Proposed bank tax could cut lending capacity by 50 billion krona

A proposed increase in Iceland’s bank tax could reduce the lending capacity of Icelandic banks by 50 billion Icelandic krona, according to an assessment by consultancy Intellecon presented by economist Dr Gunnar Haraldsson at a Financial Services Association conference this week, mbl.is reports.

The increase is intended to raise an additional six billion krona for the state treasury through a 75% increase in the tax on financial companies’ liabilities, taking the rate to 0.254%.

Haraldsson said the increase could have a negative effect on economic growth, meaning the state’s final tax revenues could be lower than projected. He cited both indirect effects and the fact that the state is the largest shareholder in the commercial banks, alongside pension funds.

“As stated in Intellecon’s analysis, there is considerable uncertainty about how much revenue the tax increase will actually generate for the state,” said Heiðrún Jónsdóttir, director general of the Financial Services Association.

Jónsdóttir also said that special taxes on banks in Iceland were five times higher than those imposed in other Western European countries, according to a KPMG analysis presented at the conference. Iceland is among the Western European countries that tax the liabilities, profits and wages of financial companies at higher levels than other industries.

“The authorities should carefully consider the warnings issued by the foreign and domestic experts who spoke at the conference. A measure that could affect the economy and have wide-ranging effects on society as a whole must be based on a sufficient analysis of its impact on both the state and the economy as a whole. We hope such an analysis will be carried out before further steps are taken,” Jónsdóttir said.

Experience from European countries

Dr Lev Ratnovski, an economist at the International Monetary Fund, discussed European countries’ experience with bank taxes at the conference.

Ratnovski cited cases in which the IMF had warned countries against imposing special bank taxes and urged them to review the taxes or allow them to expire. In some cases, the IMF had pointed to the risk of disrupting the flow of capital. In others, it had recommended that temporary taxes not be extended beyond their original period of validity.

He referred to studies linking bank taxes to higher lending rates, a reduced supply of credit and lower investment by companies that rely on bank financing. He also noted that there could be arguments for taxing banks separately, saying that the way such taxes were designed was important and that they should be assessed alongside other ways for the state to raise revenue.

“Because that’s where the money is”

Ratnovski said one argument commonly used in favour of bank taxes was often attributed to American bank robber Willie Sutton. Sutton was asked why he robbed banks and is said to have replied: “Because that’s where the money is.” Sutton later denied saying this and believed a journalist had invented the quote, but it continues to be attributed to him.

The phrase bears some resemblance to comments by Arna Lára Jónsdóttir, a Social Democratic Alliance MP and chair of the Economic Affairs and Commerce Committee, during a panel discussion at the conference. As reported by Morgunblaðið, Jónsdóttir said she did not suffer from any “tax phobia” and that “the banks have enough.”