The government has published legislation for the new thank you levy.
They say it will raise £2.5 billion a year - curiously, a figure lower than that raised by the bank bonus tax that Labour charged, although George Osborne said to the contrary in the House of Commons yesterday.
But of all,this is a pathetically small sum to levy upon the banks when they have £19 billion of tax losses to offset against their future tax bills, as I've shown.
Secondly, I am worried that this is an inappropriate tax. I know it is only targeted on certain parts of the balance sheet, but surely the risk is not within the balance sheet, it is within the trades that take place during the course of the year. Tackling the balance sheet will simply reduce a bank’s capacity to pay, how ever we look at it. Charging a tax on inappropriate trades discourages the specific trades. That has to be the right course of action. In that case we clearly need a financial transaction tax - or a Tobin tax or Robin Hood tax, whichever name you wish to apply to it.
As usual,this government has got things wrong.
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Richard, how would a transactions tax discourage risk-taking? Frm what I gather, the transactions tax is only meant to be a very small percentage, so would have zero impact upon what you perceive to be a risky trade.
@Greg
I say it won’t – others say it will
I’m being generous and believing others
I also believe in the two tier version – with rate hikes when volatility increases
For once, I agree with you!
A higher rate of tax on “riskier” trades probably makes sense, although it’s very difficult to work out because volatility is measured using past data. Most people thought CMO’s were pretty riskless….
@Richard Murphy
Northern Rock and B&B went bankrupt because they relied on short-term funding to buy long-term assets (and had poor underwrting standards).
BoS failed because it over-exposed itself to the property market, again with poor risk-management standards.
RBS blew up because they were too thinly capitalised to start with and then massively over-paid for an acquisition that turned up to be rotten at the core.
It seems difficult to identify the “inappropriate” trades. It is not like we want to discourage mortgage or property lending (if the risk is controlled) or takeovers (if proper due diligence has been conducted on the target).
On the contrary, we definitely want to charge the banks’ creditors for the imnplicit state guarantee they enjoy. Against this backdrop the concept of of a tax charged on banks’ liabilities (but not deposits) seems ok to me.
@Million Dollar Babe
But who was asking you?
@Richard Murphy
What do you mean? Is this not a discussion?
What are the prospects of disallowing the £19 billion tax loss carry-forward? In the case of the bailed institutions at least, it is truly offensive.
I thought the bailed out institutions had agreed not to carry it forward?
@Greg
Oh yeh? Where?
@Million Dollar Babe
I have to say I don’t notice much discussion from you
More diatribe
Well I have just asked you a question, which could start a discussion.
What are the prospects of seeing the carry-forward disallowed?
It’s quite simple really for mortgage lenders to operate almost risk-free. The total lent should always be less than the capitalised rental value of the property. Trouble is the lenders are greedy and reckless. They need to be constrained by regulation.
Well I can’t find any link, so maybe i’d just seen it as a suggestion. It seems to me that the losses shouldn’t be allowed to be carried forward, although it probably makes little difference to RBS seeing as it’s 84% govt owned.
I think I must have missed something, but why is everyone in favour of a bank levy? Everyone is acting like this means the amount of profit that a bank makes will be reduced. Actually, what it really means is that they are just going to pass the cost of the bank levy on to the consumer ie the genera public. So either it will be even lower interest rates on savings, or higher interest rates on our mortgage rates.
Yet every single article I see is saying how great this is. We are not actually punishing the banks. Its like when the government fines the utility companies. Sure they pay a big fine. The fine comes from their profits. Their profits come from the consumers.
Given that everyone MUST (most companies pay employees by direct debit) use a bank, its like having a monopoly on the system. Sure you can change bank, but a bank you must use none the less. Same thing with utility companies. Fining them or putting tax on them, is actually just a general tax on the public. Yet everyone is talking about taxing the banks like its the best thing since sliced bread.
This is NOT the way to punish the banks. Punishing the banks monetarily = More pain for the consumers.
The only possible way that this work with less pain for consumers, is if there was a government owned bank. That would be a check against other banks raising charges, because everyone would switch to the government bank. Only through use of competition provided by government would the rot be stopped from setting in. For some reason (and I am not saying they do this consciously), but the rates and services banks offer all seem to follow each other.
Hang on, aren’t we getting the wrong end of the stick a bit here? As I understand it the idea of the Tobin or Transaction tax is to charge a levy on a whole range of transactions and not simply target the mortgage or retail market. What we’re also forgetting here is the huge amount of investment in sub-prime mortgage packages that were essentially straw deals comprised of transaction upon transaction mixed together to obscure the fact that they were extremely high risk. In the mortgage market it’s not necessarily the direct consumer transaction that is the problem (I’m not saying it’s not a problem!) but the myriad series of transactions that appear beforehand.
