Friday, 24 July 2015

The UK’s new tax on banks does not make sense.

The UK introduced a so called “bank levy” on banks  two or three years ago presumably to make banks pay for the damage they did to the World economy. The levy was related to the size of banks’ assets.

This is being replaced by a tax on profits: that is, banks will pay a higher rate of tax than other corporations.

That does not actually make sense, and for the following reasons.

The only logical reason for such a tax is as a form of insurance premium to pay for state generosity to banks during a crisis: e.g. lender of last resort loans at sweetheart rates of interest, and (in the case of the UK), deposit insurance which at the moment is funded by taxpayers.

However, the costs that a failing bank imposes on the country as a whole have nothing to do with the profit they make. Indeed, if anything, the loss making banks are the biggest risk: they are clearly more likely to go running to the taxpayer for bailout than a profitable bank.

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