The idea that you can raise $400 billion in tax out of an industry that makes $780 billion globally in profits (numbers from their website) without it actually being the consumer that pays the tax does seem a little strange.
Haven’t they ever heard of tax incidence?
Plus, given the accounting of it, the tax is levied on the nominal figures for options and futures, not premiums. So that pretty much closes down those. Plus the overnight lending markets disappear. Short term commercial paper as well…..
There’s rather more cost to this tax than some seem to be assuming really….
I actually rather like it, also keep in mind Tobin never thought of it as a huge money raiser, it was “sand in the gears” intended to raise the cost of speculation not investment. But then I suppose we all still believe that speculation makes the world go round, sorta like the EMH, and magic ponies.
…pretty much closes down (options,futures,overnight lending markets, short term commercial paper)…
Yeah, I no longer buy groceries because of the incidence of the sales tax.
Seriously I hope you’ve had a nice lunch and calmed down a bit. That was about the most hysterical reaction (in both the hysteria on your part and the hysterical laughter on mine) I’ve ever seen to a tax on the internets, and that’s saying something.
As per your concern for those “consumers” (the wonderful one-dimensional people of mainstream economics theory)… I’ll leave others to dispute your figures. I’m tired of explaining that supply and demand sets prices, not taxation levels. Ever heard of “churning”.. if not, can I be your financial advisor?
Anyway, lets accept your “the consumers pay” and they are being a bit loose with trying to pretend they won’t.
I still don’t care. Said consumers -aka The People – need a social governance structure outside of The Market, aka The Government for various things that we will not go into here. The Government needs to be funded because people will neither work for it for free or give it things for free.
And it is not sized due to what The People want to pay but what The People need to pay. So if you don’t raise X billion from a The People thru a Tobin tax, then you have to extract X billion from The People some other way. Thanks for trying to shift it off the wealthiest and least productive among us, that’s heartwarming.
We are seeing behavior that seems destructive for reasons Tobin and others have laid out, and this tax seems like it might have an effect on that for reasons that Tobin and others have discussed. I’m having a hard time getting worked up about it.
Between the knee-jerks on either side, could we have an evaluation of how much of the alleged GDP of western countries is made up of various forms of churning which, if threatened by a Tobin tax, might [or might not] lead to calamitous real-world impacts?
5: JoB, you’re clearly enslaved to the erroneous and constricting doctrine of the free market. You should be ashamed of yourself. Consider book VIII of the Meditations of Marcus Aurelius: “This thing, what is it in itself, in its own constitution? What is its substance and material? And what its causal nature or form? And what is it doing in the world?”
Why must you assume that Worstall talks continual rubbish because he’s being paid? Does the skylark sing for pay? Does the salmon swim or the daffodil bloom for a monthly salary? Does Himalaya loom in glacial majesty over the sources of Asia’s mighty rivers because doing so produces an acceptable return on capital? No, they do it because it is inherent in their natures. A salmon which does not swim is no longer, in a very meaningful way, a salmon at all. A daffodil that doesn’t bloom is just a funny-tasting onion. Worstall not talking nonsense about everything is simply a contradiction in terms.
ajay, if he isn’t paid for these snippets, where does he get his money from? In which competitive and highly unregulated way does he obtain the funds that allow him to acquire and distribute his omniscience?
While I am somewhat sceptical about this tax (specifically, I don’t see how one would sensibly hypothecate it to the purpose proposed, or why you’d want to make the budgets for poverty reduction and climate change a function of securities market turnover, etc etc), I do think that a) anyone arguing against it has something of a duty to at least mention Stamp Duty Reserve Tax, which raises a pretty reliable £4bn per year and which has not visibly made the London Stock Exchange disappear, and b) that anyone citing Merton Miller always needs to do some careful due diligence on whether they’re citing one of the excellent economics papers written before he got his Nobel gong, or one of the really really embarrassing hack-jobs he churned out after (cf the notorious “Metallgesellschaft and the Economics of Synthetic Storage”, Culp & Miller 1995, which is actually taught at the LBS as an example of the fallacy of untailed hedging). I haven’t read the Miller paper that Oliver cites, but if Merton Miller was seriously talking about letter stock as if it were relevant to a 5bp transaction tax[1], then I would guess it was in the second category.
Wasn’t that guy in Shaun of the Dead? I kept waiting for him to turn and bite the interviewer in the neck. (Always raising the intellectual tone here.)
By the way, the Tobin tax is the law in Belgium – it gets activated when the EU goes for it and the government has a duty to try to convince the EU to go for it.
(not that I think it is a very good idea to make laws like that in general but I thought it might be interesting for some of you to know that it is, in fact, endorsed officially somewhere)
Does the skylark sing for pay? Does the salmon swim or the daffodil bloom for a monthly salary? Does Himalaya loom in glacial majesty over the sources of Asia’s mighty rivers because doing so produces an acceptable return on capital? No, they do it because it is inherent in their natures. A salmon which does not swim is no longer, in a very meaningful way, a salmon at all. A daffodil that doesn’t bloom is just a funny-tasting onion.
