GUEST COMMENT: Bankers already pay too much tax

It would make perfect political sense for Alistair Darling to base today's budget around a new tax on banks. However, it would also be economically foolish.

Given that politicians in the US and the UK have been successful in blaming the banks for a financial recession that was at least partly caused by bad monetary policy and incompetent regulation, it seems rational from their perspective for the centrepiece of the budget to be a 5 billion tax on banks to fund a series of pre-election giveaways.

5 billion is roughly the amount that banks save from not being subject to VAT and other indirect taxes. Using the 2007 input output data and applying the average rate of net taxes to total supply of products, the banking and finance sector might be thought to be undertaxed by 5.13 billion per annum. And one might add to this the one-off cost of the banking bailout which the Treasury now estimates at 10 billion.

But a year ago cebr showed how taking all taxes, together the financial sector pays a lot more in tax than is generally realised.

We estimated, partly based on PWC research, that the financial sector paid in total 67bn in tax revenues in 2006/07. This fell to 39bn in 2008/09, but we forecast a rise to 46bn by 2012/13. Because of a stronger position in the financial sector the forecast for 2012/13 might now be on the low side and a figure of 55 billion could be closer to the mark.

No comparable data is available for other sectors so it is difficult to work out what might be paid in equivalent industries. But it would be very surprising if one came to any conclusion other than that the financial sector already pays more than its share in total tax, even now, let alone in 2006/07. And the tax excess more than pays for the net costs of the bailouts.

The argument above suggests that a banking tax would not be fair, except in the eyes of those who see any tax on someone other than themselves as fair.

Would it be economically damaging? Here it depends on how it is levied and at what rate. If it is possible to ring fence domestic retail banking, there will probably be very little net damage to competitiveness. But a tax on transactions could do immense damage, even if levied at a G20 level and especially if it is not imposed on an international basis.

But the key flaw in the thinking about taxing banking is that the bankers will pay the tax. Even a second week economics student knows that it is not the bankers who will pay the tax but their customers. Those who think that a tax on bankers is a way of avoiding having to take the pain from the economic crisis are sadly deluded.