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.

43 thoughts on “How should we tax banks?

  1. A tax on deposits will feed into Right wing paranoia about governments confiscating savings. Better to support a tax on dividends, that is, tax profits after company tax. If banks are too big to fail, then shareholders have a gold-plated investment so ought to pay for the privilege.

    Also better to support Jacqui Lambie’s petition for a Tobin Tax. The currency market is just a gambling casino.

  2. Maybe modern capitalism needs a generalized concept of a windfall tax – not designed for specific industries, but across the board, intended to soak up excess profits from any industry that suddenly becomes highly profitable.

    Taxing deposits is kind of out of whack with the party that supposedly supports conservative, low-risk and rational use of money …

  3. John — no lending by banks to NBFIs? Why not?
    This is a large chunk of commercial bank lending now.

  4. Or you could extend the principle of the mining super-profits tax to all enterprises. “Resource rent tax” works just as well for other rents.

    [I’d be willing to consider outright nationalisation; the mechanism whereby private ownership can deliver improvements works through the possibility of failure, so I’d expect that a private ownership of an organisation that can’t be left to fail would reliably deliver worst-of-both-worlds results.]

  5. What is the benefit of option 1.

    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.

    compared to option 2:

    revisiting Labor’s super-profits tax (irrespective of industry). I think this was championed by Andew Wilkie.

    If not Wilkie’s general super-profits ta then surely The best course for Labor is option 3:

    to recognise that;

    Bank profits should be subject to a special tax

  6. Axe the tax: that got rid of the carbon tax, and the mining tax. Now they talk of introducing a bank tax. Ten out of ten for inconsistency.

    Perhaps they could tax the banks by looking at the difference b/n interest rates on deposit accounts and the official interest rate: the larger the difference, the more tax they pay for that account. At the moment, the difference is pretty big, especially in relative terms. To avoid cheating, make it calculated on a per account basis, not on some statistical comparison, or comparison with a standardised deposit account (like, what would that even mean?).

  7. A problem with a deposit tax. Even tough ACCC supervision preventing banks from shifting the burden on customers, this policy will still affect medium depositors to switch to non depositing banking institutions and new companies will provide such service.
    Basically this is a stealth policy to shift as much savings as possible to NBFIs over time.

    Even if ACCC can prevent banks from direct shifting of cost, banks can always reduce interest they pay for medium deposits claiming their cost, again it will be succesfull as always is. And it will shift deposits to NBFIs.

    Watch for long term incentives and implications.

  8. The problem is in how banks distribute profits, not in where the source of profit is.

    Another important special status of banks is not mentioned. What about license of banks to print new money? how important such status is? Isn’t that more important from being bailed out?

    Sure, they have to destroy money after they printed it. Banks have to destroy money as credit is paid off, but they make profits from printing new money. If they missalocate newly printed money and create bubbles which burst it is only then that they have to be bailed out. Because debtors can not return money to be destroyed and they have to receive it in order to destroy it. (or in bankruptcy proceedings a judge can allow for erasing (destruction of money) debts without giving money to bank)

    This special status of banks is the most important one but why mentioning impossibility to fail only?

  9. The appropriate tax base for a profit-enhancing subsidy is profits

    Exactly the same argument applies to government spending that enhances the value of land. How well has that concept turned out?

    The trouble is that so many Australians are petty economic rent seekers in the form of land owners and woe betide any government that tries to get them to part with any share of that economic rent.

    Untaxed economic rent – the Australian birthright.

  10. @faustusnotes

    Maybe modern capitalism needs a generalized concept of a windfall tax

    i.e. economic rent tax.

    We know how that turned out with the mining tax and we know how that turns out with land rent tax.

    Most Australians don’t like economic rent taxes, even when they would directly benefit. With stupidity like that there isn’t much hope.

  11. > Most Australians don’t like economic rent taxes, even when they would directly benefit.

    All profit is rent: once the market you’re competing against gets big enough, you’re mathematically guaranteed to be competing against people who have no idea what their cost-structures actually are, or who are too desperate to care, or who don’t care about profitability ’cause it’s shareholder money but want the sales growth to look good, and these people will set prices that _they_ cannot match, let alone you.

    Unless you can cut back competition you cannot be profitable.

  12. @Collin Street
    Not all profit is rent, some is debt: bonds, dividend stocks, credit that is inflated away while only serviced, issuing new stocks and tax credits.

    While debt is only serviced, inflation eats it away in time, that becomes profit. Countries and large corporations do that regularly as part of the policy for success. And for many is the source of the success.