I’m generally pro-Tobin tax – although I think concerns about a purely national solution – especially for the UK – might be justified. I’d say the EU as a whole would most likely be large enough to pull it off, though. I would be more cautious in expectations about it’s effect both in lowering volatility and generating revenue, but I think there’s a good chance it might work quite well and only a very tiny chance that it would actually do something bad, so I’d be all of trying it. However, referring to it as a “Robin Hood Tax” has got to be the dumbest thing ever. Robin Hood – aka stealing from the rich and giving to the poor – was/is not a sound economic institution, but an understandable, “populist” reaction to an unjust system. So this just sets up rebuttals along the lines of: “well, we understand you’re angry at the bankers, but this really isn’t rational policy”. Wouldn’t be the way to go on promoting a Tobin tax to show that it’s not populist bank-hating, but sound economic policy, that it’s not stealing from the rich, but regulating financial markets etc. But equating any type of tax with theft (even of the honorable, Robin Hood type) seems like a very bad idea.
It struck me that this great ad would have sucked terribly as a 30-second TV spot or as a half-hour documentary.
Interpreting Henry’s point to have been that electronic distribution mediums will allow for the length of content created to better match the length necessary to best accomplish its purpose, this video’s a great supporting example.
Those of us who support a securities transaction tax in the US (we came quite close to passing one in New York State in 2003) always point to the UK tax as evidence that fears of markets relocating in response to such a tax are vastly overblown. But do you think there’s any reason a Stamp Duty-type tax wouldn’t be practical here?
The financial sector has undergone runaway expansion in the last two decades. During that time, its activities have steadily become more divorced from the real economy of goods and services.
Globally it now turns over more than 60 times the size of world GDP every year.
The financial sector has undergone runaway expansion in the last two decades. During that time, its activities have steadily become more divorced from the real economy of goods and services. Globally it now turns over more than 60 times the size of world GDP every year.
The same money goes round the system many times. If bank A sells a bond to bank B for £X, and then bank B sells a bond to bank A for £X, this gets counted as a turnover of £2X, even though the resulting positions cancel.
dsquared – yeah, but are you really going to tell me that we can be sure that the effects of a tax that brings in 4bil. a year will scale up to a tax that supposedly brings in 10 or 20 times as much? I’m not saying it definitely doesn’t, but if I were a policy maker I’m not sure that’d be a risk I would like to take. As I said – I do think this is worth trying out – but whoever claims that s/he has a good idea about the actual effects of a tax with 50-100bil estimated revenue displays an intellectual hubris that is usually reserved for neoliberal economists.
Alex – absolutely is progressive taxation sound policy. That’s why I’m in favor of a Tobin tax and a progressive income tax. And that’s also why we shouldn’t frame it in terms of a hoodlum and his merry band of outcasts who live in the forest and rather randomly steal from people passing through.
I think the revenue estimates are probably over-optimistic. Transactions volumes have grown massively, and they would almost certainly contract pretty fast with even a small tax on each go-round. Of course, that’s the idea.
On the other hand, as regards the tax base, it’s not just the banks’ profits but the salary/bonus income of bankers, which is mostly economic profit rather than social opportunity cost, so there is room to raise quite a lot of money.
Sebastian! Robin Hood was a messenger from the forest gods who fought a tyrant in the name of the true king and had cool 80s rock god hair. There’s no way he could not be a pin-up boy for this kind of taxation!
A transaction tax would hit the wrong people on wall street.
The problem isn’t in the exchange traded or extremely liquid products, like G-7 FX or Futures, or Stocks. We didn’t send $13B to Goldman to cover trading losses in the CME e-Minis. The problems in the financial system are not with high speed trading. High speed trading requires plain vanilla products with lots of liquidity.
This tax wouldn’t effect the CDS market – where spreads are many multiples of the proposed tax. And the CDS market is the one that helped blow the bubble and then popped it with AIG and Lehman.
Really, there are much better places to focus your attention. For example, you could look at making sure that everything is on a balance sheet, and that total leverage never exceeds 20 to 1 including derivatives. This would contract the part of the trading world that loves systemic risk.
High speed traders typically go home with no position. Thats right, when people leave the office, the firm has a total position of zero. Even during the day, their total position isn’t that large at any given moment. I know – I live in Chicago and know these guys (and a few women) personally.
I am not saying there cannot be some computer error that makes a firm lose a few 10’s of millions, or even 100 million+. This is possible and even likely as there are so many firms doing it.
But, by their nature, high speed firms cannot and do not blow asset bubbles, or bankrupt millions of people, or create products that help Greece hide its sovereign debt.
A tobin tax is like going after earmarks in the U.S. budget – great politics, poor results. Really, you need to tackle health care costs, but I guess you can talk about earmarks for a while – it is good press, right? You should spend much more time on the CDS market and OTC products in general. This is where Wall street makes much of its money – and hides the bodies under lack of regulation, and complex products.
Also, most high frequency trading happens in the most regulated of all the financial markets – the stock markets and futures markets. And it happens in the most regulated parts of these markets – the order execution area.
Really, what they do is provide good to great short term liquidity in markets that already have ok liquidity. They are excellent at that function, and prices that average (meaning me and you) investors pay to invest in normal, everyday stocks is much lower because of their participation.
“the UK already has a purely national transaction tax on equity securities, called Stamp Duty Reserve Tax.”
Indeed, and what is the incidence of that tax? The IFS says it depresses the value of UK listed shares: making capital raising more expensive. Another, more partisan, report says that it reduces the returns to pension funds….taking a bite out of pensions in the end.
Adding 0.05% to, say, overnight interbank landing as a tax is higher than the interest received on such overnight lending at current interest rates. The tax alone amounts to a 15% a year overnight LIBOR (for something rolled over daily which is unlikely, I agree).
