The Three Taxes – a review

Well there you have it. My recipe for recovery in my role as World Leader – The Three Taxes. Not imposed on banks in the conventional sense of attacking profits but on their principal activities – lending money and trading – to recognise their special position. In other words, to make banks part of the civilised world rather than taking us all for a ride.  Because so far, banks have not been looking, listening or speaking but just carrying on as if nothing has happened.

The Three Taxes – Funny Money Tax, Financial Transaction Tax and Excess Interest Tax – are not without contention.

The Funny Money Tax is a direct response to the careless application of fractional reserve banking particularly over the past 10 years or so. Some institutions will complain that they have behaved honourably and should not be affected. Well the point is not so much a blame game as a programme for future responsibility. It is the realisation of the frailty of the world economy that was not fully appreciated.  There is nothing like a disaster to concentrate the mind. It may be that this tax could be levied at higher rates on those banks which have taken the King’s – or rather the Taxpayers’ – Shillings (many of them) so to speak until that shilling is recovered in full, although no doubt this would generate a lot of work evading such a variation and may not be worthwhile.

The most contentious is the Financial Transactions Tax but here the motivation is to quench excess volatility in the market. Some will argue that the ability to reflect market value almost instantaneously is a good thing and shows that the market responds but the problem is that it leads to substantial overshoot in valuations and is fundamentally unstable, which is what I want to quench. Because at the end of it all there is a product or service which, as I said, works on a completely different timescale. If someone can think of a better way to do it, I am all ears but in the meantime let’s get on with a simple solution and see whether it works as envisaged. Arguing about it while the practice carries on is just like Nero fiddling while Rome burns.

The Excess Interest Tax will be the most popular to implement of course, as it affects each person and business. It may lead to some bank charges being increased but if we couple it with the requirement for instant portability of accounts, transparency in interest charges and draconian penalties for lying, it will ensure that this unrepresentative tax on all of us by the banks will be reduced and that on its own will generate more spending and more banking.

Imposing these taxes should be done as soon as possible although it may be as well to start at quite a low level. Some institutions will cry foul and take their ball away but they will be replaced by others. And the new guys that enter the field will be much more efficient, which can only be a Good Thing. Banks and financial institutions are terribly wasteful and hide this behind their massive profits made not from usual business activities but as a result of their special place. Do they really need their tower blocks?

It is time to stop this farce.

Eagle-eyed readers will note that I am writing this under my own identity! Yes I have graduated to being a Staff Writer for this blog. Which is not much of a change really as we have batted ideas between us ever since the first post. We don’t see eye to eye about everything but do discuss most posts before they see the light of day!

15 thoughts on “The Three Taxes – a review”

  1. I love the hear no evil, see no evil, and say no evil monkeys. We actually have a sculpture set of them that my hubby got in Mexico years ago. These are some interesting tax changes you may be having. We are lucky in Canada to not have to be dealing with this.

    1. @Miss T: Thanks for stopping by and yes, the picture is cool. This post is the forth in a series – they were written by John in responde to a post of mine asking people what are the three measures they will intriduce to offset the economic and financial crisis were they a world leader.

    2. @Miss T – greetings to Canada. I thought the three monkeys mirrored the inactivity of the banks rather nicely! It is a little insulting to monkeys, for which I apologise to our simian friends. I wish we were having such tax changes – these are my proposals! 🙂

  2. Great post I’m all for the tax changes but, how will the average consumer be affected? I’m sure the banks will just pass their heavier tax burden on to us :(. How can you prevent this?

    1. Hi @YFS. The point of these taxes, particularly the Funny Money and Excess Interest tax, is that they will be currency dependent. So as there is a given amount of business in one currency, there is a market for banking. Banks can choose to be in that market or not but they cannot escape paying the tax as they have to report regularly to the Central Bank.

      With total transparency and portability of accounts, any bank that hikes its interest in response will end up rapidly losing accounts to more compliant banks. The transparency and portability is only what already exists for example in the energy market. We really haven’t been tough enough with the banks, probably out of fear that they will move their HQs elsewhere but that won’t matter at all if the tax is levied on a currency basis. eg if the Bank of America writes a loan and/or charges excess interest, the taxes will be levied just as if Barclays does the same in dollars with the tax going to the UK or US respectively. Funny Money tax should go to the central bank and the excess interest to the government.

