The economics of perpetual motion

Allister Heath
WOW. This government has finally cracked it. It has rewritten the laws of economics: there is now such a thing as a free lunch, the elusive El Dorado pursued so assiduously since time immemorial. I’m talking about George Osborne’s special tax on the balance sheets of large banks operating in London, hiked by another £800m to £2.5bn a year yesterday.

Please bear with me, dear reader, as I try to recount what passes for common sense at the Treasury. “The banks” are back in the black, so they can afford to pay more – and given that they remain weirdly enamoured with London, they will put up with ever-higher taxes and continue as if nothing had happened. There will (of course) be no adverse effect on lending volumes, interest rates charged, the cost of services (such as advisory or fundraising work), the employment of staff in London, dividends paid to institutional shareholders or anything else that matters. The only changes will be that profit and compensation will be reduced (with no negative effect on the incentives of shareholders or staff, obviously, and no knock-on effects) – and that the government will collect more money. A faultless scheme, the budgetary equivalent of perpetual motion.

The Labour party agrees that taxing banks doesn’t have any disadvantages or unintended, perverse consequences: it just thinks the UK should do even more of it, and specifically tax profits and bonuses even harder (the government doesn’t really disagree; it hints it will do that if the Merlin talks collapse). It’s a firmly entrenched new consensus, shared by most of the media and virtually all of the public, who want banks “to pay their fair share” (a moving target, but one which it increasingly seems to mean close to 100 per cent of profits and pay). As Voltaire’s Candide might have put it, it’s all for the best in the best of all possible worlds.

Ok, so I’m being just a little sarcastic. But how can it be assumed that such a tax will have no bad effects, without any proper thought or research? One might have expected a detailed cost-benefit analysis to work out who would end up actually paying (academic studies of tax incidence usually reveal that consumers pick up a good chunk, and sometimes even all, of the bill from any new tax). There has evidently been nothing of the sort – rather, the chancellor made up the policy on the hoof ahead of a key clash with his shadow Ed Balls.

This near-universal view that financial firms and their staff don’t pay much tax is equally baseless. The top rate of direct tax on earnings above £150,000 will hit 52 per cent from April, including employee national insurance contribution. Employers must also pay a tax on jobs – employers’ national insurance – of 13.8 per cent. So close to 58 per cent of the total cost to firms of bonuses will be directly transferred to HMRC – without this contribution, the tax on the rest of society would be even higher. Financial services firms paid £53.4bn in tax in 2009-10; Goldman Sachs alone paid £2.3bn in UK tax in 2010. The top one per cent of earners pay 26 per cent of all income tax.

I am not a banker, have never been one and will never be one. It’s much more interesting to be a newspaper editor. But if I were Bob Diamond or any of the other bank CEOs, I would tear up the Merlin deal and walk away. Why bother? Nothing will ever assuage those baying for their blood.
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