Does anyone really think that high short term interest rates is quite what we’d like to have at present? Reduced liquidity in the interbank markets? Given that one of the major worries 18 months back was that said interbank markets would entirely seize up?
@32: the mere existence of ugly poor people clogging up the country is a drain on the ability of beautiful rich people to enjoy themselves, but I don’t think you’d find many takers for the proposition that we ought to kill off all the ugly poor people. The point of tax is to take some money away from rich people – like the ones who have private pensions [because poor people certainly don’t]. If you don’t like it, start your own country.
“The Robin Hood Tax will not impact on personal banking or on retail banking. That’s because it targets a distinct area of bank operations – high-frequency large-volume trading, undertaken by financial institutions in the ‘casino economy’. 

If you change money to go on holiday, send remittances abroad, invest in a pension fund or take out a mortgage, you will not be affected by this tiny tax.”
34- are you suggesting we should let LIBOR reign freely over all the woods of Nottingham? But that would mean that it would be more difficult for overnight speculation and what would we do without overnight speculation? What in earth would we do if people could not use their nights in the absolute freedom to speculate?
I suggest we put Worstall on ebay. Head-to-head with Daniel. Winner takes all.
32: Indeed, and what is the incidence of that tax?
Well, yes, it does indeed make the things taxed more costly. It would be rather a shock if it didn’t. But the argument here is not that a transaction tax would make transactions more expensive, but that it would lead either to the disappearance of the UK as a major financial centre or to the relegation of London behind other financial centres. Neither of these have happened. The conclusion from the stamp duty is that you can indeed impose purely national transaction taxes without completely wrecking your competitiveness as a financial centre.
Does anyone really think that high short term interest rates is quite what we’d like to have at present? Reduced liquidity in the interbank markets? Given that one of the major worries 18 months back was that said interbank markets would entirely seize up?
That was a solvency crisis. Banks were terrified of lending to other banks because they thought those banks might be insolvent. The imposition of a 5bp tax on interbank lending wouldn’t have made a difference to this situation.
And encouraging banks to fund themselves through non-Tobin-taxed means – such as through deposits, rather than the capital markets – would have been rather a good thing for e.g. Northern Rock.
On the whole, it’s not. As a first approximation, things add up, but errors and uncertainties of various forms are proportional to transaction size, not net balance change. As the speculative transaction rate rises, they dwarf actual changes in economic activity. Fraud, agency problems, risk definition and so on are manageable problems only at manageable transaction volumes.
In the limit, it becomes locally economically rational for a speculation-based firm to pay a single trader a bonus the size of a major industry in a mid-sized country for not screwing up quite as badly as his peers.
At that point, you have an economic system that is CINO: Capitalism In Name Only. It simply doesn’t have any of the systemic properties, good and bad, that people spent the 20C fighting over.
but I don’t think you’d find many takers for the proposition that we ought to kill off all the ugly poor people
“The sun beams down on a brand new day
No more welfare tax to pay
Unsightly slums gone up in flashing light
Jobless millions whisked away
At last we have more room to play
All systems go to kill the poor tonight”
Not that I’m ungrateful for the spectacle, is it “bait Worstall then laugh at his unavailing attempts to be taken seriously” week? If so, does this event have a Facebook group?
@36 – gosh, did I say that I’d written that website? If I did it must have been in my sleep. The point of tax – in a society with any aspiration to justice – is still to take money away from people who can afford it. Taking tax away from people who can’t afford it to give to people who can is called ‘being a fascist pig’, and gets you one, ONE, free trip to the brick wall of your choice, bot bot bot…
Mr Worstall does in my view tend to be wrong a lot, but he’s often more courteous in his contributions than some of the people overkeen to make that point.
It’s interesting, incidentally, to compare 32, which opposes the transaction tax because it will make life difficult for high-speed traders, who are a good thing because they lower stock prices: what they do is provide good to great short term liquidity in markets that already have ok liquidity. They are excellent at that function, and prices that average (meaning me and you) investors pay to invest in normal, everyday stocks is much lower because of their participation.
with 33, which opposes a transaction tax because it lowers stock prices: and what is the incidence of that tax? The IFS says it depresses the value of UK listed shares: making capital-raising more expensive.
he’s often more courteous in his contributions than some of the people overkeen to make that point
I think that the evidence shows that this statement is itself a bit Worstall; in fact he’s entirely given to calling people “Economic Idiots”, writing pissy obituaries etc.
Not on here, though, which was my point. (Also see Marko, perhaps notorious for a bloke-out-of-Scanners approach on his own blog, but perfectly polite on his rare visits to Aaronovitch Watch.)
We don’t have a supranational body because there’s no will to do something perfectly legitimate and sensible like imposing a Tobin tax.
(to dsquared: the idea as I understand it is to slow down short term speculation, the fact that the money that does get through is used for this or for that is accidental and it is not helpful to lump all of the lefty wishes together; it blurs the argument that’s there)
Campaigners for a “Robin Hood tax” watched with alarm as thousands of votes poured into their website, rejecting their proposal for a levy on City wheeler-dealing, to raise money to fight poverty and climate change.
After a bit more investigation, though, the unlikely backlash against the rob-the-rich plan – almost 5,000 no votes against the Robin Hood tax within 20 minutes – turned out to emanate from just two computer servers, one of which was registered to the investment bank Goldman Sachs.
What practical difference exists between “short term speculation” that’s supposedly causing so many social harms, and ordinary market making? I wonder too how changes in trading volume are presumed to cause volatility… the relationship is almost certainly inverse in equity markets (thinner issues are almost always more volatile.)
