The reason I would not support this transaction tax even at this small rate is because of what is likely to happen in the future. Once introduced politicians will increase it. Politicians have constituencies and constituents demand spending. Generally raising taxes does not make politicians very popular with their constituents. What better way than just to tweak the transaction tax ever upwards. No crowds of angry protesters as it is just those nasty bankers and hedge funds getting taxed. Eventually the tax is not internalised and it does start to widen spreads. I don’t go a bundle on the efficient market hypothesis. However, I also don’t believe a price can be as efficient with a tax applied and a wider spread as one without a tax.

If we in the UK want to raise a lot of money from a tax (27 billion) with a positive effect on the environment then remove the VAT zero-rating on food. There is a tremendous amount of food wasted in the UK, with much of it ending up in landfill. With VAT applied food would be used more efficiently and less wasted. This would obviously affect regressively those on low-incomes. So counteract the effects through the tax and benefits system for those on low-incomes.

(And it’s probably libellous).

Both his links are well worth a read.

I’m even tempted to say that Giles may be closer to us than he is to Tim, (if still more of a cutter) – but I suspect that would only lead to trouble.

And rather than reply to Tim I think this response on Duncan’s Oxfam blog by Sony does it pretty well:

http://www.oxfamblogs.org/fp2p/?p=2009#comment-11900

http://www.centreforum.org/publications/a-balancing-act.html

I am not an ideological cutter. In fact, while I’m posting myself here, read this piece of utter contrarian excellence

http://freethinkingeconomist.com/2010/01/06/the-government-is-smaller-than-you-think/

We do have to cut, eventually: you can’t have your revenue machine generating 10% less without the spending coming down …. eventually. But I’m no Adam Smith Institute ideologue, sir …

I’m a Fellow at the Adam Smith Inst, so yes, that goes with the territory.

“Financial transaction taxes will have a progressive incidence. ”

No, that’s the thing that needs to be proved, not the thing that can be assumed.

If the incidence is upon all users of financial markets then it’s not in fact all that progressive.

Indeed, we can go further. If margins widen as a result of reduced liquidity, what happens next? OK, we’ve seen that the bruden falls on users. But where do the margins go? To the banks and bankers!

An FTT can therefore be highly regressive. No, not will be, but could be. And we’d rather like to nkow before enacting it, would we not?

I’ve read Kapoor’s paper and am deeply unimpressed.

It is rather that any taxation or cuts package affects people in different ways. Financial transaction taxes will have a progressive incidence. Spending cuts or VAT increases will have a regressive impact.

That’s a political choice – and I expect that you too are a cutter, and possibly a more rapid one than Giles.

Ah, no, you’re missing the point about tax incidence. It isn’t that people “will try to pass on” taxes. We’re not invoking agency here.

We’re saying that in response to a change in taxation behaviour will change. As a result of those changes in behaviour then other people will be affected by the tax.

Here, a reduction in liquidity will lead to a widening of margins. Thus everyone using those financial markets where margins have widened faces higher costs. The incidence of the tax therefore falls (at least in part) upon all users of financial markets.

Yes, people changing money to pay for beer on holiday, yes, pension finds, yes, remittances and so on.

There’s also the point that such incidence is not capped at the amount of the tax collected. It was Joe Stiglitz back in 1980 who showed that incidence can be higher than 100%. The effects of the changed behaviour can be more expensive than the sum raised.

That’s the problem with this tax: it’s being sold on a false prospectus. The RHT campaign keeps averring that the consumer in general won’t be affected. And yet they will be.

“While I would like to live in a world where issues are settled by dispassionate debate, we don’t – and this is how campaigning works.”

That’s a pretty weasel worded way of saying “we’ll get people to support this by lying to them”.