Higher Taxes or Lower Spending?

Contemplate 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  That’s as a result of within the outdated days there was no curiosity paid on financial institution reserves, so there was a excessive alternative price of holding reserves.  

Now, now we have no reserve necessities, however we do pay curiosity on reserves (IOR).  This was achieved as a result of policymakers wished to maneuver to a “flooring system”, the place banks would select to carry massive portions of reserves.  The adoption of IOR permits the central financial institution to inject plenty of reserves into the system, with out driving rates of interest all the way down to zero.   You’ll be able to consider massive 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 might set the short-term coverage rate of interest at that degree. It’s efficient, however not the one solution to management short-term charges.

As a substitute, it may require banks to carry a set 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 submit.  Suppose the federal government all of a sudden 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 includes a minimize in authorities spending.  But it surely additionally strikes us from a scenario the place there isn’t a web circulate of cash to or from bankers, to a scenario the place all that continues to be is a $1000 tax on bankers.  That looks like a tax enhance.

Giles views issues in a different way:

One problem 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 will 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 manner of viewing issues.  You’ll be primarily forcing banks to lend plenty of cash to the British authorities at a fee of zero %.  That looks as if the imposition of a tax on banking.