I doubt increased volumes have depressed equity values but they’ve certainly shrunk the bid/ask spreads on listed equities (1/8th in the 70’s ,1/16th in the 80’s , 1/100 today). Won’t a Tobin tax just be baked into the dealer’s spread? How will this liquidity charge *not* be passed through to (eg) pension fund investors?
Dsquared, didn’t the 1986 finance act exempt market makers and broker-dealers from the stamp tax? Am I wrong on this? I don’t see how it compares to the tax under discussion.
Chris (54) –
I think the Robin Hood people deserved that one. These “online voting” things are a farce and I applaud any effort to ridicule them, even if it emanates from an investment bank.
Gimmicky online polls are at the Murdoch/Fox News level of discourse. They should have no place in an honest debate.
I misspoke – what I meant to say that high speed trading reduces the costs associated with normal investors participating in the stock market.
The largest cost that nearly all investors face is the bid/ask spread. High speed traders reduce the bid ask spread for almost any exchange transaction that you or I would be party to. Crossing the bid/ask spread is a real cost. Usually, this cost is far higher than the brokerage cost.
High speed trading does not reduce the price of the shares, it reduces the “price” of participation.
The bid/ask spread in illiquid products contributes greatly to the profits of the banks.
Yes, they make lots of money in high speed trading. However, this money used to:
1. be much greater
2. go to different people.
3. and now goes to fewer people
Look up the history of Knight “Trading”. Really, high frequency trading should be called high frequency market making. That is the function they are providing. Yes it is lucrative – it has always been extremely lucrative. My boss made several 10’s of millions as a market maker in the trading pits of Chicago. But really, these “traders” in chicago were not really traders – they were largely market makers.
Today, the same function is provided by computers and high frequency computer trading. Less money is being made overall – probably by a factor of 2 or so because of competition.
But, the money is concentrated in far fewer hands. There are only a few 10’s of good market making firms out there, whereas during the heyday of the human market makers, there were thousands at the CME alone, much less the CBOT, NYSE, CBOE, Philex, Comex, NYMEX, Liffe, LSE, and so on.
Now, you have firms like Getco, Goldman (former Hull Trading, purchased for $900M or so back in 2000), Citadel, Timber Hill, and a few others making markets in hundreds of stocks and commidites at the same time. You learn how to create the infrastructure and trading programs, then you can deploy that same idea across any liquid market internationally over the course of 3 years.
I know this because I’ve lived it. Also, I’ve talked to these people over beers and dinner, coffee and had my kids at their houses. Two of my good friends entire job is to seek out relatively liquid international markets, so these companies based out of Chicago can take their existing knowledge of technology and algo trading and deploy it within a period of a year to entirely new markets.
These are companies who go trade significant percentages of the NYSE volume. They go home with almost no positions every day. You would not recognize their names, and they really never have on huge positions. They just make $100-200 at a time, hundreds of times a day.
{ 61 comments }
Phil Ruse 02.10.10 at 8:56 am
Another indirect tax on the population? And are there people who still believe that ring fencing such income would really work?
Tim Worstall 02.10.10 at 11:25 am
The idea that you can raise $400 billion in tax out of an industry that makes $780 billion globally in profits (numbers from their website) without it actually being the consumer that pays the tax does seem a little strange.
Haven’t they ever heard of tax incidence?
Plus, given the accounting of it, the tax is levied on the nominal figures for options and futures, not premiums. So that pretty much closes down those. Plus the overnight lending markets disappear. Short term commercial paper as well…..
There’s rather more cost to this tax than some seem to be assuming really….
Chris Bertram 02.10.10 at 12:06 pm
Prediction posted at 8.08am, waggy finger wagged at 11.40am
http://timesonline.typepad.com/oliver_kamm/2010/02/not-time-for-tobin.html
Casey Jennings 02.10.10 at 12:18 pm
I actually rather like it, also keep in mind Tobin never thought of it as a huge money raiser, it was “sand in the gears” intended to raise the cost of speculation not investment. But then I suppose we all still believe that speculation makes the world go round, sorta like the EMH, and magic ponies.
JoB 02.10.10 at 12:20 pm
2- How much do they pay you for distributing this non-information? And, crucially, have your services been developed in response to market pressures?
a different chris 02.10.10 at 12:35 pm
…pretty much closes down (options,futures,overnight lending markets, short term commercial paper)…
Yeah, I no longer buy groceries because of the incidence of the sales tax.
Seriously I hope you’ve had a nice lunch and calmed down a bit. That was about the most hysterical reaction (in both the hysteria on your part and the hysterical laughter on mine) I’ve ever seen to a tax on the internets, and that’s saying something.
As per your concern for those “consumers” (the wonderful one-dimensional people of mainstream economics theory)… I’ll leave others to dispute your figures. I’m tired of explaining that supply and demand sets prices, not taxation levels. Ever heard of “churning”.. if not, can I be your financial advisor?
Anyway, lets accept your “the consumers pay” and they are being a bit loose with trying to pretend they won’t.
I still don’t care. Said consumers -aka The People – need a social governance structure outside of The Market, aka The Government for various things that we will not go into here. The Government needs to be funded because people will neither work for it for free or give it things for free.
And it is not sized due to what The People want to pay but what The People need to pay. So if you don’t raise X billion from a The People thru a Tobin tax, then you have to extract X billion from The People some other way. Thanks for trying to shift it off the wealthiest and least productive among us, that’s heartwarming.