    If you claim that all profit is rent then you can also say that all saving is rent because it does the same to economy. Savings are unspent part of income and profit is also unspent part of income. In order for someone to have savings or profit, some other agent have to go into debt by equal ammount (public or private) in order to prevent unemployment.

    Where that comes from? From: total cost of all corporations is total income which is the only source to buy what was produced. If there is savings, profits (money is frozen) then all that was produced can not be sold in next cycle and unemployment is result.
    To allow someone have savings or profit, someone else has to go into debt in order to keep cycle closed.
    Add growing population and you have to have a rising money supply in order to buy more then corporations can spend to produce. So corporations also have to go into debt to produce more next time then they sold last time.
    So debt has to be the source of buying more then spent and also producing more then last cycle.

    Total cost of production = total income (demand). Have to have a rising money supply (debt) to cover for savings and increasing population.

  13. Jordan says that a tax on bank deposits to help pay for their greater security will be a stealth policy of getting deposits out of banks.

    In other words Jordan says that the tax will fall completely on depositors – not on bank profits to any extent. And Jordan says depositors are completely irrational – being charged far less than the additional security benefit they get from choosing banks will drive them away from banks.

    I know markets are not perfect. But surely finance is an area where they are, well, rather less imperfect than in some other areas?

  14. @ChrisH
    I was talking about medium depositors. Please refer to earlier post. Medium size depositors are those around guaranteed level. What is guaranteed level in Australia? $100 000, or $200 000 like in USA?

    Let me remind you that Cypriot bail-in included cuts to deposits above guaranteed levels while shareholders and bondholders stayed whole. So it is called bail-in instead of bail-out. That is the trend for the future. It was very succesfull in regulator’s mind (only).
    So you better get out of such risk and get into less riskier and more profitable part of bank bonds instead of CD with your above guaranteed level of deposit. Tax on that will incentivize you too.

  15. @Jordan

    Collin Street is right. Theoretically all profit is rent.

    The profit from providing credit is the payment for it beyond capital repayment. This is a “rent” although it can be termed interest.

    If you are in debt, you have someone elses capital, which you must pay back, plus an extra amount as a form of rent.

    Under capitalism rents are unreasonable and generate crisis tendencies, under socialism they are reasonable in much the way implied by Piketty.

  16. Bank profits should be subject to a special tax, reflecting their special status

    Or they could be charged a fee reflecting their special status, with the size of the fee a function of their size. The politics would be a lot easier.

  17. In the post war period (up till Keating’s preparation to sell the Commonwealth Bank), both state and commonwealth governments had their own retail banks that operated at reasonable profit rates. This prevented non-government banks from becoming hugely profitable, because they had to compete with government owned banks. Competition from non-government banks prevented the government banks from becoming hugely inefficient. It worked well. It would not be difficult to return to this system, but it would be unfashionable.

  18. I would suggest that the power to create debt money should be given to the Reserve Bank. Thus a commercial bank in order to lend needs to demonstrate adequate reserves and then the Reserve Bank creates the debt money and transfers it to the commercial bank at the cash rate. Then commercial banks lend at rates restricted by legislation. No rate may be more than x% greater than the offical cash rate %. Usurious interest rates, like those on current credit cards would be strictly forbidden. Again, these rates should be no more than x% greater than the official cash rate.

    The state should possess the monopoly on fiat money creation and debt money creation. Simple. Next problem?

  19. @Unanimous
    I used to have a passbook savings account as a school kid set up by my school and/or parents in the 70s. Up until the time the Comm bank was sold, the account wasn’t touched. It started with few hundred dollars in it and the interest earned increased the balance to ~$850 with no transactions or the account being touched. After the Comm bank was sold, the account still wasn’t touched, but instead of increasing, it started reducing in value with a fee here & a fee there. Again, zero transactions or balance checks. This erosion of my balance started accelerating through to the 90s when I was lucky to actually check the balance before there was nothing left. I promptly closed the account upon learning this.
    It’s a clear illustration of how banking has changed since the 70s.

  20. @Ivor
    I agree that most of the profits are rent, they decrease demand. I just wanted to point out that savings too decrease demand. I just wanted to imply theoretical implications, not saying that is something bad and that should be reduced. Just that there is a need to replace them for economy to function. There is a need for increased money supply, a.k.a money printing which imediately asociate with Weimar.

    Banks do not lend someone else’e capital. Deposits go straight into bank reserves, by law. Those bank reserves are the source for interbank lending and government debt.
    Since deposits(savings) are everincreasing so government debt can and should everincrease in order to replace them and put money back into economy.

