Finance Minister Jim Flaherty was in gunslinging mode last week, striding out to defend Canada's banks against the mandarins at the International Monetary Fund. They want G20 governments to impose a new bank tax to help pay for the bailouts and deficits that resulted from the global financial crisis. But Mr. Flaherty is having no part of it.
Before a supportive hometown crowd on Bay Street, he denounced the idea of "excessive, arbitrary, punitive" taxes on Canadian banks, which have weathered the financial storm with flying colours. (Of course, that $200-billion low-interest line of credit from Ottawa helped just a bit.) "We're not going to punish our banks for the fact that they have acted responsibly," he righteously thundered.
Mr. Flaherty has now become the leading international opponent of new bank taxes. Thanks in part to his strident opposition, the G20 postponed any decision on the matter until at least June.
Moreover, the Finance Minister's tough talk is providing useful cover for the fact that his government is actually cutting bank taxes - not increasing them. On Jan. 1, corporate taxes fell by a full percentage point; under Mr. Flaherty's plan, they will fall three more points by 2012. That will save Canada's über-profitable financial sector about $2-billion a year.
Since 2005, before-tax profits in Canada's financial sector have averaged $50-billion a year. Amid the global carnage of 2009, they fell to a mere $44-billion. The financial sector, which employs just 6 per cent of Canadian workers, has been sucking up more than 25 per cent of all business profits. Incredibly, during a wicked recession that was centred in finance, that share actually rose last year.
In theory, finance is supposed to be the handmaiden of growth, facilitating productive investments in the real economy. In practice, finance is the tail that's come to wag the economic dog. Financial profit-seeking is now an end it itself, with often disastrous results.
In fact, we're now experiencing the destructive irrationality of financial markets all over again, with the European debt crisis. Pundits blame the Greeks' lack of fiscal discipline. But it's bond speculators, not Athens politicians, who precipitated this crisis: using credit default swaps and other derivatives to exploit perceived uncertainty and attack the bonds of Greece (and other countries), driving up interest rates on sovereign debt to 10 per cent or higher. This is just a variant of the same herd behaviour that brought down Lehman Brothers, and it could potentially spark a global double dip.
In this context, there are two broad economic arguments for taxing finance. One is to discourage overly risky behaviour, by imposing a disincentive on excess leverage and other undesirable activities. In my view, direct regulations would be more effective than modest taxes at controlling these practices, and hence preventing the next meltdown.
But the second argument for higher bank taxes becomes more convincing with every uptick in public debt. Financiers are economically and morally obliged to make a larger contribution to the cost of running our government. This is justified by their uniquely profitable and protected status - not to mention that, if the state hadn't ridden to their rescue, the bankers would all be wearing barrels today.
Cancelling the latest corporate tax cuts would recoup $2-billion a year from the financial sector alone. Better yet, restoring tax rates for the financial sector to where they were when the Conservatives took office (21 per cent, plus a 1.12 per cent surtax) would boost the take to $4-billion a year.
So before Ottawa cuts a single person off EI, lays off a single civil servant or sells a single 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.