The United Kingdom's Labour Party in its quest to regain a majority has promised to raise the bank levy in order to expand child care in the country. Although it is good politics to promise to taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. large banks and expand welfare programs, this is not good policy.
The UK's bank levy is a 0.13 percent annual tax on certain debts that are on large banks' balance sheets. This tax was first introduced in 2011 in the United Kingdom after the financial crisis as one of the ways to prevent banks from taking on risky borrowing. It was originally supposed to raise approximately 2.6 billion pounds every year.
However, from 2011 to present, the UK has needed to raise the rate several times because it never reached its revenue goal. It started as low as 0.075 and grew to 0.088, 0.105, and finally to the present 0.13 percent (it is set to increase again to 0.142 percent next year). Even with these increases, the tax has only managed to raise around 1.8 billion pounds each year.
Now the Labour Party wants to increase the levy again in order to fund an expansion of child care services for working parents. The tax increase, they estimate, will raise an additional 800 million pounds for this program.
This tax was never meant as a funding mechanism for the UK (I’m sure politicians didn’t mind the extra revenue). The bank levy is meant to discourage banks from participating in risky borrowing. If the tax is working the way it is supposed to, the amount of tax revenue should shrink overtime as banks take on fewer and fewer risky loans. It makes no sense to tie an increase in spending to a tax increase that will simply further discourage banks' borrowing behavior, further reducing revenues.
In fact, that is exactly what the UK has experienced with this tax. Even though the tax rate continues to increase, revenues never seem to increase. There is a direct behavioral response to the tax.
What will likely happen if Labour gets its way is that there will be extra welfare spending, yet very little additional revenues to fund it. The UK will then have to raise taxes again on something else to make up for the short fall.
If the program expansion is as important as Labour claims, they should use a much more stable source of revenue such as an increase in the VAT or income tax. But then, that wouldn’t be as politically popular, would it?
We saw a similar political gimmick earlier this year here at home when President Obama wanted to raise the cigarette tax in order to pay for an expansion in pre-K.
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