A Heated Debate
“We want our money back!” declared US President Barack Obama recently, when he announced his administration’s intention to levy a special tax on large financial institutions to recover losses by taxpayers on the Troubled Asset Relief Program (TARP).
The timing is no coincidence. Bonus season is looming in banks. Thus, it is hardly surprising that European political leaders jumped on the bandwagon too.
The Austrian Chancellor’s proposal is modelled on the White House plan. A socalled ‘Bank Solidarity Fee’ will contribute to the balancing of the budget in the aftermath of the financial crisis and serve as insurance premium for the banking sector.
The Principle of Equality
From a legal perspective, the constitutionality of a bank tax must be considered. The legislator, as under any democratic constitution, is not free to tax as it wishes. The principle of equality as one of the most essential fundamental rights sets the benchmark.
Over the last few decades the Austrian Constitutional Court has transformed the principle of equality into a general principle of objectiveness. Equal must be treated as equal; unequal must be treated as unequal. Deviations are only admissible on the grounds of objectiveness. If a legislative act treating equal matters as unequal is not justified in terms of objectiveness, such act may be ruled unconstitutional.
In terms of tax laws the legislature is free to choose the objects and subjects of taxation within the limits of fundamental rights. Thus, a special tax on banks is only constitutional if the legislator can put forward an objective justification for levying higher taxes on banks in comparison to other enterprises.
All Quiet on the Austrian Front
A special levy on banks has already been tried in Austria. In 1984, the Constitutional Court rejected a legal challenge to a special levy on credit institutions (which was later scrapped).
Back then the administration put forward two justifications: first, the higher profitability of banks, and secondly the privileged position of the banking sector, in particular the high entry barrier to the banking market (bank licence), the exemption from competition law, and indirect subsidies such as state-sponsored saving.
The Constitutional Court rejected the idea of higher profitability due to lack of empirical evidence, but accepted the assertion of a privileged position.
Current Justifications
Twenty-six years later, the arguments asserted back then should be investigated as to whether they still hold. Exemptions from competition law have long been abolished. Government subsidies are granted for various reasons in various markets; whether the banking sector is privileged in comparison to other sectors requires further analysis.
High market barriers to entry exist in several markets and are not exclusive to the banking sector. All in all, under current circumstances the administration’s position accepted by the Constitutional Court in 1984 seems weak at best.
In terms of the new ‘Bank Solidarity Fee’ two justifications have been put forward in Austria: first, the levy serves to compensate the state for the banking crisis caused by banks; secondly, it should be considered as insurance premium for a future crisis.
From a legal perspective these arguments seem questionable. The principle of individual responsibility forbids collective punishment. So even if some banks may have contributed to the financial crisis, not all may have acted irresponsibly. As to those banks contributing to the crisis, amassing risks may have been economically unwise but it was not illegal per se. Even the notion that only banks have triggered the financial crisis appears weak.
The lax monetary policy of the US Federal Reserve is deemed to have laid the basis for the crisis (i.e. the State itself). The main recipients of TARP funds have been Fannie Mae and Freddie Mac (two mortgage giants close to the State) and AIG (an insurance giant). In Austria only a few banks have received funding from the State, for which – contrary to the US – market interest is paid. Two of those banks have economically not been able to pay interest. Overall, it is unclear at this stage whether the emergency funding will cost or benefit the taxpayer.
The insurance argument put forward appears problematic too as in fact there is no insurance scheme. Banks would in the ‘insured’ event (i.e. a new crisis) not have the guarantee to be rescued by the State.
Under these circumstances the introduction of a special bank tax will prove difficult. The arguments currently put forward by the administration seem not adequate enough to cross the hurdle of constitutional limits to taxation. A new bank tax, if passed into law, may face legal challenges.