Should City banks be taxed on their profits to prevent them paying out big bonuses to star traders? That’s the view being attributed to FSA chairman Lord Turner this morning, after his comments in the latest issue of Prospect. Turner suggested that the City had grown ‘beyond a socially reasonable size’ and speculated about the possible use of so-called ‘Tobin taxes’ to divert some of their fat profits to more socially deserving causes. This has inevitably prompted criticism that he wants to destroy the competitiveness of one of the UK’s most successful industries – but on closer inspection, he only seems to be suggesting this as a fall-back option, and possibly only if other countries follow suit...
Turner was taking part in a round-table discussion about the future of the British banking system (which is an interesting read, by the way, if you can lay your hands on a copy), and was pretty open about what he thinks needs to be done. He did accept that the City had grown ‘larger than is socially optimal’, and that some of the financial innovation of recent years ‘has produced products of very dubious social value’ – and he’s clearly in favour of measures that will help to cut it down to size.
However, Turner believes that adjusting capital requirements (i.e. the amount of money banks must have in their coffers relative to their capital at risk) is the real key to changing the way the City behaves. Attacking bonuses is not the answer, he suggests – tighter bonus curbs wouldn’t have prevented the financial crisis, because bankers will always be inclined to irrational exuberance even if they’re rewarded in shares (as he points out, Lehman boss Dick Fuld’s bonus was entirely in shares, and look how that turned out).
It’s only if this doesn’t work that he thinks taxes might be required. ‘If increased capital requirements are insufficient, I am happy to consider tax on financial transactions, Tobin taxes,’ he says. The idea is that this would cream off some of the banks’ profits, which would not only reduce the amount available for paying bonuses, but also provide ‘a nice sensible revenue source for funding global public goods’ (whatever these may be). Given that he goes on to point out: ‘The problem is that getting global agreement will be very difficult’, he’s not exactly blind to the potential issues. But that hasn't stopped the Treasury, the City and even the FSA distancing themselves from his comments this morning,
Turner’s surely right to argue that there’s a point where an industry can get too big, regardless of the amount of tax it’s pouring into the Treasury’s coffers. But we’re not as convinced as he is that London will continue to be a world financial centre (for reasons of geography, as much as anything) regardless of what regulators do – or that it’s a good idea for the government to start redistributing corporate profits (or that there'll ever be an international consensus on this topic). But it’s an interesting debate, and Turner has some interesting ideas. We can’t help feeling that the Tories would be wrong to kick him into the long grass along with the FSA...
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