We are seeing behavior that seems destructive for reasons Tobin and others have laid out, and this tax seems like it might have an effect on that for reasons that Tobin and others have discussed. I’m having a hard time getting worked up about it.
alex 02.10.10 at 12:54 pm
Between the knee-jerks on either side, could we have an evaluation of how much of the alleged GDP of western countries is made up of various forms of churning which, if threatened by a Tobin tax, might [or might not] lead to calamitous real-world impacts?
ajay 02.10.10 at 12:56 pm
5: JoB, you’re clearly enslaved to the erroneous and constricting doctrine of the free market. You should be ashamed of yourself. Consider book VIII of the Meditations of Marcus Aurelius: “This thing, what is it in itself, in its own constitution? What is its substance and material? And what its causal nature or form? And what is it doing in the world?”
Why must you assume that Worstall talks continual rubbish because he’s being paid? Does the skylark sing for pay? Does the salmon swim or the daffodil bloom for a monthly salary? Does Himalaya loom in glacial majesty over the sources of Asia’s mighty rivers because doing so produces an acceptable return on capital? No, they do it because it is inherent in their natures. A salmon which does not swim is no longer, in a very meaningful way, a salmon at all. A daffodil that doesn’t bloom is just a funny-tasting onion. Worstall not talking nonsense about everything is simply a contradiction in terms.
JoB 02.10.10 at 1:43 pm
ajay, if he isn’t paid for these snippets, where does he get his money from? In which competitive and highly unregulated way does he obtain the funds that allow him to acquire and distribute his omniscience?
dsquared 02.10.10 at 2:30 pm
While I am somewhat sceptical about this tax (specifically, I don’t see how one would sensibly hypothecate it to the purpose proposed, or why you’d want to make the budgets for poverty reduction and climate change a function of securities market turnover, etc etc), I do think that a) anyone arguing against it has something of a duty to at least mention Stamp Duty Reserve Tax, which raises a pretty reliable £4bn per year and which has not visibly made the London Stock Exchange disappear, and b) that anyone citing Merton Miller always needs to do some careful due diligence on whether they’re citing one of the excellent economics papers written before he got his Nobel gong, or one of the really really embarrassing hack-jobs he churned out after (cf the notorious “Metallgesellschaft and the Economics of Synthetic Storage”, Culp & Miller 1995, which is actually taught at the LBS as an example of the fallacy of untailed hedging). I haven’t read the Miller paper that Oliver cites, but if Merton Miller was seriously talking about letter stock as if it were relevant to a 5bp transaction tax[1], then I would guess it was in the second category.
Miracle Max 02.10.10 at 3:06 pm
Wasn’t that guy in Shaun of the Dead? I kept waiting for him to turn and bite the interviewer in the neck. (Always raising the intellectual tone here.)
Ombrageux 02.10.10 at 3:09 pm
Excellently executed ad, may as well be art. No idea on the specifics of whether it works.
Billikin 02.10.10 at 3:30 pm
Phil Ruse: “Another indirect tax on the population? And are there people who still believe that ring fencing such income would really work?”
Ah, yes! The frictionless world.
bob mcmanus 02.10.10 at 3:55 pm
11:I am saddened to live in a world where Bill Nighy is not recognized on sight.
Miracle Max 02.10.10 at 4:10 pm
14: If he hasn’t been on American Idol, we don’t know him.
JoB 02.10.10 at 4:27 pm
By the way, the Tobin tax is the law in Belgium – it gets activated when the EU goes for it and the government has a duty to try to convince the EU to go for it.
(not that I think it is a very good idea to make laws like that in general but I thought it might be interesting for some of you to know that it is, in fact, endorsed officially somewhere)
David 02.10.10 at 5:17 pm
Bill Nighy is Rufus Scrimegour? Why on earth isn’t he Xenophilius Lovegood, a part he was made to play?
alex 02.10.10 at 6:34 pm
He’s the king of the vampires in Underworld, does that help?
geo 02.10.10 at 6:43 pm
Does the skylark sing for pay? Does the salmon swim or the daffodil bloom for a monthly salary? Does Himalaya loom in glacial majesty over the sources of Asia’s mighty rivers because doing so produces an acceptable return on capital? No, they do it because it is inherent in their natures. A salmon which does not swim is no longer, in a very meaningful way, a salmon at all. A daffodil that doesn’t bloom is just a funny-tasting onion.
Exquisite prose, ajay. Carry on.
Sebastian 02.10.10 at 7:05 pm
I’m generally pro-Tobin tax – although I think concerns about a purely national solution – especially for the UK – might be justified. I’d say the EU as a whole would most likely be large enough to pull it off, though. I would be more cautious in expectations about it’s effect both in lowering volatility and generating revenue, but I think there’s a good chance it might work quite well and only a very tiny chance that it would actually do something bad, so I’d be all of trying it.
However, referring to it as a “Robin Hood Tax” has got to be the dumbest thing ever. Robin Hood – aka stealing from the rich and giving to the poor – was/is not a sound economic institution, but an understandable, “populist” reaction to an unjust system. So this just sets up rebuttals along the lines of: “well, we understand you’re angry at the bankers, but this really isn’t rational policy”. Wouldn’t be the way to go on promoting a Tobin tax to show that it’s not populist bank-hating, but sound economic policy, that it’s not stealing from the rich, but regulating financial markets etc. But equating any type of tax with theft (even of the honorable, Robin Hood type) seems like a very bad idea.
