Take into account the next thought experiment. The federal government imposes a tax of $1000 on all bankers. One the exact same day, the federal government authorizes a brand new spending program, a $1000 subsidy to all bankers. How ought to we consider this mixed coverage? To me, it’s a nothingburger.
Economists used to view reserve necessities as an implicit tax on banks. That’s as a result of within the outdated days there was no curiosity paid on financial institution reserves, so there was a excessive alternative value of holding reserves.
Now, we have now no reserve necessities, however we do pay curiosity on reserves (IOR). This was completed as a result of policymakers wished to maneuver to a “flooring system”, the place banks would select to carry giant portions of reserves. The adoption of IOR permits the central financial institution to inject numerous reserves into the system, with out driving rates of interest right down to zero. You may consider giant reserve holdings as a tax on banking, and IOR as an offsetting subsidy.
Chris Giles has an article in the FT the place he means that the BoE transfer to a system the place the tax is maintained however the subsidy is eliminated:
The central financial institution pays 5.25 per cent on reserves in order that it may possibly set the short-term coverage rate of interest at that degree. It’s efficient, however not the one method to management short-term charges.
As an alternative, it may require banks to carry a hard and fast amount of cash with out curiosity, paying 5.25 per cent solely on a small a part of the reserves.
I don’t like the concept of paying curiosity on reserves, however I additionally oppose reserve necessities.
Return to the thought experiment on the high of this publish. Suppose the federal government abruptly eliminated the $1000 subsidy to bankers, however stored the $1000 tax in place. How ought to we take into consideration that change? In a technical sense, it entails a lower in authorities spending. But it surely additionally strikes us from a scenario the place there isn’t any internet circulate of cash to or from bankers, to a scenario the place all that continues to be is a $1000 tax on bankers. That seems like a tax improve.
Giles views issues otherwise:
One issue is that Andrew Bailey, BoE governor, nonetheless must be persuaded. In 2021 he mentioned the coverage can be a tax on banking. The reality is that it might decrease public spending.
The “fact” is that fact is a slippery idea, particularly the place phrases are poorly outlined. I perceive Giles’s level, however I discover Bailey’s characterization to be nearer to my means of viewing issues. You’d be primarily forcing banks to lend numerous cash to the British authorities at a charge of zero %. That looks as if the imposition of a tax on banking.
