT say there will be significant costs, which the consumer will be wearing.
All this has been discussed endlessly
And you know what: it’s all been dealt with too
“And you know what: it’s all been dealt with too”
Yes, quite comprehensively by the EU study into the matter.
They found that an FTT would lead to a decrease in GDP, increase transaction costs, not raise large amounts of revenue (if at all via substitution) and the costs would fall primarily on consumers of financial products.
You have chosen once again to simply assert that you know better, and none of the above predictions would come true.
Why don’t you simply admit that that the cost would not fall on banks, even if it might reduce bank revenues?
This comment has been posted further to point 5 of the comments policy to which attention is drawn.
“This comment has been posted further to point 5 of the comments policy to which attention is drawn.”
Pretty much your standard answer when your argument has been blown out the water and it is clear you are talking nonsense. You consistently fail, or are simply unable to answer questions which point out the deep flaws in what you write.
Note that disagreeing with you doesn’t mean someone is wrong. In fact, evidence shows that more often than not it is you who is wrong, or simply ignores the evidence contrary to what you are saying.
I could
I can’t be bothered to when it has been done so many times before
And as that comment policy says: when a person continually makes the same comment with intent to irritate the warning given is then enacted
Richard – you’d do yourself far more credit if you actually admitted your mistakes or acknowledged that your claims were opinions rather than facts, but repeatedly censoring those that have more experience than you in certain key areas under discussion just makes you look like an egomaniac!
I’d basically made similar points to “Tier”, once again based on a huge amount of expertise and experience, yet you simply refuse to publish that which demonstrates your opinions to be false.
I dismissed these arguments because others more experienced than me across Europe have done so for good reason,which is why 11 countries have opted for an FTT
I treat the claims made as propaganda to defend in unreformed banking sector that brought our economy to its knees once and which could easily do so again because of its obsession with unnecessary trading designed to extract rents from society
Your huge evidence is indeed evidence, but is evidence that if cash is thrown at an issue an argument can always be created to sustain an abusive status quo
“I dismissed these arguments because others more experienced than me across Europe have done so for good reason,which is why 11 countries have opted for an FTT”
Those very same countries are doing it despite the known problems of an FTT – from their very own research. One of the big drivers is that the EU wants it’s own tax base, rather than relying on member states – but ultimately it is a case of politics trumping economic reality.
The FTT tackles a known problem
It may not be a perfect solution and remember in m view the perfect yield is zero but it is better than the status quo
“I treat the claims made as propaganda to defend in unreformed banking sector that brought our economy to its knees once and which could easily do so again because of its obsession with unnecessary trading designed to extract rents from society Your huge evidence is indeed evidence, but is evidence that if cash is thrown at an issue an argument can always be created to sustain an abusive status quo”
Yet what you have said is also no more than propaganda. You have no facts to support your argument. I’ve had a conversation with a certain Euro politician on the FTT and frankly he had no interest in listening to any information, evidence or reason. He has no experience in finance yet was trying to regulate for an FTT based on his own prejudices – much like yours Richard.
If they do bring in an FTT, and when it inevitably fails, costs are passed to consumers, mortgage prices go up, GDP growth is damamged and it doesn’t raise much money, will you still be arguing for it? Or will you simply argue that somehow the tax is now being avoided and make up some numbers about how big the tax gap on it is?
If FTT goes it will not be because it failed but because the lobby spending won
Just as with 50p tax rate
Or it could just be that people look at the economic reality of the proposal and decide the costs outweigh the benefits. Like they did in Sweden when they got rid of their FTT.
Conspiracy theories about neoliberal lobbying really are just that – conspiracy theories. Especially when you consider that the EU did their own research, found an FTT would have negative consequences, and yet still are aiming to implement one (which will be an abject failure). Surely, if there were lobbyists with enough spending and power to stop an FTT it would have happened? Yet the opposite is true, at which point your logic falls to pieces.
You also fail to recognise the significant lobbying (and financial resources) from “the other” side of the debate. You essentially fall into that catagory – as a paid lobbyist.
Of course there are negative consequences to an FTT: those are exactly the things that it is designed to tackle if seen from the neoliberal perspective
“Of course there are negative consequences to an FTT: those are exactly the things that it is designed to tackle if seen from the neoliberal perspective”
Enough with the neoliberal nonsense. The more you use it the less I believe you even know what it means. You simply use it as a vaguely offensive term for aything you don’t like.
As for the cosequences of an FTT. I’ll list them and you can tell me which of the outcomes would be good for an economy, and then if opposing that outcome is somehow neoliberal.
Lower GDP growth
Little or no increase in tax revenue
Costs passed to consumers
Financial market liquidity reduced (and consequently volatility increased)
Interbank money market liquidity dramatically reduced (borrowing costs increased)
High frequency trading costs increased.
I think I have a very good idea what it means
You just don’t like it
Another non-answer. I assume because doing so would mean admitting that there is no neoliberal conspiracy at work here, and the best research available shows the FTT has negative economic effects – again nothing to do with neoliberalism.
Unless of course, the EU are being neoliberal when they did the research but then suddenly stopped being neoliberal when they agreed to implement an FTT.
Respectfully, you are wasting my time, yet again
You may not publish this but I find it a little hard to take a complaint from you about a patronising tone given your responses in both this thread and elsewhere in this blog. Matthew 7:3