Will Planned Bank Taxes Go Far Enough?

The UK emergency budget, which will impose a £2billion tax on banks, both domestic and foreign bank operations domiciled there, along with the upcoming G20 meetings, is pushing a contentious issue to the fore: how and how much to tax banks.

There are two motivations at work. First, with most advanced economies keen to narrow fiscal deficits that blew out as a result of the global financial crisis, the perps are a logical target. Second, taxes are a way to discourage certain types of behavior.

George Osborne, the UK chancellor, said that France and Germany had pledged to implement similar levies. The Financial Times summarized the new taxes:

Mr Osborne said the new UK levy would be calculated on the basis of its total liabilities less core capital and insured deposits. So-called repo funding, liquid funds guaranteed with government bonds, would also be exempt. In a move to encourage banks to lengthen funding terms, the levy will be charged at half the rate on financing longer than a year.

Treasury documents suggested that the levy would raise £1.2bn next year, with the levy pitched at 0.04 per cent of targeted liabilities, rising to 0.07 per cent the following year, generating more than £2bn in 2012.

Mr Osborne said he would separately pursue a globally co-ordinated tax on bank profits or remuneration, as recommended by the International Monetary Fund.

Yves here. The biggest risk of banking is simultaneously their raison d’etre. They take short term funding and make longer term loans. When they screw up (either due to making too many bad loans or by having liquidity problems by going too far with the classic “borrow short-lend long” formula), the state has to rescue big banks. Since we haven’t solved the big bank problem, and banks seem constitutionally incapable of reforming themselves, the next best idea appears to be to nudge them in the direction of operating with bigger safety buffers. One of them, per the formula above, is to reward banks for relying more on deposits (which even though they technically can be withdrawn at will, from a practical standpoint are pretty sticky) and, when they borrow, for relying on longer-term funding.

The problem is that the UK bank levy appears to be a bit of sleight of hand, and may do little to change behavior. Even though, per the Financial Times, Osborne contended, “the new levy ‘far outweighs’ any tax benefits extended to the corporate sector as a whole, analysts disagreed. From the Guardian:

Deutsche Bank analysts noted the significance of the corporation tax change. “Taking 2% off the 2012 tax rate for the five banks listed in the UK would increase profit by £1.16bn, that it is should almost offset all of the banks tax. Overall a good outcome for the banks.”

But even with that sop, international banks are threatening to shift assets into Japan or Switzerland (note: I wouldn’t bet on Japan as a safe haven if the US, UK, and EU manage to act in a coordinated manner). Political and budget commentators in the UK noted that the banks got off easy. Unions in particular were unhappy both about the level of the levy, less than half of what had been anticipated, and worse, the failure to impose effective taxes on bonuses. Bank shares rose even as industry executives howled.

Unfortunately, there is not assurance that even this modest move to tax an industry that just wrecked the global economy will get much traction. As the Wall Street Journal noted:

Bank levies will be on the agenda at the Toronto summit, according to G-20 officials, as its leaders seek to maintain a united front on tax and regulatory changes to avoid a repeat of the recent meltdown. Officials are expected to agree in principle, as they have in the past, that citizens shouldn’t pay for the sins of their countries’ banks.

But in the details, leaders are likely to agree to disagree, say people close to the matter. The countries that have footed the bill to bail out their financial sectors—including the U.K., U.S., Germany and France—are backing various levies on bank balance sheets. Countries such as Canada and Australia see such levies as punishment for their banks, which were left relatively unscathed by the credit crisis.

Yves here. Cynics might say that the reason Canada and Australia have done well so far is first, their overheated residential real estate markets haven’t crashed yet. Second, as commodities-driven economies, they have been the biggest beneficiaries of China’s pumping a trillion dollars of liquidity into its economy during the crisis. Third, as as countries that are not capital exporters (as in they do not have high domestic savings rates) their financial institutions were not investors in foreign assets, and hence did not load up on toxic US paper. But don’t expect those arguments to carry much weight with politicians in those countries.

And in any event, these holdouts may not make much difference if the G20 members are successful in agreeing to implement measures to prevent banks from moving to avoid taxed. Presumably, that would include shifting assets or exposures. But it will take a real show of unity, plus some tenacity, to make even a modest measure like this stick.

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  1. Anonamous

    Australia has no need for such a tax; our housing market will not crash as it has in the US and UK because our economy is sound and improving, plus migrants need homes when they move here. China our largest trading partner has just signed commercial deals worth 10 billion,ABARE says we will export 30% more alone in commodities next year and WA has labor shortages.If people in the US and UK dont like their new bank taxes, they can always open accounts in Australia via the internet to avoid them.

