How should we tax banks?
The first real Budget leak of the season has sprung, with indications that the government will introduce a tax on bank deposits, aimed at financing a deposit insurance fund. This was proposed by Labor in 2013, and attacked by Tony Abbott at the time. Judging by Andrew Leigh’s comments that “I don’t think we’re going to take any lessons on bipartisanship from Joe Hockey”, they haven’t forgotten.
The best course for Labor would be to support the measure, but to impose ACCC supervision to stop the banks passing the charge onto consumers. That should be the wedge for permanent ACCC oversight of fees and charges.
None of this, however, gets to the real issue. Banks are immensely profitable, and their profitability rests on the fact that they can never really fail. It’s nearly always cheaper for the regulators to bail a bank out (for example, via a takeover) than to actually shut it down and pay out the depositors.
The appropriate tax base for a profit-enhancing subsidy is profits, currently running at $29 billion per year. Bank profits should be subject to a special tax, reflecting their special status. This would raise substantially more revenue than a deposit insurance levy.
Obviously, as I’ve noted before, this would require a sharp separation between banks and non-bank financial institutions. Banks should be prohibited from owning, or lending to NBFIs.