Taxing the banks will just hurt consumers

It is tragic that this Major Bank Levy Bill 2017 is supported by the Liberal government and the Labor opposition.

Let me be clear: it is absolutely opposed by the Liberal Democrats. This is a tax on banks, and not even all banks — only the biggest banks.

I will give you three sound reasons it should be thrown out. First, it amounts to redistribution. The government hopes to collect $6.2 billion from this tax over the next four years so that it can continue to provide funds to welfare recipients and public servants. Some of this money would come from bank shareholders. Even if you subscribe to the view that money is better in the hands of the poor rather than the rich, you should remember that bank shareholders range from Australia’s rich list to anyone with funds in superannuation, including low-income Australians. And we should remember that recipients of welfare in Australia are more often high and middle-income earners than they are low-income earners and that Australia’s public servants are invariably high-income earners.

Some of the $6.2 billion that the government hopes to collect from this bank tax would come from bank employees through reduced remuneration over time, yet bank employees do a useful job of intermediating funds, meaning that they direct money from deposits towards investment ideas that stack up. By contrast, most public servants do not contribute in any economic sense, and some of the $6.2 billion that the government hopes to collect from this bank tax would come from bank customers who will receive reduced interest on their deposits and pay higher interest rates on their borrowings. Banking is not a sin that warrants a new sin tax. The welfare recipients and public servants that this $6.2 billion is earmarked for do not deserve the money more than the banks’ shareholders, employees and customers. Bank shareholders, bank employees and bank customers do not deserve this tax. It is their money. There is no justification for redistributing bank money. It is better off where it is.

Beyond the question of redistribution, I oppose the bank tax because it will change the way we do things for the worse.
The bank tax will make people less inclined to finance banks, meaning that less bank lending will occur, fewer business ideas will get off the ground and fewer private sector jobs will be made.

Perversely, this will lead to more pressure to grow the ranks of welfare recipients and public servants and the downward spiral of a shrinking private sector and burgeoning public sector will continue.

How the banks go about their business will change, too. International experience cited by the government suggests that banks may increase the ratio of their capital to lending. The government says this is a good thing, but this is curious, because it implies that the minimum capital levels required by the prudential regulator are too low. We should be weary of suggestions that it is always good to lift the ratio of capital to lending. The people who think that are mostly the same people who believe that fractional reserve banking is a massive Jewish conspiracy. The government also acknowledges that international experience suggests that a bank tax will encourage banks to pursue riskier lending. Perhaps banks facing an extra tax when they borrow funds will borrow only if the returns from on-lending are that little bit higher.

The mere task of paying and collecting the bank tax will also divert resources and time. To pay the tax, each of the affected banks will need to undertake systems upgrades costing around $3 million each. This is money down the drain. The banks will have to hire more lawyers and tax accountants to walk the line between paying too much tax and falling foul of a new antiavoidance provision. This provision will say it is against the law for a bank to do something that a court subsequently thinks is for the sole or dominant purpose of getting a tax benefit. Putting taxpayers in this limbo land position is irresponsible. The tax office and prudential regulator will no doubt have to assign staff to get their heads around this new tax, too. That is more people employed in unproductive activities. If this keeps up, no-one in this country will be employed to make anything useful.

It is incumbent on me to slay some myths about the wisdom of putting a tax on big banks but not small banks. A lot of people in this place say that they stand up for small business, but I seem to be the only person in this place who also stands up for big business. More should do so, because it is big business that is more productive, that is innovative, that generates higher paying jobs and that employs more Australians than small business. Every big business began as a successful small business anyway.

The decision to tax some banks and not others creates inherent problems at the boundary. It unfairly treats banks that are just over the threshold compared with those that are just below the threshold. This is particularly the case given that a bank will be taxed on all the relevant liabilities, not just those over the threshold. This boundary issue may not be urgent now, given the current make-up of the banking sector, but it is foolish to enact a permanent law based solely on current circumstances. The bank tax also discourages small banks from becoming big banks.

The government justifies its attack on big banks by noting that they have lower costs, but it makes no sense to put a tax on the businesses in an industry that have lower costs. This just discourages striving for lower costs and rewards waste. Higher costs across the industry will be the result. The government justifies its attack on big banks by noting that the big banks charge higher prices and still maintain market share, but this suggests that the government thinks the customers of the big banks are stupid and will not shift banks even though it is in their interest to do so. If that is the case — and I do not believe it is — then putting an extra tax on big banks will not change it. It will just punish those who are loyal to the banks for other reasons, which is hardly a good basis for public policy.

The government also says that its bank tax is fair because big banks pose risks to the financial system and the economy. This is not true. The primary victims of the collapse of a big bank would be the people who choose to do business with that bank. Beyond these costs, there would be significant system- and economy-wide problems only to the extent that the government poorly manages the payments system between banks and only to the extent that the government does something as stupid as bailing out a failing bank. And basing policy on the social costs from big banks without considering the social benefits from their service of redirecting funds from savers to borrowers is piecemeal.

If we take into account the social costs and benefits from big banks, then big banks would be more deserving of a special subsidy than a special tax. I oppose the bank tax. It is unwarranted distribution. It will change the way we do things for the worse. Taxing big banks but not small banks makes no sense. With bill after bill that passes this place with Liberal and Labor support, Labor is drifting dangerously into jingoistic self-destruction. The Liberal Democrats are determined to call out this mad descent. For the record, we have never received any donations from the banks — more’s the pity, although we live in hope! But my point is this: the Liberal Democrats are a party of principle, and this bill is just wrong in principle.