Spain | The effects of a new tax on banks

Summary

A specific tax on banks leads to an equilibrium with less credit and a higher cost, lower growth in activity and employment, and lower revenues than initially expected.

Key points

• Key points:
• More often than is desirable, economic policy proposals are made that seem to ignore the accumulated knowledge of decades of theoretical and empirical research. This is the case of the announced bank tax with the justification of taxing the alleged "windfall" profits due to the ECB rate hike.
• First of all, the economic sense of creating a sector-specific tax must be evaluated, as opposed to a generalized tax increase on all companies for redistributive purposes, as has been argued. Taxes specific to a certain sector are only justifiable when the aim is to reduce its activity because they generate some externality or cost to society as a whole.
• Secondly, the very concept of "windfall" profits is dubious in tax and economic terms. These profits are associated with those obtained as a result of an improvement in the environment (in this case, the ECB's rate hike) and not as a result of the company's own successful management.
• Thirdly, it is necessary to have some form of ex ante evaluation. For the time being, it has only been announced that this tax is intended to raise some 1.5 billion euros per year (slightly more than 0.1% of GDP) and that it is not expected to affect investments or bank credit.
• Unfortunately, it is foreseeable that the most vulnerable customers such as young people, people with less financial education, women or small businesses may find themselves to be more affected in relative terms.

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