Vince Cable’s banking tax doesn’t help anyone

Vince Cable wants banks to pay 10% on their profits to raise £2bn. But this new tax is the wrong option and won’t work.

Vince Cable – one of the few politicians to emerge from the financial crisis with his reputation enhanced – wants banks to pay an additional 10 per cent on their profits in return for the trillion pounds the taxpayer has sent their way in financial support. The Liberal Democrats argue that such a levy would raise around £2 billion a year for the government’s coffers, as well as reducing the amount of cash banks have available to pay eye-watering bonuses.

Unfortunately Mr Cable has succumbed to the temptation to crowd please. There is no doubt that banks owe a great debt to the British taxpayer for saving their skins, and are entitled to want their pound of flesh in return. But a new tax is the wrong tool for the job. Not, as suggested by the British Bankers’ Association, because a new tax will lead to an exodus of banks, and jobs, from the UK. Even hedge funds, with far greater geographical mobility, are reluctant to leave London.  A new tax is a bad idea because it won’t work.

First, it won’t raise much: banks have expert teams that do nothing but work out how to reduce their employer’s tax bill. The mooted £2 billion is almost certainly an overestimation. Levying the tax bill will also have a cost to HM Revenue and Customs – so the amount of money eventually reaching the Treasury is unlikely to make much of a dent in the UK’s deficit.

Second, the tax will hurt ordinary people, not bankers: the proposal will not affect bankers’ bonuses. Bonuses are paid out of revenue, not profit, so will be undiminished by the tax. Shareholders are the group that will suffer most, as they receive their dividends from after-tax profits. Who are some of the biggest holders of bank shares? Pension funds and insurance companies – not the targets Mr Cable is intending to punish. And there is little doubt that banks will use government interference as an excuse to cut lending and raise the cost of borrowing, passing the cost onto the consumer.

Third, it makes the real problem worse: short-term regulatory measures, ‘special’ taxes and political posturing succeed only in making banking less competitive. New entrants struggle to navigate regulatory requirements, cannot afford profit taxes and are too small, and too poor, to lobby the government as effectively as the big boys. Putting up these additional barriers to entry means existing banks just get bigger – making it even harder to let them fail.

Banks should have the decency to return some money to the taxpayer whether they received government support or not. Shareholders should be more active in managing staff remuneration. That neither is likely to happen does not mean the government should try to control these decisions. The appropriate field for effective state intervention, as this blog pointed out last month, is to make banking more competitive. The Lib Dems are right to want to split up the banks – and Mr Cable would be better advised to focus his talents on developing a sensible policy for doing so.

3 Responses to “Vince Cable’s banking tax doesn’t help anyone”

  1. Ann Danylkiw

    RT@leftfootfwd Cable’s banking tax doesn’t help, won't work and will entrench the power big banks http://bit.ly/4EaNXu // fuzzy econ

  2. Gaps in the Dialogue

    Clearly Vince Cable wants, after the ‘Mansion Tax’ gaffe, to get back in the game and at least he and his party are willing to regularly come up with ideas (if only to give up on them sooner rather than later) to spark debate. Conservative opposition still seems to be too hesitant to put ideas out there in case they are shot down ahead of the election.

    In the case of this new tax, it is perhaps a sign that Cable is very keen to re-enter debate – so keen that the plan to break up banks will take too long and therefore Lib Dems have fallen back on a tax. Unfortunate? Maybe. But at least there is something to discuss – something from which other ideas can emerge.

  3. Joe Cox

    I very much welcome Vince Cable’s addition to the debate around the banking sector and remuneration. He speaks with great authority on these matters.

    I particularly welcome the symbolic nature of the 10% levy as a condition to the government propping up the banking system.

    An initial concern I have is that there are now many ideas aiming to tackle the ‘problem’ of an overly large banking system making profit on the back of taxpayer guarantees. All are welcome but more action and less ideas may be the order of the day for those wanting reform.

    My main concerns with this proposal are that an ongoing 10% levy would encourage those banks who are relying on public funds to quickly rid themselves of their government shackles and lead to avoidance schemes of all kind. Therefore it might be questionable whether it would raise as much as £2bn.

    Far swifter and clinical would be a minimum tax of 25% on banks’ bonus funds could net £1.5bn as Compass called for earlier this year. This would be an acknowledgement of the state were in and send a very real message that banks should be ruled by the people and the state, not the other way round. This could be invested into a Green New Deal to tackle the desperate problem of youth unemployment and the climate crisis (http://www.guardian.co.uk/commentisfree/2009/oct/31/bank-bonus-windfall-tax)

    In the long term of course we need a wholly different banking system and a much smaller one. A CHAPS or a Tobin style tax is a good idea to shrink the over-reliance on the banking sector in the long term.

    I have to say I am less persuaded by Varun’s arguments about competitiveness. A huge UK Treasury bailout bill suggests that the banks were never as profitable as suggested and it was only a matter of time until they collapsed.

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