Salient 02.10.10 at 7:05 pm
It struck me that this great ad would have sucked terribly as a 30-second TV spot or as a half-hour documentary.
Interpreting Henry’s point to have been that electronic distribution mediums will allow for the length of content created to better match the length necessary to best accomplish its purpose, this video’s a great supporting example.
dsquared 02.10.10 at 8:14 pm
although I think concerns about a purely national solution – especially for the UK – might be justified
the UK already has a purely national transaction tax on equity securities, called Stamp Duty Reserve Tax.
Lemuel Pitkin 02.10.10 at 8:31 pm
dsquared-
Those of us who support a securities transaction tax in the US (we came quite close to passing one in New York State in 2003) always point to the UK tax as evidence that fears of markets relocating in response to such a tax are vastly overblown. But do you think there’s any reason a Stamp Duty-type tax wouldn’t be practical here?
Alex 02.10.10 at 9:05 pm
Sebastian:
Progressive taxation is perfectly sound economic policy.
Alex 02.10.10 at 9:31 pm
On their website, it says:
How is that even possible?
Alex 02.10.10 at 9:32 pm
Oops, blockquote fail.
That should’ve been:
How is that even possible?
Gareth Rees 02.10.10 at 9:58 pm
The same money goes round the system many times. If bank A sells a bond to bank B for £X, and then bank B sells a bond to bank A for £X, this gets counted as a turnover of £2X, even though the resulting positions cancel.
Sebastian 02.11.10 at 1:10 am
dsquared – yeah, but are you really going to tell me that we can be sure that the effects of a tax that brings in 4bil. a year will scale up to a tax that supposedly brings in 10 or 20 times as much? I’m not saying it definitely doesn’t, but if I were a policy maker I’m not sure that’d be a risk I would like to take. As I said – I do think this is worth trying out – but whoever claims that s/he has a good idea about the actual effects of a tax with 50-100bil estimated revenue displays an intellectual hubris that is usually reserved for neoliberal economists.
Alex – absolutely is progressive taxation sound policy. That’s why I’m in favor of a Tobin tax and a progressive income tax. And that’s also why we shouldn’t frame it in terms of a hoodlum and his merry band of outcasts who live in the forest and rather randomly steal from people passing through.
geo 02.11.10 at 1:47 am
Sebastian, I’m shocked. Robin Hood a “hoodlum”?
John Quiggin 02.11.10 at 2:16 am
I think the revenue estimates are probably over-optimistic. Transactions volumes have grown massively, and they would almost certainly contract pretty fast with even a small tax on each go-round. Of course, that’s the idea.
On the other hand, as regards the tax base, it’s not just the banks’ profits but the salary/bonus income of bankers, which is mostly economic profit rather than social opportunity cost, so there is room to raise quite a lot of money.
sg 02.11.10 at 4:31 am
Sebastian! Robin Hood was a messenger from the forest gods who fought a tyrant in the name of the true king and had cool 80s rock god hair. There’s no way he could not be a pin-up boy for this kind of taxation!
Mr. E 02.11.10 at 5:05 am
A transaction tax would hit the wrong people on wall street.
The problem isn’t in the exchange traded or extremely liquid products, like G-7 FX or Futures, or Stocks. We didn’t send $13B to Goldman to cover trading losses in the CME e-Minis. The problems in the financial system are not with high speed trading. High speed trading requires plain vanilla products with lots of liquidity.
This tax wouldn’t effect the CDS market – where spreads are many multiples of the proposed tax. And the CDS market is the one that helped blow the bubble and then popped it with AIG and Lehman.
Really, there are much better places to focus your attention. For example, you could look at making sure that everything is on a balance sheet, and that total leverage never exceeds 20 to 1 including derivatives. This would contract the part of the trading world that loves systemic risk.
High speed traders typically go home with no position. Thats right, when people leave the office, the firm has a total position of zero. Even during the day, their total position isn’t that large at any given moment. I know – I live in Chicago and know these guys (and a few women) personally.
I am not saying there cannot be some computer error that makes a firm lose a few 10’s of millions, or even 100 million+. This is possible and even likely as there are so many firms doing it.
But, by their nature, high speed firms cannot and do not blow asset bubbles, or bankrupt millions of people, or create products that help Greece hide its sovereign debt.
A tobin tax is like going after earmarks in the U.S. budget – great politics, poor results. Really, you need to tackle health care costs, but I guess you can talk about earmarks for a while – it is good press, right? You should spend much more time on the CDS market and OTC products in general. This is where Wall street makes much of its money – and hides the bodies under lack of regulation, and complex products.
Also, most high frequency trading happens in the most regulated of all the financial markets – the stock markets and futures markets. And it happens in the most regulated parts of these markets – the order execution area.
Really, what they do is provide good to great short term liquidity in markets that already have ok liquidity. They are excellent at that function, and prices that average (meaning me and you) investors pay to invest in normal, everyday stocks is much lower because of their participation.
Tim Worstall 02.11.10 at 7:40 am
“the UK already has a purely national transaction tax on equity securities, called Stamp Duty Reserve Tax.”
Indeed, and what is the incidence of that tax? The IFS says it depresses the value of UK listed shares: making capital raising more expensive. Another, more partisan, report says that it reduces the returns to pension funds….taking a bite out of pensions in the end.