    Banks issue new money when issuing credits, it is nobody’s capital. When credits are spent on buying new housing or physical capital, seller puts it into banks as deposits which go into bank reserves. Credits create deposits.
    From this is how debts replace savings and profits as the source of demand and are the source of savings and profits.

    Banks print new money when issue credits and destroy it as credit is repaid and only interest part is left as profit to banks.

    This implys that deposits should not be taxed since they are the source for government debt.

  21. @Ikonoclast
    For reasons I do not understand, the RBA “does not lend to the banks at current rates” and they are forced to “borrow overseas” to finance their lending. Hence their charging of interest rates higher than that set by the RBA. This actually weakens the “so-called” monetary policy of the RBA, so why does it even happen? Can anyone explain?

  22. @Jordan

    “Deposits go straight into bank reserves, by law. Those bank reserves are the source for interbank lending and government debt.”

    Please explain how bank reserves are the source for government debt. I thought govt. debt is created by issuing bonds, which any fin. institution including super funds etc. can buy. So you include those institutions in “banks”?

    Second, just because deposits are the source of “govt debt”, what is the harm in taxing them?
    Please note that govt. debt need not equal govt deficits.

  23. @Unanimous

    I agree. I am heavily in favour of renationalising the Commonwealth Bank, Telstra, Australia Post, Qantas, CSL (Commonwealth Serum Laboratories), any and all railways not currently state owned and any roads, bridges and tollways not state owned. In addition I would like to see a Commonwealth super fund for all who wish to join (not just public servants), a Commonwealth Insurance Company and a Commonwealth Shipping Company (freight). All airports and infrastructure should be renationalised. We also need a Commonwealth Renewable Energy Co. making solar and wind power and probably a national electric car company. While we are at it re-order all large Australian corporations into worker owned and managed companies. Implement capital flight laws. Nationalise all mines. Put Australian billionaires in jail if they avoid tax of use tax havens. Ten years for each offence. Allow them to live in private hotel-jails if they foot 1,000% of their total jail bill.

  24. @Jordan

    Savings decrease some consumption but then increase consumption elsewhere.

    However saving in the form of hoarding (ie cash under the bed) does decrease demand.

    I like to keep the two concepts – saving (in banks) and saving (as a hoard) – separate.

  25. @Collin Street

    All profit is rent

    Are wages rent?

    Wages in Australia are taxed much more heavily than economic rents. But in Australia lightly taxed economic rent is a Australian birthright, so that’s not going to change.

  26. @totaram
    Check for Primary dealers. Usually they are largest banks to which government sells debt. Primary dealers can then sell it to anyone later on as you noted. “which any fin. institution including super funds etc. can buy”

    ” I thought govt. debt is created by issuing bonds” You are talking about creating, i am talking about who buys it, about the source of funds.

    Deposits go straight to Bank reserves.
    This practice comes from using gold as currency. Gold deposits into bank goes into reserves(bank vaults) while depositor receives note of deposit (which later on became money). Bank is not allowed to sell such gold, it is not theirs. But it can lend it. Can state tax it, or should it? That is what you ask. And deposits are not the property of bank. So should it be taxed?

    Gold had to stay in reserves and gather dust. Why not lend it and make interest while it is waiting for depositor to claim it? Gold is not tangible, nor money is. So they lend it to the most secure borrower, state.
    The same is today with digital numbers as money. Deposits have to stay in reserves and can be lent only to the most secure borrowers; state or other banks (AAA rating), instead of gathering dust in computors and loosing value.

    This way deposits are counted twice, trice and quadruple. They are counted as deposits of owner, lent to state that spend it, beneficiaries put it again as deposit and circle repeats indefinetly.

    Savings are everincreasing so state can keep everincreasing debt as the most secure borrower.
    Depression is when such circle is forced to go back by way it became. All debts to clear/ liquidate all debts. It must not be allowed.

  27. @Ivor
    “Savings decrease some consumption but then increase consumption elsewhere.”

    True. And i am not talking about hoarding under the mattres, thats minor issue today.

    But, how that consumption elswhere is achieved? It is recorded as debt in order to achieve such consumption elswhere. It is recorded as public debt. State spends it and receiver deposits it into bank. Do you see the circle there?

    If you think your saving is lent to other person, as i supose that you are thinking, did you ever acuier that person’s name? And can you?
    Savings are lent only to states and other banks. They can not be lent to persons. Toooo risky.

    Credits are new money to avoid the risk of loosing someone else’s deposits/ savings.
    When spent, credits become deposits of a seller. Another circle.

