In 1776, Adam Smith wrote in “The Wealth of Nations”: "Such things as defending the country and maintaining the institutions of good government are of general benefit to the public. Thus, it is reasonable that the population as a whole should contribute to the tax costs. It is also reasonable to demand certain other things of a tax system – for example, that the amounts of tax individuals pay should bear some relationship to their abilities to pay… Good taxes meet four major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain rather than arbitrary (3) payable at times and in ways convenient to the taxpayers and (4) cheap to administer and collect."
As time goes on, one may add several other points to consider. I would argue that (5) a tax should also be directly linked to the issue that it aims to solve – think proceeds from road tax (“kelių mokėstis”) going directly to fund the quality of transport infrastructure via Lietuvos automobilių kelių direkcija, or that part of your personal income tax (GPM) that is actually (though quite arbitrarily) attributed to the municipality that you live in.
The proposed “solidarity tax” on banks, which would go to fund important defence-related infrastructure projects does not check any of the five boxes.
The wording of the proposed bill already suggest this. What exactly is unexpected profit (netikėtas pelnas)? Banking is a cyclical business. Will we give back this tax when the economy turns, defaults pile up and the banks are suffering losses? Did the government suggest a solidarity tax to help financial institutions during the previous crisis? Why are we again picking one specific sector? Not proportionate.
How can you call it a tax on profit, yet calculate on basis of net interest income? Besides, banks have very different income profiles. The formulae suggested in the proposed bill will be hard to calculate, as the basis of “four average years” is both arbitrary and differs from bank to bank. Arbitrary and difficult to administer.
And as always, Lithuania never learns that it is just bad bad bad taste and simply infuriating to suggest a tax retrospectively – how we can even consider banks to apply this on already this year’s financial figures?
I doubt this bill will go through (or at least in the form it is now), but if it does let’s consider: what will be the effect on banks? I doubt any financial institution would change course of ordinary business to try to diminish the effect of this tax. After all, a bank is more like a cruise ship, set on a clear course. From a PR perspective, the tax would go towards a righteous cause, so my guess is they will end up paying it. The effect on consumers should be minimal, I would doubt there would be any changes in pricing, especially considering that only the larger banks with EUR 400m+ deposits are being reigned in. But again, I’m not sure how this can be OK to, for instance, the competition authorities.
Banks and shareholders should be worried. Not only will this tax reduce planned dividends (or push them to zero for the period the tax is active) and have an impact on banks’ valuations, it will also impact banks’ capital planning, and future forecasts as well. The math is simple: lower profits mean less capital, which in turn leads to less funding. The EUR 510m that are expected to be collected – in a two year period – is still a sizeable chunk of the banks’ profits! In 2022, all Lithuanian banks together had aggregate profit of ~ EUR 500m. Even if, as the Bank of Lithuania suggests, the profits in 2023 could potentially reach EUR 1b, does this mean the solidarity tax would be raking in 25-50% of the affected banks’ profits?!
What if the government likes this tax so much that they decide to keep it after 2024? If the aim of the Bank of Lithuania, as they say, is to improve competition in the market – this tax will have the opposite effect. Will new potential entrants find this approach – both the tax itself and the way our government goes about imposing new taxes – an appealing reason to invest? Instead of establishing their base in Lithuania they may simply opt to establish a branch office, or passport services from another jurisdiction. Will Lithuanian tax coffers be increased if such things transpire?
Yes, the War in Ukraine has changed the way we look at things, and I would have no issue in a broad general tax increase, on corporates and residents alike, if there are funding holes that need to be filed in. But this proposition may do more harm than good. Even though economic theory evolves, some things that were true 250 years ago remain so.
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