Why the key arguments for Australia’s new tax on the major banks don’t stack up

 

If you are looking for lessons in obfuscation, governments spoil you with choice. But an ideal example is the Major Bank Levy, currently before Parliament.

The levy is forecast to raise around $1.6 billion per year from Australia’s five major banks, but it is effectively a tax on households. Forget the smokescreen about banks ‘absorbing’ the tax — they won’t. The international evidence, including work cited by the government, says the levy will cause an increase in mortgage rates. And Australian experts agree. My mortgage is going to pay the levy, and so is yours.

This tax hit on mortgages is on top of the ever-increasing household tax burden —  personal tax as a share of GDP has been increasing by 0.3 percentage points per year, cumulative, ever since the GFC. This tax burden is set to go well above its historical average in coming years.

The levy is also likely to result in higher business lending rates, which is exactly what we don’t need when new business investment as a share of the economy is close to an all-time low and set to fall further.

Australia’s bank levy could reduce GDP by about $1.7 billion per year, using IMF calculations. This is a substantial impact compared to the revenue raised of $1.6 billion. By comparison, a personal tax increase of the same size would cut GDP by about $0.9 billion, based on Treasury estimates. So the bank levy is significantly more harmful to the economy than personal tax.

The standard, but deceptive, response is to argue the levy’s harmful effects can be ignored because the impact is ‘small’. But this is an absurd way to dismiss debate. Governments should never adopt a bad policy just because the impact is negligible across the whole economy. If we followed this approach slavishly, every small bad policy could become immediately acceptable. Here lies the path to madness, rather than sound policy.

And the Coalition is acting as though it doesn’t agree with this approach. It is rightly criticising the ALP’s policy of increasing the top marginal tax rate to 49%, which would raise about the same revenue as the bank levy. If this arguably small, but bad, decision can be criticised, the Coalition’s bank levy can be criticised on the same terms.

Also, don’t be deceived by the unstated assumption that the levy will always be small in impact. Revenue forecasts for the levy are debatable, let alone the constantly wrong forecasts for the rest of the budget. As a result, the levy could easily be increased — and a supposedly ‘small’ impact would no longer be small.

The trickery about the levy also includes the government’s argument that the levy will improve bank resilience. However, the actual impact is likely to be the exact opposite. The levy discourages the use of long-term bank funding — one of the best types of funding for resilience — and is unlikely to encourage greater use of equity, despite the government’s arguments.

International experience is another red herring. The government argues the levy will bring Australia into alignment with other developed countries, but this isn’t correct. About half the countries in the European Union don’t have a levy on deposits, nor does the US. And many countries with a levy have massively subsidised their banking system, including through quantitative easing, while Australia has not.

The levy is argued to level the playing field by charging for an ‘unfair’ advantage for the big banks. But this is another smokescreen. Analysis by the RBA found the supposed funding advantage was substantial after the GFC, but has fallen since then and wasn’t significantly different from zero in 2014, the most recent year analysed. So this provides no support for the levy. Worse, the levy prejudices and devalues a Productivity Commission inquiry into banking competition. If the Commission finds there aren’t any unfair advantages to the big banks, this would let us know that we’ve been fooled by the illusionists arguing for the levy.

Supporters of the levy also argue the levy is a charge for the big banks being seen as ‘Too Big To Fail’ (TBTF). However, this would be counter by efforts of the RBA, APRA and global regulators to ensure larger banks are not classified as TBTF. The Murray Inquiry into the financial system emphasised the costs of TBTF banks, including increased moral hazard and financial market risks.

And there is one other smokescreen: the levy is said to be essential to returning the budget to surplus. But based on current forecasts the levy won’t materially change the time or size of the surplus. If the levy increases, the budget impact might be larger — but then the levy is no longer ‘small’, exposing the trickery of that particular argument for supporting the levy.

The Australian public doesn’t need these ongoing lessons in obfuscation. If a policy is bad, we should be wary about it rather than being expected to fall for these illusionist’s tricks.

Michael Potter is a Research Fellow in the Economics Program at the Centre for Independent Studies and author of the CIS research report The Major Bank Levy: We’re all going to be hit.