Why The Banks Were An Obvious Target

Stepping back, we can see that there really should have been no surprise that the budget grabbed a $6 billion prize from the banks.

Apart from the fact that the financial sector is so big – half of all company dividends in Australia come from the financial sector – there have been  moves around the world to tax banks in various ways.

The only debate is whether the funds raised go towards general taxation, or to a specific fund to insulate banks for later potential failures.

Clearly in last night’s announcement, it was all about plugging a hole in the budget, and we expect the charge to remain at least for the next 10 years. And as banks liabilities grow so does the money to Treasury, so there is a natural hedge down the track. In any case, this is really an indirect tax on consumers.

But it is worth looking at what has been happening else where.

In the UK an 8% higher company tax rate was applied to banks last year.

In the European Economic Community there are active proposals to impose a Financial Transaction Tax, which would be on trading transactions between banks. According to early plans, the tax would impact financial transactions between financial institutions charging 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts,The tax that could raise 57 billion Euros per year if implemented across the entire EU.

The IMF had proposed several approaches to a Bank Levy, but it was initially targetted at helping to recoup the costs of bank failures and bail-outs in 2007.

The IMF’s report suggested a levy on all major financial institutions balance sheets. They said it could be imposed at a flat rate initially but could be refined later depending on the risk profile of the particular institution.

This is akin to the Financial Crisis Responsibility Fee which President Obama’s proposed  after the GFC and would raise US$90 billion over 10 years from US banks with assets of more than US$50 billion. Except the revenue was to flow into general funds.

Another approach is a Financial Activities Tax (FAT) which could be charged on bank profits, banker’s remuneration, or both. Again this could flow to general revenue, or to a fund to assist with a future bank crisis.

Given the large sums involved it is no surprise that the banks are targets, despite the fact this distorts the free market. When a government is short of cash this can appear a nice target – especially if the sector is already on the nose.

But is does set a worrying precedent – it says if you are a profitable business (especially in a sector which makes excess profits) then you are a target. In the Australian context, there are other sectors which would fit that description just as well.

By the way, some have called this a “Tobin Tax”. James Tobin a Nobel Prize winner, suggested a tax be added to all spot conversions of one currency into another to curtail short-term financial round-trip excursions into another currency.

But now, the Tobin tax is wrongly used to describe all forms of short term transaction taxation, whether across currencies or no.

 

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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