He says, again, that he’s cracked it.
A Robin Hood Tax – a financial transaction tax – is back on the agenda thanks to the EU, and rightly so.
I wrote about this in 2010 in a joint publication called ‘Taxing Banks‘. In it I set out the data supporting such a tax, estimated how much it would raise and suggested – contrary to the claim of bankers – that the charge would not end up falling on bank customers but on the banks themselves.
Just to remind you, here’s the entirety of his logic:
Before making recommendations it is important to address a contentious issue, which is whether a bank, as a
limited liability corporation can ever pay tax itself, or whether it acts as a mere conduit to transfer tax liability
Those who subscribe to the idea that banks (and other limited liability entities) do not pay tax refer to the
theory of tax incidence to support their views. This theory suggests that as legal liability entities are not real
people, and just agents for them, and only real people can actually pay tax, the burden of any tax imposed on
such an entity is always passed on to others and this has to be determined before the consequence of any tax
charge can be determined.
There can be little doubt that the theory of tax incidence has technical validity in economic theory. If, as that
theory assumes, corporations are run for their shareholders, and all consequences of corporate behaviour flow
to those who engage with the entity in one form or another – this being a view that essentially sees the limited
liability entity as little more than a bundle of contractual arrangements – then it follows, as the theory
suggests, that if a tax burden on a limited entity cannot be passed on by it to its customers by way of higher
prices to its suppliers by way of lower prices or its employees by way of lower wages then the shareholders will
suffer the burden of the tax, either through reduced earnings paid by way of dividend or through lower
retained earnings, the latter being assumed to be reflected directly in the price of equity in the company.
Unfortunately the impact of tax incidence in practice is less predictable then economic theory suggests likely
to be the case. Corporations can readily change where, when and at what rate they pay tax. They do this by
relocating transactions and whole businesses, by tax avoiding and by tax arbitraging. If they were not liable for
the taxes they pay there would be little logic to any of these actions and it is reasonable to assume they are
rational. In addition, when it appears that banks can to some degree choose the incidence of any tax imposed
on them (as the current reaction bonus taxes on bankers in the UK shows7) there is no reliable basis on which
to estimate or predict tax incidence resulting from any given change in policy.
Additionally, it may be a logical error to assume that corporations are mere agents and act as a bundle of
contracts. The reality is that corporations are synergistic entities that appear to create worth in their own
right. Indeed, if they did not there is no logical reason for them to exist. This does, however, suggest that it is
possible for the incidence of a tax to fall upon the corporation itself.
In that case the only rational thing to do is assume that banks are, at least in some cases, as noted in this
report, the taxpayer who does bear the burden of the tax charged to them. It is therefore reasonable to think
that additional taxes charged to banks might result in those banks making contribution to the governments
that have suffered the cost of repairing the banking system. This is assumed in this report unless noted
This is what the TUC, TJN, Christian Aid etc rely upon as their evidence that yes, really, banks will be the people who pay the tax.
Economic theory says that companies cannot pay the tax. Ritchie says that they can and that’s it, settled. Never mind what the OECD has said about it, the IMF, even the EU report notes that banks themselves will not bear the incidence of the tax. Never mind that we’ve actually known that companies do not bear the incidence of taxes since 1899, when Seligman wrote on the subject.
Ritchie declares that this is all a logical error and therefore, dangnammit, don’t listen to them over there.
And people wonder why I snarl about him so much.