Toronto G-20 Meetings, Robin Hood taxes on banks and Canada
from Jim Stanford
One of the most controversial topics that will be addressed at this month’s G-20 meetings in Toronto, Canada will be the proposal for new taxes on banks and other financial institutions. Unfortunately, the host to the summit, Canada’s strongly neoliberal Conservative government, has already expressed strident opposition to any new tax on banks – whether a Robin Hood-style tax as proposed by Oxfam and other progressive groups, or the milder measures being studied by the IMF.
While the host government certainly does not have any veto power at these summits, Canada’s vocal opposition to any new taxes (or restrictions of any kind) on private banks certainly throws up another roadblock to get something done. Indeed, with President Obama adopting (for the time being, anyway) a more populist, finance-bashing tone (symbolized by the lawsuit against Goldman Sachs), Canada’s government – led by Finance Minister Jim Flaherty – has become the leading international voice against new bank taxes.
Before a supportive hometown crowd on Toronto’s Bay Street (Canada’s version of Wall Street), he recently denounced the idea of “excessive, arbitrary, punitive” taxes on Canada’s banks, which weathered the global financial storm with flying colours. Our banks didn’t make bad, risky decisions. Our banks didn’t join the excesses that brought down American and European institutions. Our banks behaved prudently and rationally. Our banks didn’t need a bail-out. “We’re not going to punish our banks for the fact that they have acted responsibly,” he righteously thundered. The market worked well in Canada, he argues, so we’re not going to mess with it – and neither should other countries.
This pompously self-congratulatory tone is not remotely justified by the economic facts. The reality is that Canada’s uber-profitable private banks are supported by a tight web of government protections and subsidies. Their consistent profits and relative stability reflect much less the market-driven rationality of their executives, than the virtue of public regulation and protection. Despite this protected situation, however, the banks did indeed receive unprecedented government support at the time of the crisis (through a range of measures that provided upwards of $200 billion Cdn. in liquidity support when the banks needed it the most). Finally, and most painfully, far from increasing taxes on the banks (as so many are now proposing), Flaherty’s government is actually cutting them.
Here are the facts about Canada’s banking system, the support it receives from government, and the direction of bank taxes in Canada:
- Canada’s banking system is dominated by 5 big banks which control some 90 percent of total banking assets in the country.
- They have earned steady, above-normal profits every year for almost two decades. Even in fiscal 2009, with the global system melting down around them, they earned a combined after-tax profit for the year of $13.5 billion (for those 5 banks alone).
- This comfortable and lucrative oligopoly is reinforced by government prohibition against any of the major banks being merged or taken over by a controlling interest, and a complementary requirement that all of the banks must be majority Canadian owned. This protected the large banks against take-over threats from U.S. and other foreign banks, which were flush with cash while the bubble was expanding. When manufacturing workers ask for defence against competing imports, they are denounced as “protectionist.” But Canada’s banks get this kind of assistance every day of the year.
- The financial sector (which employs just 6 percent of Canadian workers) has been sucking up over one-quarter of all business profits in Canada. Incredibly, amidst a wicked recession that was centred in finance, that share actually rose last year.
- Canada has a strong public system of deposit insurance, unconditionally guaranteeing cash and term deposits up to $60,000 per person per account. Depositors can access the guarantee several times over, by opening multiple accounts with multiple institutions. Public deposit insurance mostly defuses the risk of any panic attacks on the banks from the public in times of stress.
- More importantly in the recent crisis, Canada has a strong public institution which guarantees almost all residential mortgages, the Canadian Mortgage and Housing Corporation (CMHC). So long as a mortgage meets basic CMHC requirements (which were relaxed in recent years, as CMHC followed the industry’s lead in allowing increasingly lax down-payment and other terms), the mortgage is guaranteed by CMHC (a government-owned agency). This meant that Canadian banks never faced the risk of widespread mortgage defaults that helped bring down their U.S. counterparts. The government faced that risk.
- Also, the CMHC guarantee facilitated a more reliable and convenient process of mortgage securitization for Canada’s banks (most Canadian mortgages are still securitized). Because they were government-guaranteed, mortgage-based bonds and related assets never lost their value as they did in the U.S. (with consequently destructive knock-on effects on balance sheets, bank capital, and so on).
- Despite all this regular support, when the financial crisis hit Canada’s government stepped in with additional, extraordinary measures to support the private banks. Finance Minister Flaherty implemented an Extraordinary Financing Framework (EFF) that provided a potential total of $200 billion in liquidity assistance for the private banks, delivered via a number of forms.
- These measures included an innovative process of “swapping” cash for CMHC-guaranteed mortgages (so that the government temporarily took ownership of the mortgages), emergency ultra-low-interest loans, and other forms of capital injection. The banks tapped into these measures energetically as the crisis worsened. The funds have since been repaid (easily, as the banks retained healthy profitability right through the credit) – but that doesn’t negate the fact that this bail-out was essential to preserving their stability.
The relative “success” and stability of Canada’s banking system has much less to do with the rationality of private decision-taking, and much more to do with the wisdom and effectiveness of public regulation, public insurance, and outright public ownership. We Canadians are glad that our banks are stable. We wouldn’t even necessarily begrudge the above-normal profits that are generated in this protected, supported oligopoly, so long as the banks do their job at supplying stable credit to the real economy – and so long as they pay their damn taxes.
However, Flaherty’s government is relaxing even that last, modest bit of social accountability over private banks. Indeed, the Finance Minister’s tough talk against the Robin Hood tax seems designed to provide useful cover for the fact that his government is actually cutting bank taxes – not increasing them. On January 1 corporate taxes fell by a full percentage point, and under Mr. Flaherty’s fiscal plan they will fall three more points by 2012. That will save Canada’s financial sector around $2 billion per year. Incredibly, these tax cuts are being implemented even as Flaherty’s government grapples with a $40 billion+ deficit, and warns Canadians that they must tighten their belts in coming years to balance the books. Let’s start the balancing process with the banks, which continue to generate unusual profits despite the global financial crisis which they were very much a part of causing.
Cancelling the latest corporate tax cuts would recoup $2 billion per year from the financial sector alone. Better yet, restoring tax rates for the financial sector to where they were when the Conservatives took power (21 percent, plus a 1.12 percent surtax) would boost the take to $4 billion per year. So before Ottawa cuts a single person off unemployment benefits, lays off a single civil servant, or sells a single public asset in the name of deficit reduction, it had better tap the banks for their full contribution to running the government that saved their own bacon. That’s not excessive or punitive. It’s simply called paying your fair share.
And don’t believe Mr. Flaherty or Prime Minister Stephen Harper when they lecture the world in Toronto about the supposed virtues of Canada’s more “rational” banks. They didn’t behave as aggressively as those in other countries – mostly because they didn’t feel any compulsion to. They were comfortable making swads of profits being less “innovative,” in the context of a regulated, oligopolistic, government-guaranteed industry. Moreover, when the bubble burst, the nanny state was still on hand for Canada’s banks, with massive additional support.
We could have a discussion about the extent to which the Robin Hood tax or other taxes would actually change bank behaviour (I tend to think that stronger, more direct regulations and controls are necessary, not just fiscal disincentives, to really put a dent in the destructive processes of leveraged speculation). But there’s no debate at all that banks should make a decent contribution, through their taxes, to the social costs of the crisis they caused. And Canada’s protected, profitable banks would be a great place to start.