In 2012, the levy will increase to 0.075pc as part of the Government’s attempt to encourage banks to hold less risky liabilities on their balance sheets.
“We have consulted on the design of the scheme so that it achieves two objectives: first, ensuring that banks make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy.
“Second, the final scheme design will encourage the banks to make greater use of more stable sources of funding, such as long-term debt and equity, working with the grain of our wider reform programme,” said Mark Hoban, Financial Secretary to the Treasury.
Critics of the banking industry pounced on the levy as being insufficient and said banks should pay more in tax.
“The Treasury says the £2.5bn bank levy is a ‘fair contribution’, yet in the new year, when bankers will be paying themselves tens of billions of pounds in bonuses, the rise in VAT will be hitting the poorest hardest,” said David Hillman, a spokesman for the Robin Hood Tax campaign.
This banking levy simply isn\’t an attempt to feed cash into hte Treasury\’s coffers. That\’s not what it\’s about at all.
It\’s an insurance premium.
We all know damn well that the Government isn\’t going to allow one of the big banks to fall over. There is thus an implicit guarantee to the wholesale markets on those banks.
Implicit guarnatees should be paid for: make explicit an implicit subsidy. Thus, charge them for the guarantee that is being offered. This is why the levy does not fall on deposits which are already guaranteed (retail deposits) and does not fall on either equity or long term bonds.
You can also, if you like, look upon it as a Pigou Tax. Short term funding from the wholesale markets has an externality: banking systems without deposit guarantees are subject to runs. Thus a Pigou Tax.
But whichever way you look at it, Pigou Tax or insurance levy, it\’s not a method of filling up the Treasury. For a Pigou Tax should be set at the rate of the damage that might be done: an insurance levy at the proper premium rate for the insurance being offered. Not at whatever rate would give the Robin Hood Tax people lots of lovely money to go play in Africa with.
Not at whatever rate would give the Robin Hood Tax people lots of lovely money to go play in Africa with.
We all know damn well that the Government isn’t going to allow one of the big banks to fall over.
Which is a large part of the reason why they do fall over IMO. Government should be an enforcer of private contracts, not a guarantor of them.
There is thus an implicit guarantee to the wholesale markets on those banks.
Which takes away from the wholesale markets the requirement to price the risk of lending to a specific bank appropriately. This increases the risk in the system.
We can’t make the banking system safe, because it fundamentally isn’t safe. The solution is to design the system so that all participants are constantly faced with the knowledge that it isn’t safe, so they act accordingly.
It’s an insurance premium.
Is it at a sufficient rate to be a proper insurance premium? Also, will the government actually have the money on-hand to pay out if the banks collapse (cf. Ireland)? If there is one thing worse than a guarantee that distorts the market, it’s a false guarantee that distorts the market.
What happens to the money?
“the Robin Hood Tax people”
But that doesn’t quite say it. Robin Hood was taking back his own stuff that had been stolen from him in the first place.
The Prince John tax would be more accurate.