Where I see the Tobin tax as being most useful is in reducing the risk inherent in the financial system at large, risk increased by frequent and totally speculative trading, credit default swaps, futures, hedge funds, shorting and derivatives. It’s worth bearing in mind that the derivatives market is apparently worth more than the global economy, which is frankly an insane position to be in. This activity piles risk on risk on risk.
I agree with Carol that better regulation is the way ahead for the mortgage market, absolutely.
@ Passerby – this is always the counter argument and I don’t believe it’s hugely valid. Extending the logic, you could say that charing banks corporation tax costs consumers money…Modern banking is phenomenally complex and retail banking generates a fraction of the overall profit of most banks (take Barclays as an example). Actually, retail banking is probably subsidised by the other operations (I say probably because I know in one case that it plainly is but not in the others). Frankly, if a tax raises costs for consumers it’s doing its job as it’s reducing our expectations on return and at the same time showing us the true cost of banking, from which we’re frankly shielded at the moment. If it reduces the systemic risk then it’s going to be a hell of a lot cheaper for us in the long term.
@ SFL, could you detail how you think a Tobin tax will reduce risk because (as someone who works in the industry) I can’t see how it will make any impact apart from on very low margin, high volume trades.
As Richard has already pointed out, the banks will gain more through a reduction in Corporation Tax than they’ll lose through this levy. And of course, nothing will be done to stop them carrying forward their tax loss. Until we get politicians in power who do not believe in, and will fight against, the mantra of neoliberal capitalism, the banks will be able to do as they like.
“The only possible way that this work with less pain for consumers, is if there was a government owned bank. That would be a check against other banks raising charges, because everyone would switch to the government bank. Only through use of competition provided by government would the rot be stopped from setting in. For some reason (and I am not saying they do this consciously), but the rates and services banks offer all seem to follow each other.”
Exactly. We need a banking system that serves the economy and the rest of society; what we’ve got is the exact opposite and this government won’t do anything to change that
The reason why banks are so profitable is because they can create credit out of thin air. Why the hell isn’t credit creation under state control, with the state collecting the seignorage?
@ Greg. I’m going to put my hand up and say “no”, I can’t explain exactly how it would work because I simply don’t know enough. I think I do know enough however to observe that:
a) markets and traders of whatever flavour are not, despite the received wisdom, rational. They are prone to enormous speculative bubbles and falls.
b) the financial services industry as a whole is in my view grossly shielded from the downside of its activities and unfairly exposed to the upside
c) a great deal of industry activity is highly short-termist
d) we as consumers are far too endeared to frankly unsustainable levels of percentage growth
It seems to me that the current model of globalised capitalist trade is not rational or priced fairly in the sense that there is virtually nothing built in to accommodate the unbelievable risk built in – transactions and activity need to priced in such a way that much better accounts for their true cost and at the moment the Tobin or Tobin-style taxes seem to be the only vaguely viable idea on the table.
By the way I’d say the same of capitalism as a whole. Again I’m not advocating some return to wax candles and potatoes for breakfast, lunch and dinner but the price of the goods and services we buy are grossly distorted by a lack of proper or ‘full’ pricing.
@ SFL, I agree with the gist of what you are saying. There is little to deter risk taking behaviour in search of personal gain apart from the threat of the sack if it goes wrong (or perhaps a mutli billion Euro fine as per the SG trader!). And this is not correct.
However, imposing a transaction tax will make zero difference. It will just reduce profit per trade, but not actually stop the trade taking place. It could even have the effect of increasing these trades, to negate the effect of the tax on a traders P&L.
Unfortunately I believe that we’ve not seen any suggestions (whether to make remuneration more in shares than cash, or to have bonuses paid over set numbers of years etc) that will remove the risk-taking element of trading in financial markets.
You can be insolvent on a balance sheet basis (assets worth less than liabilities, in this case due to dodgy assets) but also on cashflow basis (running out of cash, lack of liquidity).
The reason why the bank levy is a good idea is because liquidity was a big issue during the crisis and the way this bank levy is structured it encourages banks to have more secure, longer term funding thereby reducing the cashflow insolvency risks.
I dont see how a transaction tax helps balance sheet insolvency because it cant be weighted by reference to the risk of the transaction (as you’d need someone to analyse each and every transaction and take a guess as to its risk) – which it would need to be if it was to have a deterrence effect as regards riskier transactions. Asset risk needs to be addressed by regulation rather than taxation.
No, it’s the *wrong* target, it is one of the right targets, but I think it is slightly misconceived. Poor liquidity management was the cause of the downfall of Northern Rock and Bradford and Bingley and was a contributory factor elsewhere. Imposing a tax on short term deposits doiscourages their use, but making them less financially attractive only goes part way to dissuading banks because (i) if the price differential between short and long term deposit rates is big enough they will still run a large liquidity risk and (ii) part, probably 50% of the cost of the tax will be passed onto depositors in the form of lower deposit rates, thus defeating the object of the exercise. I wouldn’t be surprised if it was not more than that because banks have a de facto monopoly on short term deposit taking.