  28. @Ikonoclast
    That would be a communism. That was the solution that communism used. But, private desire to decide on what spend debt money has shown to be very valuable. And if state is the only one deciding where to put new money, it creates resentment and resistance from population. That is why communism failed. State was the only one deciding where to put new money and feedback from population became muted, so it crashed from resistance.

    In neoliberalism with “balanced budget” mantra while only banks issue new debt money, there we are recreating a single decider of where to put new money. And resentment from population is showing, soon resistance will apear or deep state will be too powerfull. This is the general way why communism failed and lack of knowledge is recreating the same condition in capitalism.

    Only sustainable solution is to let state and private banks share power to create new money.
    Conditions for banks to prevent them from buying political influence is 90% marginal tax on bank profits and bank employees (special status), only fixed interest rates and forcing wages up that will provide for inflation eating away the debts over time.
    Negative real interest rates for borrowers is a free lunch that somewhat corrects bad distribution of money in the system and state also corrects it.

    If we could also reverse the credit scoring system so that poor can enjoy lower interest rates then rich, then Picketty’s r>g goes away.

    Sure, there is an issue with private banks reducing lending to new risky projects, so state must own a Developement bank that will force new money into new experimental entrepeneurship with close to 0 rate debt. It has to be a permanent feature to give a competition to old crusty huge corporations.

    It would be also great to place cost of automatic stabilisers in recessions onto Central Bank creating new money instead of placing it on state debt as is the case today.

    To recap:
    90% marginal tax
    rising minimum wage
    reverse credit scoring
    place the cost of automatic stabilisers onto Central Banks new money.
    Also keep a bankruptcy institution as is. This is a must.
    Everything else as is would work.

    More democracy at work would be great too in order to prevent externalities being placed onto public.

  29. > Are wages rent?

    Owing to a recent experience I can tell you with absolute certainty that somewhere around a third of my current income [20/hr] represents rent generated by australian immigration restrictions. Twenty an hour is reasonably profitable; thirteen an hour, not-so-much, and will not reliably pay the costs I incur to produce my labour. Will not be “profitable”.

  30. Banks are immensely profitable, and their profitability rests on the fact that they can never really fail.

    I don’t see the logic in this statement. How does protection from failure cause high profits? Surely high margins are indicative of barriers to entry not protection from failure. If actual investors were being protected, explicitly or implicitly, then we would have more banks and more bank competition and lower margins.

  31. @TerjeP
    Apparently the protection from failure (thanks to Rudd labor gov) killed off the competition from the big 4 post GFC. IIRC they were able to borrow at much better rates thanks to the guarantee offered in 2008. Less competition = more room to increase margin?

    To quote from–/3815636

    “In contrast to their smaller rivals, the four majors are now regarded by credit rating agencies and investors alike as “too-big-to-fail”. The majors get the benefit of credit ratings that have been explicitly lifted “two notches” higher than they would otherwise be because Standard & Poor’s thinks they alone can depend on “extraordinary government support” in a crisis.

    This helps them raise money much more cheaply than their smaller peers, which in turn means it is almost impossible to compete effectively against them. Size thus begets more size.”

  32. @Ikonoclast
    I don’t agree with nationalising all of those things. I think it is important to look at each case individually. I wouldn’t nationalise any of the current banks, but would start a new bank (e.g. Federal Bank of Australia), and encourage each state to also start one. Why pay for the stream of enourmous profits that the current Commonwealth Bank is expected to generate in the future, when the aim of the owning the bank is to reduce those enourmous profits to a reasonable level?

    Another approach might be to enable more competition – things like making account numbers portable as is the case with phone numbers, or separating ownership of the street side operations (branches, ATMs, etc.) from the management of the account balance sheets. Imagine if all bank branches and ATMs could carry out operations on any bank account, regardles of which bank ran the account. If you go to get a mortgage, all bank branches can act as brokers – no need to visit all banks, you can compare everything that’s available right there in one branch.

  33. @Jordan

    The consumption elsewhere is effected only at the cost of incrementally destabilising the circular flow to the point to where you end up in a GFC, a recession, or with a higher “natural” rate of unemployment.

    It is a temporary circumstance.

    i do not view credit as new money. I see it as an IOU with interest added. This destroys capitalism in the long-run.

  34. Troy’s right, and that is indeed the reason some form of tax on bank deposits is good policy. My concern though is the detailed form of that taxation.

