Of Levies, Profits, and Backstops: The Bank Tax in Context

The Australian government’s surprising decision to impose a new tax targeted precisely at the biggest financial institutions in the country continues to generate public debate.  We have reviewed the structure, likely effects, and economic and regulatory context of the proposed 0.06% levy on selected liabilities of the 5 largest financial institutions in Australia.

The loud (but ultimately token) complaints of the banks about this measure cannot be taken too seriously.  It represents a tiny share of their assets (0.03%), gross revenue (well under 1%), and before-tax profits (around 2%).  It offsets only a small share of the benefit these same institutions receive from the public guarantee of their operations.  The banks consistently earn profit margins that are far larger than normal, thanks to government protection and their dominant market position.  Most importantly, the banks will get back two to three times as much in savings from the same Coalition government's promise to cut their company income tax rate by 5 percentage points, as it will pay in the new levy.  Little wonder, then, that the banks are not complaining too vociferously.

The bank levy fits very uncomfortably with the Coalition government's usual insistence on enriching business (not taxing it).  But it certainly opens a political door for progressives to demand other policy changes to make businesses, including in other sectors, pay a fair share toward the maintenance of the society which allows them to make such profits.