    1. scottinnj

      The big 4 Oz banks are all highly reliant on wholesale international funding i.e a a result of years of current account deficits. When the financial crisis hit the Aussie government was quick to provide (for a fee, the quantum of which I don’t recall) a guarantee so that a liquidity issue didn’t turn into a solvency issue. Plus, quite frankly, the market is so oligopolistic (the Big 4 have gained share since the start of the crisis) that it is almost impossible to blow them up (The National tried with a disaster in the US home loan market but even that hardly hurt in the long run)

      I agree that Oz has been resiliant, though I have to observe that it usually is a winning strategy to take the other side of the ‘its different this time/here’ argument. Certainly the worst excesses of the US loan market aren’t evident which helps as does the commodity boom so maybe the floor is higher but it still appears frothy.

  2. michel

    The thing that is striking to some in Europe about the UK so called ‘austerity’ budget is how moderate it is – too moderate one might think. Many of the measures take effect if they do a year or two from now. Many of the most egregiously idiotic government programs are being canceled, but many are not, they are simply being pruned when they should be abolished. But the discussion showed clearly what the choices are, which most of the left commentators always refuse to discuss in quantitative terms.

    We start with debt as about 62% of GDP, and the current deficit as 11%. We know that when a country gets to debt of 90% of GDP (whether it operates its own currency or not) growth slows and stops. We know this from the impeccably liberal source of Rogoff and Reinhart.

    The argument from the left is that to carry on like this will in some way they do not specify lead to economic recovery, or as they usually put it, to stop doing this will lead to a double dip recession.

    Carry on like this for three more years, and you are over 90%. No ifs ands or buts about it. So the question for the left is, why do you think that this time it will be different? Why do you think that to carry on borrowing and wasting will have ANY beneficial effects on growth? What exactly do you want to do about the deficit: how do you propose to keep debt under 90% of GDP by continuing to run deficits of over 10%?

    This is, as someone said of Reagan’s deficit spending and tax reductions, the economics of the madhouse, and for the same reason: it is denying that deficits matter. Nor is it even ‘progressive’. As the leader of the impeccably liberal Liberal Democratic party in the UK said: spending more on state interest payments on state debt than you do on hospitals or education is not progressive. As the Labour MP Frank Field has said, also impeccably liberal, incenting the poor to work hard at spending a life out of employment and on benefits is not benefiting them, it is wasting them.

    Not that this is really about benefiting the poor. What we now see the left defending is indefensible. It was public sector union looting, on the same scale or greater than than the looting of the economy by the Finance sector, which, with the collusion of the last government, got us into the financial crisis.

    The UK needs to stop making childbearing a state funded profession. It needs to stop incenting people to be disabled. It needs to stop paying huge amounts of housing money to landlords in the form of housing allowances. There are whole government departments which simply need to be abolished.

    The UK also needs to stop a sort of interest group bribery, which is reminiscent of Cook County at its worst, where the left party pays generous untargeted and unscreened state benefits to large areas in exchange for people voting for the party that delivers these. This is the corruption at the heart of the Labor party welfare agenda, and is not caring at all, but exploitative. It is comparable to the former Russian policy of unlimited cheap vodka, never mind the health consequences.

    And contrary to what our host usually says on this blog, when you stop public sector looting, the result will not be disastrous recession, it will be renewed economic growth, and self respect for those who move from dependence to work.

    1. Gerald Muller

      Exactly the same could be said about France, which is in a similar state as the UK.
      Your last paragraph leaves me asking where you have read Yves condoning State looting because otherwise it would lead to economic recession.

    2. aet

      We know things from the evidence, not by consulting the Pope in Rome, or some economists’ academic

      The analogy with Russia and vodka is good, but replace “vodka” with “food, shelter and medical care”and that’s how nation-states ALL work.

      Why not just stop spending on the Iraq and Afghan wars, instead, if you want to save money….

  3. Mickey Hickey

    The link is to an article by Murray Dobbin a well respected reporter in Canada. The site Rabble is a leading left/union/feminist web site that occasionally goes over the top and to the left. Canada Mortgage and Housing Corporation is a state owned entity similar to Fannie Mae and Freddy Mac. Sleight of hand is the modus operandi used to bail out Canadian Banks. The Governor of the Bank of Canada Mark Carney is an ex Goldman Sachs operative who is now “concerned” about consumer indebtedness as interest rates rise on consumer credit and mortgages. The gov’t of Canada is true blue Conservative and talks responsibly but acts like a bunch of big spenders. The gov’ts opposition to bank tax/insurance using the line we did not need to bail out our banks is hypocritical in the extreme.


  4. Layne

    Why go to the trouble of inventing a new tax? Wouldn’t it be better to just directly increase bank’s reserve requirements?

    1. GiggleT

      Because bank reserve requirements can not be used for anything else, whereas a tax can be levied and put into the general coffers for whatever the politicians want to do.

  5. michel

    Let us ask this question. If you are a parent of a few children with a partner out of work, and do not work yourself, then you’ll find, after adding up all the different benefits in the UK, that you are in receipt of a tax free income which is well over the median taxed income from working.

    Why will it deliver economic growth to go further into debt to continue funding this level of benefits for the economically inactive proportion of the population, now in the millions?

    Why is it fair or just for people below the median incomes to be paying taxes to generate this level of benefit for people who as a result end up better of than they are?

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