    The simplest would be a Bank Accounts Debit (BAD) tax. But several of the States had exactly such a tax prior to 2000 and it was widely agreed to be their most inefficient tax (much worse than property stamp duty). It seriously distorted financial allocation – that’s why the Feds made getting rid of it one condition of the States getting the GST proceeds.

    If they just collect it from the banks on their aggregate level of defined deposits then Goodhart’s Law applies. Left to themselves the bastards will quickly play fast and loose with the definition of “deposits”, fostering some wonderful financial innovations. That of course defeats the whole purpose of the deposit guarantee. So if they go down that road then the devil really will be in the regulatory detail.

  35. @derrida derider

    the bastards will quickly play fast and loose with the definition of “deposits”

    They can try. Deposit is not defined in the Banking Act, but there is quite a body of law on what is a deposit.

  36. @Ivor
    “The consumption elsewhere is effected only at the cost of incrementally destabilising the circular flow to the point to where you end up in a GFC, a recession, or with a higher “natural” rate of unemployment.

    It is a temporary circumstance.”

    What you mean by teporary? 20? 30? 100years? It is called secular stagnation, and some good economists are saying it will be a whole future like that.

    “i do not view credit as new money. I see it as an IOU with interest added. This destroys capitalism in the long-run.”

    What is an IOU with interest added? It is money, with inflation reducing the value just as the interest reduces value of credit given.

    Let’s take it in real terms, in terms of goods that you need.
    Money is IOU, you are holding somene else’s debt in real goods. You give paper with debt recorded on it to a debtor and he distingushes its debt in real goods to you. It is only then that you found a debtor willing to give you what you need. and you gave a record of debt to seller who then start searching for goods that he wants to use.

    Another example using real terms: You give your labor hours to employer and after determined time you receive employers debt to you recorded on paper(money). Now you search for debtors that want to keep records of debt and give you product of their labor (real goods that you need) in exchange.
    Money is IOU but some else’s debt to you in real terms. Money is not real good, it is record of debt. Credit is record of debt too.

    Credit was the source of succes of capitalism and of course that it will be the destruction source of it if missmanaged. And inflation is the crucial part of keeping the credit going not to “cost of incrementally destabilising the circular flow to the point to where you end up in a GFC”

    And inflation caused by wage growth (demand growth) is the only proper inflation that does that, not the inflation caused by excessive money printing or energy price raise. It is affected by proper saving menagement. Savings have to be returned back into economy (real economy not paper asset economy) and are recorded as public debt.

    Tax on deposit is an attempt to force savings back into economy, not give it mechanisms to voluntarily returns and that could end up damaging the economy since people always find ways to avoid being forced. These measures are being formalized in order to preserve status quo of low inflation and low wages which is destroying capitalism.

  37. They can try. Deposit is not defined in the Banking Act, but there is quite a body of law on what is a deposit.

    Laws are only as good as the people enforcing them.

    The basic problem we face in australia, and in a lot of other countries, is that the right half of politics is dominated by people who have what appear to be pretty significant medical/mental problems. There’s a difference between “selfishness” and “a genuine inability to recognise that other people’s interests are not identical to your own”, and at this point I think it’s pretty clear that when we’re talking about most of federal cabinet we’re talking about the latter, not the former.

    [I mean, is there anyone — anyone at all — who’s willing to argue that they believe Chris Pyne is cognitively normal, after the “fixer” episode?]

  38. @Collin Street

    I agree. I think it is pretty clear that a majority of the key figures of the LNP cabinet are barking mad. Abbott and Pyne certainly are barking mad, each in his own distinct way. Scott Morrison lacks all empathy for other human beings. Brandis comes a close second on that score. There is a term for that pathology. Then there are the outright dopes and dills like Joe Hockey and Barnaby Joyce. I wouldn’t leave either of them in charge of a corner store.

  39. @John Quiggin

    Yes. But access to cheap inputs only allows high margins (and profits) if there are barriers to entry. Troy has reminded me of the mechanism by which competition was killed but the issue is still one of competition and barriers to entry which seem fixable separate to the question of governments offering protection from failure.

    If high profits are the concern then I think the focus should be on opening up access to new players.

    I think the issue of governments protecting banks from failure is more to do with moral hazard and risk management. If governments are going to protect banks they should do so in such a way that they do not protect shareholders.

  40. * I worded that poorly. Access to cheap inputs that you’re competitors also have cheap access to should have no impact on profits in a competitive market. But obviously if the cheap inputs are available to some but not others they do make a difference.

  41. Competition in banking encourages risk taking which raises the cost of protecting the system. So, it’s not a solution.

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