Adding 0.05% to, say, overnight interbank landing as a tax is higher than the interest received on such overnight lending at current interest rates. The tax alone amounts to a 15% a year overnight LIBOR (for something rolled over daily which is unlikely, I agree).
Does anyone really think that high short term interest rates is quite what we’d like to have at present? Reduced liquidity in the interbank markets? Given that one of the major worries 18 months back was that said interbank markets would entirely seize up?
alex 02.11.10 at 8:38 am
@32: the mere existence of ugly poor people clogging up the country is a drain on the ability of beautiful rich people to enjoy themselves, but I don’t think you’d find many takers for the proposition that we ought to kill off all the ugly poor people. The point of tax is to take some money away from rich people – like the ones who have private pensions [because poor people certainly don’t]. If you don’t like it, start your own country.
Walt 02.11.10 at 9:26 am
I admit it. I pay Worstall to post on the Internet. It’s because he inspires such good work in response.
Tim Worstall 02.11.10 at 9:42 am
From the Robin Hood Tax website:
“The Robin Hood Tax will not impact on personal banking or on retail banking. That’s because it targets a distinct area of bank operations – high-frequency large-volume trading, undertaken by financial institutions in the ‘casino economy’. 

If you change money to go on holiday, send remittances abroad, invest in a pension fund or take out a mortgage, you will not be affected by this tiny tax.”
http://robinhoodtax.org.uk/how-it-works/the-big-idea/
“The point of tax is to take some money away from rich people – like the ones who have private pensions [because poor people certainly don’t].”
Something of an inconsistency between those two.
JoB 02.11.10 at 10:04 am
34- are you suggesting we should let LIBOR reign freely over all the woods of Nottingham? But that would mean that it would be more difficult for overnight speculation and what would we do without overnight speculation? What in earth would we do if people could not use their nights in the absolute freedom to speculate?
I suggest we put Worstall on ebay. Head-to-head with Daniel. Winner takes all.
ajay 02.11.10 at 11:12 am
32: Indeed, and what is the incidence of that tax?
Well, yes, it does indeed make the things taxed more costly. It would be rather a shock if it didn’t. But the argument here is not that a transaction tax would make transactions more expensive, but that it would lead either to the disappearance of the UK as a major financial centre or to the relegation of London behind other financial centres. Neither of these have happened. The conclusion from the stamp duty is that you can indeed impose purely national transaction taxes without completely wrecking your competitiveness as a financial centre.
Does anyone really think that high short term interest rates is quite what we’d like to have at present? Reduced liquidity in the interbank markets? Given that one of the major worries 18 months back was that said interbank markets would entirely seize up?
That was a solvency crisis. Banks were terrified of lending to other banks because they thought those banks might be insolvent. The imposition of a 5bp tax on interbank lending wouldn’t have made a difference to this situation.
And encouraging banks to fund themselves through non-Tobin-taxed means – such as through deposits, rather than the capital markets – would have been rather a good thing for e.g. Northern Rock.
soru 02.11.10 at 11:26 am
How is that even possible?
On the whole, it’s not. As a first approximation, things add up, but errors and uncertainties of various forms are proportional to transaction size, not net balance change. As the speculative transaction rate rises, they dwarf actual changes in economic activity. Fraud, agency problems, risk definition and so on are manageable problems only at manageable transaction volumes.
In the limit, it becomes locally economically rational for a speculation-based firm to pay a single trader a bonus the size of a major industry in a mid-sized country for not screwing up quite as badly as his peers.
At that point, you have an economic system that is CINO: Capitalism In Name Only. It simply doesn’t have any of the systemic properties, good and bad, that people spent the 20C fighting over.
ejh 02.11.10 at 11:43 am
but I don’t think you’d find many takers for the proposition that we ought to kill off all the ugly poor people
“The sun beams down on a brand new day
No more welfare tax to pay
Unsightly slums gone up in flashing light
Jobless millions whisked away
At last we have more room to play
All systems go to kill the poor tonight”
engels 02.11.10 at 12:25 pm
I would suggest packaging Worstall with a number of similar low-grade right-wing economists and trading him on the London stock exchange.
JoB 02.11.10 at 12:45 pm
Can I slice them in little teeny-weeny pieces and repackage them to go along a glossy brochure?
Neil 02.11.10 at 1:51 pm
Not that I’m ungrateful for the spectacle, is it “bait Worstall then laugh at his unavailing attempts to be taken seriously” week? If so, does this event have a Facebook group?
alex 02.11.10 at 2:47 pm
@36 – gosh, did I say that I’d written that website? If I did it must have been in my sleep. The point of tax – in a society with any aspiration to justice – is still to take money away from people who can afford it. Taking tax away from people who can’t afford it to give to people who can is called ‘being a fascist pig’, and gets you one, ONE, free trip to the brick wall of your choice, bot bot bot…
ejh 02.11.10 at 3:02 pm
Mr Worstall does in my view tend to be wrong a lot, but he’s often more courteous in his contributions than some of the people overkeen to make that point.
ajay 02.11.10 at 4:42 pm
I admit it. I pay Worstall to post on the Internet. It’s because he inspires such good work in response.
He’s a Coasean public good. Ironic, really, given his views.
Not that I’m ungrateful for the spectacle, is it “bait Worstall then laugh at his unavailing attempts to be taken seriously†week?
