Sunday, 4 January 2015

"Why We Want Dynamic Scoring Of Budgets..."

Emailed in by MBK, an article by Tim Worstall in Forbes:

However, we also know that different taxes have different deadweight costs. Sometimes the deadweight cost is actually the reason to impose the tax. This is partially true of Pigou Taxes (like a carbon tax, the aim and point is to reduce carbon emissions) and others like cigarette taxes can sometimes be so classified.

We even know a rough order of ranking of those deadweight costs.

Transactions taxes have vast deadweight costs: at least one official report on the financial transactions tax (the report from the EU itself) tells us that that tax would make the whole economy so much smaller that it would actually lose tax revenue by being levied. Lower than that are wealth taxes (a once off wealth tax that no one knows is coming does not, but a regular one does), then capital and corporation taxes, then income taxes, then with still lower deadweight costs consumption taxes (like a VAT or sales tax)* and then finally, at the bottom, we find that repeated taxes on non-movable property can even have positive deadweights. And that last can also be called a land value tax.

Please do note again that this is nothing to do with how much we tax but only with how we tax. Further, all of these assumptions have been tested emiprically and make up the heart of optimal taxation theory. We really do know that if we raise $100 in a transactions tax then we’ll lose more economic activity than if we raise $100 in a land value tax.

* He consistently ranks these incorrectly. VAT and sales taxes are transaction taxes, and hence go to the very top of the naughty list. But hey.


The Stigler said...

lefties, righties, it's more complicated than that, isn't it? Plenty of London Labour MPs want to protect house prices in London.

Meanwhile, Milton Friedman would probably agree with what Stiglitz said there.

Mark Wadsworth said...

TS: "Plenty of London Labour MPs want to protect house prices in London."

They are neither lefties nor righties, they are Homeys.

In this context, I'd count Stiglitz and in particular Picketty as "lefties" because they see inequality as inherently a bad thing and equality as a good thing, however it is achieved.

My view is that with the right tax system in place, there'd be more wealth and less inequality. But that's just reinstating the natural order of things and not "starting off where we are and working backwards".

Anonymous said...

In terms of a financial transaction tax, even if we accept the claim that deadweight costs are greater than revenue gained from the tax, in the case of an FTT that, [as in the case of a carbon tax] is a feature, not a bug.

The Stigler said...

wrong article... oops.

Mark Wadsworth said...


a) There's nothing wrong with financial transactions, as such.

b) An FTT is unenforceable, transactions will just be booked overseas or not reported.

c) If a tax can't be enforced, it is a bad tax.

d) Taxes can only be enforced at national level, so good taxes, in this context are:

i. Bank asset tax on the value of UK lending.

ii. Land Value Tax - seeing as 80% of bank lending is secured on land.

Anonymous said...

Your a) As with most things, nothing wrong in moderation. So there's something very wrong with financial transactions, or the level at which they have been carried out as well as the degree of abstraction to which they have evolved.
b) Dozens of countries have some form of FTT already including the UK.Not reporting trades sounds suspiciously like evasion rather than avoidance.
d)i & ii. Not disagreeing with that. Yet as things stand we are more likely to see a global agreement on a FTT [maybe after one more blowoff] than a national agreement on LVT which is widely regarded as good as an electoral suicide note by both main parties.

Mark Wadsworth said...

PC, I disagree hotly.

"Financial transactions" themselves are innocuous, it all depends on what is being bought and sold.

If what is being bought and sold is "unaffordable mortgage debt" then that is a bad thing, but "unaffordable mortgage debt" is inherently a bad thing, whether it is constantly being bought and sold or not.

If that is too complicated for you, it's like the difference between "selling" and "stolen goods".

"Selling" is harmless, "stolen goods" is inherently a bad thing.

Anonymous said...

I think it's a bit semantic but I'd take issue with with you on two fronts. Financial trans' are in and of themselves innocuous but there are two aspects which are not. One is the sheer volume/speed of trading that has become a source of revenue for banks that effectively amplifies risks [flash crashes, fat tail events] and fleeces investors [churning]. It's precisely these sorts of transactions made on wafer margins that would be in jeopardy from even a tiny FTT.
Furthermore, the development of 'investment' vehicles meant primarily to deceive the buyer is in itself a modern development and one that is harmful to the wider economy and the industry itself ultimately since only through the implicit public subsidy and insurance that those banks enjoy are they able to engage in such practices.

Now if the industry were to get trimmed down to size and activity levels via LVT then I accept that would be the best solution. In the absence of LVT a FTT is the best alternative we can hope for in my opinion.

Mark Wadsworth said...

PC, that's knee jerk stuff and you are confusing two separate issues:

1. High frequency trading and churn. This is a bit naughty but largely voluntary. Nobody is forced to give the banks their money to speculate with and nobody is forced to play the stock exchange or currency markets.

2. Packaging of unaffordable mortgage debt into so-called safe investments. This is evil.

An FTT would reduce the amount of the former but would have little impact on the latter.

So wrong problem, wrong solution.

The way to shut down 2 as well as raising a few billion quid, a bank asset tax (which already exists) would hit the spot, it is also easily enforceable.