Banks: too big to fail, too rich not to socially contribute

The combination of being too big to fail, community underwriting and large profits make it economically and socially imperative for the government to treat banks like individuals and subject them to progressive taxation.

Even the most fanatical market economist would find something profoundly uneasy about an individual who earns $311,000 a week (based on last year's remuneration) comparing a $3.34 billion half year corporate profit with the cost of a cup of coffee.

CBA boss Ralph Norris came close to justifying his $16 million dollar pay packet by trying to normalise his banks gangster profit on the basis that profit measured on the basis of the banks return on assets is only about 1 per cent.

Norris stated that a way to conceptualise the profit was to imagine that the assets of the bank were $900 - not nearly $900 billion – and on that basis a $3.34 return was modest.

Like most things in life, relativities as analogies are poor guides. Objectivity and absolutes are everything. The only bottom line with the CBA is that it is on track this year to make a profit of over $6 billion.

Last year the four banks combined made of $21 billion profit. That equates to $1,000 from every Australian. Whichever light you hold that up to, the sums are incontestably big.

Norris' return on assets point of reference is inapposite in relation to entities whose total assets are nearly the size of Australian's annual economy – there is only so much moss you can scrape from a stone.

Having said that, the recent venting that has been projected at the banks for their mega profits, especially following the November out-of-cycle rate rises, is misplaced. Banks are not to be blamed for their largesse.

Talk of 'corporate social responsibility' over the past decade has been shown to be nonsense. And so it should be. Corporations exist to make money for their owners (the shareholders) and so long as they comply with the law and pay their tax they have discharged their responsibility to the community.

There are other institutions in the community that individuals should be looking to in order to fulfil basic human and social needs. They start and end with governments, churches, families and charities.

Any dereliction relating to bank profits rests with one entity: the government. It's the government's role to raise money by imposing taxes to pay for essential services and infrastructure.

There are lots of theories doing the rounds of economics and philosophy departments on how government's should raise tax. But there is near universal consensus that ability to pay must be a cornerstone of taxation policy.

Progressive taxation is a near universally aspect of the tax system. Hence individuals on less than $37,000 pay income tax at 15 cents in dollar; those on $180,000 (happily – at least in most cases) pay 45 cents.

Yet banks, like all corporations, pay a flat 30 cents in dollar. There are some sound reasons for this. It encourages investment in business activities and keeps Australia internationally competitive.

None of these reasons apply to the banks. Their principle business base is locked into the local economy. Moreover, when it comes to making money banks occupy a privileged position.

They are nearly essential institutions, having permeated the life of every adult Australian. Most financial transactions – even welfare payments – now involve the banks, giving banks unprecedented capacity to charge fees, charges and interest on our money.

This is in contrast to mining companies, which are the other cash cows in the economy. The return on assets by many mining companies at present is much larger than the banks (about 7 to 1), but their market is far bigger (potentially the whole world) and their business involves enormous risks.

The banks have also benefited immeasurably from the government decision to guarantee bank deposits and thereby underwrite their existence - a decision which also weakened their competitors, increasing the concentration of loans from banks to record levels.

Fairness commands that the contribution of the banks to the society which has constructed economic and social conditions allowing them to make massive profits should exceed the flat rate of tax paid by your local hairdresser and butcher.

Banks should be taxed at least an additional 5% on profits exceeding one billion dollars. This would raise approximately one billion dollars per year.

The money should not go into general government revenue – it is too easily wasted. It is a situation where funds from the mega rich should be earmarked for the worst off in the community.

There are lots of contenders here. Hundreds of thousands of Australians on the Newstart allowance are forced to endure life on $234 a week (about $100 a week less than the pension); more than 100,000 Australians are homeless and nearly one third of Australia's 2.6 million carers are suffering depression - often due to inadequate government assistance.

Ideally, the bank tax should be spent on homes for homeless. It is a project that provides an essential need, the progress can be tangibly measured and can be readily adjusted according to the amount of tax derived annually. A billion dollars could build around 8,000 apartments.

The banks will of course counter that strong banks are essential for economic prosperity. While this is the case, better still is slightly less strong banks are more real people living under roofs.

The Labor government is still nursing wounds from the imposition of the mining tax and it will have a strong aversion to taking on any interest group. Yet on the criteria of popularity and principle, taxing banks to house the homeless is something that will hopefully resonate even with our PM's newfound mysterious intuition.

In the end, the banks hopefully won't even oppose the tax. In bank world one billion dollars is apparently the equivalent of about a measly dollar – and surely no one would squabble over the cost of a small bag of mixed lollies.