  3. Interesting to hear your perspective of tax policy in the UK. In the US, our debt bubble exploded back in 2008, the EU is just begining to deal with the debt issue, so higher taxes along with budget cuts will have to be part of the medicine. Much of the volatility in the US markets is now being caused by megabanks using a strategy called high frequency trading. I would be curious to know if the transaction tax was instituted to prevent high frequency trading?

    1. Hi @Paul. Tks 4 yur comments.

      I wish it were tax policy but our govt seems intent on cutting public spending by 25% which will cause about 750,000 job losses in my estimate. So the people will be paying when it was the banks that caused it. It doesn’t say much for the politicians’ expensive education I’m afraid because they clearly cannot count.

      Euroland had its head in the sand thinking it was all an Anglo-American problem but their banks bought into it as well. Now with the knock-on effects of recession, questions have begun to be asked about some parts of the EU. But if the banks were stupid enough to lend shed loads imagining that they would be bailed out, they too haven’t learnt to count.

      High frequency trading is a disease which makes the markets unstable through massive positive feedback – like holding the mike by the loudspeaker and turning up the volume. The only possible yet simple remedy I have come across is a small transaction tax – not enough to stop market response to real changes but enough to stop speculators notching up their cents on million dollar trades. Given that you can trade with up to 200 times leverage – whereas of course if you just want to settle a bill the leverage is 1 – this will I hope kill that gambling.

      This has been proposed by the European Commission, from which sometimes sensible proposals emerge, but the UK has said ‘only if every one does’ and of course the US has said a big no!

  4. Interesting thoughts. I especially like the first tax enabling the taxpayer to recoup any bailout money. The transaction tax also seems reasonable especially for high frequency trading. Maybe a day trading type tax for any institution in and out within the same day so that most small investors don’t get hit.

  5. Hi @cashflowmatra.

    The bailout of UK banks has cost the taxpayer shedloads – at least £80billion directly without the guarantees and loss of tax revenues. That’s on a government income of about £450 billion a year which is probably pro-rata more than most others apart from Ireland and Iceland. And all because the banks went off and printed excess money without a care in the world. Lehmans at the height was leveraged 60-80 times in USD so had less than 1.5% in the kitty. I am sure the same happened in sterling but the crash also tool $8 billion out of the London market over a weekend. So recovering that from the taxpayer by increasing taxes and cutting services is not only unfair but also stupid beyond belief – but that’s what is happening. Fortunately we can devalue a little – by about 20% since the start – otherwise we would be like Ireland.

    A much better way is to recover the money by some sort of responsibility tax which is what I suggest on all loans written by all banks in sterling. A 1% tax on the additional money created would generate about £20+ billion a year, I reckon (total sterling bank deposits recorded at the BoE are a bit over £2 trillion which is an estimator of the amount of money created and rolled over) which would go a long way to recovering the debt and could be cut once this has happened – or not 😛 Even more so in the US….

  6. Taxes won’t stop them, they can get around taxes! They should be penalized for making bad loans. Let it affect their profits. Instead, we keep the interest rate low so they can make more profits. The only losers in this is society.

    1. @krantcents – Thanks for your thoughts but all banks have to report every month their deposits and many other parameters to the central bank (BoE, Fed, ECB etc) that is – or should be – in ‘charge’ of the currency. If they don’t, or they lie and their numbers don’t add up, they can have their licence withdrawn. So the balances should be accurate to the penny.

      Profits on the other hand are the illusion of a clever accountant who may generate off-shore companies in low or no tax havens and siphon money there to avoid tax. Hence taxing based on the reported balances is much more difficult to avoid. Perhaps the word ‘tax’ is wrong – call it a ‘charge’ or whatever – but the effect is the same.

      Anyway it should be worth trying!

  7. I would love to see the end results of these changes on the consumer long-term. Might be something interesting and hopefully not too painful to watch.

  8. @Aloysa – Thanks for your comment. I too would love to see something like these taxes tried. The problem I suspect is that the politicians are either too much in hock to the banks – old school tie and everything – or afraid of them because of political donations.

    Given that the main effect would be to reduce the size of bank profits, this would all be to the good for people and business because that reduction in profit would generate much more business in the longer run, even public investment. 😛

  9. @Paula – Thanks for your comments but lucky you! All we seem to discuss this side of the pond is the Euro, to which the UK doesn’t belong of course. (More of that in a later post …. 🙂 )

    It is a diversion maybe to avoid talking about our domestic tax policy and how to solve the problem. Huh.

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