…decade, actually.
ajay 02.11.10 at 4:48 pm
It’s interesting, incidentally, to compare 32, which opposes the transaction tax because it will make life difficult for high-speed traders, who are a good thing because they lower stock prices:
what they do is provide good to great short term liquidity in markets that already have ok liquidity. They are excellent at that function, and prices that average (meaning me and you) investors pay to invest in normal, everyday stocks is much lower because of their participation.
with 33, which opposes a transaction tax because it lowers stock prices:
and what is the incidence of that tax? The IFS says it depresses the value of UK listed shares: making capital-raising more expensive.
dsquared 02.11.10 at 4:58 pm
he’s often more courteous in his contributions than some of the people overkeen to make that point
I think that the evidence shows that this statement is itself a bit Worstall; in fact he’s entirely given to calling people “Economic Idiots”, writing pissy obituaries etc.
ejh 02.11.10 at 5:32 pm
Not on here, though, which was my point. (Also see Marko, perhaps notorious for a bloke-out-of-Scanners approach on his own blog, but perfectly polite on his rare visits to Aaronovitch Watch.)
Tom 02.11.10 at 8:20 pm
@ajay, 47: the latter actually says that it depresses stock *values*.
Alex 02.11.10 at 10:46 pm
Which decade? 2001-2010? 2010-2019?
Ted 02.12.10 at 5:27 am
There is no hope for such a Tobin Tax because we do not have a supranational body with the legitimacy to collect it.
JoB 02.12.10 at 8:24 am
We don’t have a supranational body because there’s no will to do something perfectly legitimate and sensible like imposing a Tobin tax.
(to dsquared: the idea as I understand it is to slow down short term speculation, the fact that the money that does get through is used for this or for that is accidental and it is not helpful to lump all of the lefty wishes together; it blurs the argument that’s there)
Chris Bertram 02.12.10 at 9:35 am
http://www.guardian.co.uk/business/2010/feb/11/goldman-sachs-tobin-tax
ajay 02.12.10 at 9:57 am
50: is there a distinction, in this context?
JoB 02.12.10 at 12:03 pm
54- so it’s having the intended effect already: one less server speculating against Greece! ;-)
nijl 02.12.10 at 1:00 pm
What practical difference exists between “short term speculation” that’s supposedly causing so many social harms, and ordinary market making? I wonder too how changes in trading volume are presumed to cause volatility… the relationship is almost certainly inverse in equity markets (thinner issues are almost always more volatile.)
I doubt increased volumes have depressed equity values but they’ve certainly shrunk the bid/ask spreads on listed equities (1/8th in the 70’s ,1/16th in the 80’s , 1/100 today). Won’t a Tobin tax just be baked into the dealer’s spread? How will this liquidity charge *not* be passed through to (eg) pension fund investors?
nijl 02.12.10 at 1:17 pm
Dsquared, didn’t the 1986 finance act exempt market makers and broker-dealers from the stamp tax? Am I wrong on this? I don’t see how it compares to the tax under discussion.
Sebastian 02.12.10 at 11:18 pm
Chris (54) –
I think the Robin Hood people deserved that one. These “online voting” things are a farce and I applaud any effort to ridicule them, even if it emanates from an investment bank.
Gimmicky online polls are at the Murdoch/Fox News level of discourse. They should have no place in an honest debate.
Mr. E 02.13.10 at 2:41 am
ajay at 47,
I misspoke – what I meant to say that high speed trading reduces the costs associated with normal investors participating in the stock market.
The largest cost that nearly all investors face is the bid/ask spread. High speed traders reduce the bid ask spread for almost any exchange transaction that you or I would be party to. Crossing the bid/ask spread is a real cost. Usually, this cost is far higher than the brokerage cost.
High speed trading does not reduce the price of the shares, it reduces the “price” of participation.
The bid/ask spread in illiquid products contributes greatly to the profits of the banks.
Yes, they make lots of money in high speed trading. However, this money used to:
1. be much greater
2. go to different people.
3. and now goes to fewer people
Look up the history of Knight “Trading”. Really, high frequency trading should be called high frequency market making. That is the function they are providing. Yes it is lucrative – it has always been extremely lucrative. My boss made several 10’s of millions as a market maker in the trading pits of Chicago. But really, these “traders” in chicago were not really traders – they were largely market makers.
Today, the same function is provided by computers and high frequency computer trading. Less money is being made overall – probably by a factor of 2 or so because of competition.
But, the money is concentrated in far fewer hands. There are only a few 10’s of good market making firms out there, whereas during the heyday of the human market makers, there were thousands at the CME alone, much less the CBOT, NYSE, CBOE, Philex, Comex, NYMEX, Liffe, LSE, and so on.
Now, you have firms like Getco, Goldman (former Hull Trading, purchased for $900M or so back in 2000), Citadel, Timber Hill, and a few others making markets in hundreds of stocks and commidites at the same time. You learn how to create the infrastructure and trading programs, then you can deploy that same idea across any liquid market internationally over the course of 3 years.
I know this because I’ve lived it. Also, I’ve talked to these people over beers and dinner, coffee and had my kids at their houses. Two of my good friends entire job is to seek out relatively liquid international markets, so these companies based out of Chicago can take their existing knowledge of technology and algo trading and deploy it within a period of a year to entirely new markets.
These are companies who go trade significant percentages of the NYSE volume. They go home with almost no positions every day. You would not recognize their names, and they really never have on huge positions. They just make $100-200 at a time, hundreds of times a day.
ajay 02.15.10 at 10:40 am
60: ah, I see. That makes sense, thanks.
Comments on this entry are closed.