Why bank windfall taxes backfire

Martien Lubberink writes:

Another reason to tread carefully on taxing banks is that the government relies on them to support the economy in difficult times.

The recent Covid years are an obvious example. Important policy initiatives, such as the Funding for Lending Programme and the Large Scale Asset Purchase Programme, relied on the banks’ cooperation. So it isn’t obvious why our government should turn its back on the banks when profits are high and ask for assistance when times are difficult.

More important, however, is the empirical evidence on bank taxes: do they work in practice? I am sorry to disappoint the good intentions of those in favour. Recent studies have shown that such taxes do not work as intended.

A study by the Bundesbank, which examined levies imposed on German banks from 2011 to 2014, showed the tax take of the German bank levy was lower than expected as banks managed to avoid the levy. A bigger worry is that banks affected by the levy reduced lending.

Another study on German bank levies showed banks increased their lending interest rates by about 0.14 percentage points, which is substantial. Interestingly, the study also showed non-levy paying lenders increased their rates. These banks piggybacked on the bank levy, at the expense of borrowers.

So the extra levies result in less lending, and higher rates on those who do get a loan. Just what we need in NZ!

The studies showed a bank tax increases the cost of doing business for banks and banks respond to that by avoiding the tax, lending less, and charging higher fees. For New Zealanders, this means that homeowners, small businesses, and other borrowers will suffer the consequences of the bank tax.

This is what the Greens want!