The windfall banks tax is gaining support
“Is it time for a new windfall tax on banks?” asked this blog back in the summer. It seems so. The Westminster press briefing is that the chancellor is considering a banks tax in his pre-budget statement.
As I argued then, it is not only banks such as Lloyds, RBS and Northern Rock that have benefited from the state bail-out; Barclays, HSBC and Standard Chartered would have suffered greatly if the government had not intervened to support the system. Even banks in which the Treasury is not a shareholder have benefited from the Bank of England’s special lending regime.
It seems fair therefore that all banks should pay for the benefit they received, therefore, and a one-off windfall tax is a good way to do that. Ministers are drawing up plans for the tax raid according to The Sunday Telegraph’s front-page story.
Perhaps because all businesses and individuals gained from rescuing the banking system, the tax should fall on everyone, but the surge in bank profits since the blog was written and the prospect of high bonuses merely increases the justification for taxing the banks. The Tory government imposed a windfall tax on banks in 1981 because of the high profits from retail banking during that recession and Labour hit former privatised utilities with a windfall tax in 1999, so there is precedent.
Given the state of the public finances and the need to raise taxation, a tax on the banks would be popular. But there are snags: some nationalised banks are not making any profits to tax, and demanding any payment reduces the banks’ capital at the very time they are being told to increase it.
So let me offer a solution to those problems. The 1981 tax was a levy on balance sheet totals, not profits: a new version could be on assets or transactions rather than bottom line. Secondly, allow the banks to pay in shares, thus leaving their capital reserves unchanged but existing investors’ holdings diluted.
That would give the government a small investment in non-aided banks such as Barclays and a larger holding in lenders such as Royal Bank of Scotland that would be sold, in time, along with other state stakes. Quasi equity could also be taken in the building societies that benefited from rescuing the system with the societies incentivised to buy-back the shares with future profits.
There are other ways to make the banks pay for their own folly, including limiting tax relief on their losses, and the windfall tax may simply remain a threat in case banks do not subscribe to a new code on avoidance. But as this blog wrote on 5 August: “Banking got off lightly from last year’s rescue and ought to pay directly. Taxing the bankers is impractical so taxing the banks should be considered.”
