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Wednesday, February 15, 2012
Leading academics call for excess bank profits tax in AFR
Big four must cop excess profits tax
The Australian Financial Review
GEOFF HARCOURT, RAJA JUNANKAR, PETER KRIESLER, JOHN NEVILE
On February 7 the Reserve Bank of Australia decided to leave the cash rate unchanged at 4.25 per cent.
However, the big four banks have decided to raise their mortgage rates by between six and 10 basis points. This is a controversial new game being played in which the big four are moving their interest rates independently of the RBA.
The commercial banking system plays a vital role in the functioning of the economy by providing credit to firms and households.
The RBA, as a central bank and lender of last resort, generally follows a rule of supporting the banks in times of need: they are too big to fail.
In the aftermath of the global financial crisis, the federal government guaranteed individual depositors up to $1 million.
Furthermore, the government has maintained the oligopoly position of the big four banks that provides them with a safe, protected market, with virtually no overall risk.
All this implies that profitability of the banks, measured as a rate of return on their total capital, will usually be well above the average rate of profit, similarly measured, in the economy as a whole.
It follows that the difference between their actual profitability and this national average is due to their privileged position; it is a pure profit.
We contend that this difference should be subject to an excess profits tax (similar to the resource rent tax) because it does not reflect in any way their contribution to the efficient operation of the economy.
It is rather an index of their privileged and oligopolistic role in the Australian economy.
Such a measure would neither affect the efficiency with which the banks perform their necessary social functions, nor the returns they should pay their shareholders, but it would make their treatment more equitable with regard to other taxpayers who are not in their privileged position.
This suggested reform of an excess profits tax on banks is based on an economic, not a populist, basis.
Professor Geoff Harcourt
Professor Raja Junankar
Associate Professor Peter Kriesler
Professor John Nevile
School of Economics
University of NSW