Image by Bernard Spragg. NZ CC 2.0 via Flickr https://goo.gl/AyZC56

The Bank Levy announced by Treasurer Morrison in the May 2017 Budget, to start on 1 July 2017, is estimated to raise $1.6 billion per year. The levy is 6 basis points (0.06%) on certain liabilities of big banks that exceed $100 billion – that is, it will apply only to the “big 5”: the Commonwealth Bank, NAB, Westpac, ANZ and major investment bank Macquarie.

The $6.2 billion revenue forecast over the forward estimates is net of company tax and other taxes. Presumably, this means it will be deductible against the company tax, as is the Petroleum Resource Rent Tax and royalties for miners.

Clearly, the main purpose of the Bank Levy is to raise revenue – although some queries have been raised about the estimates.

But what other role does this new tax play? The Bank Levy could be:

  1. Compensation for the government guarantee on bank deposits.
  2. A tax on financial services (not done properly in the GST).
  3. A device to ‘level the playing field’ for smaller banks.
  4. A super profits tax on the banks.

“Too big to fail”?

The Bank Levy might help compensate the government for the “too big to fail” implicit guarantee for the banks. This was a big issue at the time of the Global Financial Crisis in 2008. It has been observed that this guarantee is worth two notches for bank credit ratings, or 0.17% on their funding costs. On this maths the levy is cheap.

In 2013 the ALP floated the idea of a bank deposit tax. This would have imposed a 0.05% levy on deposits up to $250,000, to go into a Financial Stability Fund to pay for the Government guarantee on such deposits. The idea was canned by the Abbott-Hockey Government in 2015.

The United Kingdom introduced its Bank Levy – to which the budget proposal is very similar – at a rate of 0.21% so that banks “make a full and fair contribution in respect of the potential risk they pose on the wider economy”. The UK government actually bailed out some banks in the GFC, something that was avoided in Australia. The UK Levy applies to the global balance sheets of UK and foreign banks which operate in the UK and is paid by banks whose total liabilities exceed GBP 20 billion. The rate has been reduced but the UK levy still raised GBP 3.39 billion or A$6 billion in just one year in 2015-16.

The Australian Bank Levy explicitly avoids taxing the deposits of individuals, businesses and other entities protected by the Financial Claims Scheme – exclusions which might well be questioned. But it might still be passed on to customers – whether deposit holders or borrowers – depending on how tight the regulatory scrutiny is of Bank fees or interest rates, and the level of competition in the banking sector.

Better taxation of financial services?

The Goods and Services Tax (GST) under-taxes financial services. This is because it is difficult to distinguish between the interest rate and financial services of banks. The GST “input-taxes” financial services, so that banks do not charge GST to customers, but they cannot claim input credits on business inputs such as equipment. This means that the GST collected from banks is a lot less than the ideal as measured by value added in the industry. The Treasury estimates the GST lost to be about $3.5 billion each year.

Could this new tax on banks properly tax the financial services they provide? If the Bank Levy does fill this gap in the GST, then it should be passed on to customers, contrary to the Treasurer’s view. It should also apply to all banks. The value of bank services is not likely to be systematically related to the size of liabilities. And if the GST was levied on bank services, business customers of banks should be able to get input credits for the GST on bank services. It would be better to address the GST issues directly as proposed by the IMF in 2010 or by a 2015 Report to the South Australian Department of Premier and Cabinet.

Level the playing field?

On the other hand, if the Bank Levy is intended to level the playing field, it should only apply to the big players. It might reduce the advantage of the big banks, making smaller banks more competitive. Certainly, the market has seen it this way, with share prices of the big banks down and shares of regional banks like Bendigo and Adelaide and Bank of Queensland up strongly following the budget.

A super profits tax on banks?

The Government remains committed to its Enterprise Tax Plan which aims for the company tax rate to be cut from 30% to 25% by 2026-27 – including for the Banks. The Budget states “Having secured tax cuts for small and medium businesses, the Government is committed to extending the tax cuts to cover all companies in Australia.” The Government has not yet persuaded the Senate to extend the cut to big corporations.

One of the sticking points for the company tax cut is that it reduces tax on our most profitable corporations that derive what economists call “rents”, for example the miners, from non-renewable resources, or from a highly-regulated market such as banking, reflecting the oligopolistic nature of the industry.

Is the Bank Levy intended to substitute for a super profits tax, capturing some return on high bank profits? Big bank profits exceeded $30 billion in each of the last two years. Their combined company tax bill exceeds $11 billion. A lower company tax rate could shave about $2 billion off that, with the levy partially neutralising the company tax cut for the banks.

In the UK, the Bank Levy is now being reduced and partially replaced by a new 8% corporation tax surcharge on bank profits. The UK company tax rate is a low 18% and a lot of their economy is financial services – so it’s not surprising the government wants to keep raising revenue from this sector. The surcharge applies to most banks in the UK (with annual profits over GBP 25 million), bringing their tax rate up to 26%.

Under the new Bank Levy, big banks could end up paying nearly as much tax as they do under the current 30% company tax rate, measured against profits. So the major oligopoly banks would in effect be quarantined from the company tax cut – although the tax cut is not scheduled for some years down the track.

In economic theory, a super profits tax has the advantage that it is absorbed out of bank profits and does not change investment. The Bank Levy is a blunt and indirect way of taxing super profits, and does not raise as much revenue as a profit-based tax could. A better option could be a company tax surcharge or a cash flow style rent tax.

Why tax the banks?

As the bank robber famously said, “That is where the money is”. The Australian Banking Association has called it “lazy policy” and CEO Anna Bligh said “every Australian is going to have to pay the bill”. If it is not passed to customers in prices, it could be borne by shareholders. The Treasurer wants it to be absorbed by internal efficiencies: that could mean lost jobs for bank employees.

The Bank Levy has no clear economic rationale, but contrary to recent statements by Anna Bligh of the ABA, there are some good reasons for us to tax banks, or financial services, more than we do now. It’s certainly feasible to apply the Bank Levy: it worked in the UK and banks are a good place to look for revenue. It could make a company tax cut more acceptable. But in the long run, we should be exploring better ways to tax the banks.

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