The loudest demand in British politics right now is also the least examined one. “Tax the banks” is easy to say. The mechanism is harder, and the mechanism decides who actually pays.
The surcharge, explained fairly
Let us start with what exists. Banks in the United Kingdom pay corporation tax at 25 percent on their profits. On top of that, profitable banks pay a surcharge: an extra levy on profits above 100 million pounds. The surcharge began at 8 percent in 2016. In 2023 it was cut to 3 percent, at the same time the headline rate rose to 25 percent. For a profitable bank, the combined rate on the marginal pound is roughly 28 percent.
The history matters. The surcharge was the political price of the banking crisis. When the state rescued the banks in 2008, the taxpayer absorbed losses that no private investor would touch; the levy that followed was the bill presented afterward, and the 8 percent rate was the number that made the gesture look serious. The cut in 2023 was sold the same way every cut is sold: as the price of keeping the industry competitive.
The case for a bank levy, stated generously, is real. Banks are not ordinary companies. They are insured by the state, explicitly or implicitly; when they fail, the taxpayer absorbs the losses. A charge on bank profits is, in part, a price for that guarantee. This is the version of the argument a fair reader can respect.
The TUC goes further. It wants a windfall tax on top of the existing structure, and it wants the proceeds pointed at household bills. It points at the profits, which are hard to argue with: HSBC alone made 7.5 billion pounds in the second quarter of this year. Positive Money has priced the demand: a windfall levy at 38 percent would raise 19 billion pounds. If the surcharge is a price for the guarantee, the windfall tax is a second charge for the same guarantee.
The numbers look free. That is the entire appeal. A windfall is, by definition, money that fell out of the sky, so taxing it appears to cost no one anything. The profit is visible, the headlines are loud, and the tax seems to land on an institution rather than on a person.
Here is where the fair explanation has to stop and ask the question the slogan skips: who pays?
Why the demand is so loud
“Tax the banks” has become the populist demand of the year, and it spans every aisle. The TUC wants 25 billion pounds from bank bonuses. The Treasury, per Bloomberg Tax, declines to rule out higher bank taxes at the October Budget. The Chancellor has heard the warning directly: Jamie Dimon, the chief executive of JPMorgan, called John Healey on Thursday, August 13, to say that tax the banks and the jobs leave, citing the finance jobs New York has already lost. The call was reported on August 16; the Guardian covered it the next day.
The Budget is confirmed for October 28, today roughly 70 days out. Capital Economics estimates it could raise up to 25 billion pounds, or 0.8 percent of GDP, tilted toward capital, wealth, and income taxes, and pushing the tax burden to a record 39 percent. This site has been counting down to that Budget: The 63 Billion Reckoning laid out the scale of the hole the Treasury is trying to fill. The bank windfall tax is not a fringe demand. It is a live candidate for the biggest fiscal event of the year.
Smart people believe this one because the profits are right there in the headlines, and the pain appears to land on an institution. Institutions do not feel pain. People do. The question is whether the two are connected, and the answer decides whether the tax is a windfall or a bill.
There is a reason the demand is so popular, and it is not the economics. It is the rare policy that draws applause from every direction at once: the unions get the redistribution, the Treasury gets the revenue, the politicians get the villain. When every side claps for the same tax, the sensible assumption is that no-one in the room is paying for it.
The pivot: banks are pass-through machines
A bank is not a pot of money. It is a machine that moves money between people. It takes deposits and lends them out, and it prices risk into the spread between what it pays savers and what it charges borrowers. The deposits are not the bank’s money; they are the customers’ money, rented. The bank’s profit is the rent on other people’s money, and the tax on that profit is a tax on the rental price.
When the state raises the tax on bank profits, the bank does not absorb it. It reprices. The surcharge is priced into lending spreads and deposit rates: borrowers pay more, savers earn less. The capital the tax consumes is capital not lent.
Watch it happen at the level of a single loan. The bank’s tax bill rises, and the loan officer prices the new cost into the rate on the next mortgage and the next business loan. The saver’s rate moves the same way, a step behind. None of this is a conspiracy. It is arithmetic, passed through a machine that has no other way to absorb a cost.
This is the same pass-through this site traced for the North Sea in The 78% Tax on the North Sea: A Tax on Investment. When you tax a production machine, the machine does not pay; its customers do. And when the owners of the machine decide the after-tax return is no longer worth the risk, the machine stops, or it moves.
A bank levy is that mechanism applied to a different machine. The North Sea lesson is the 78 percent rate stacking until capital left the basin. Dimon’s phone call is the same warning delivered in advance: tax the banks and the finance jobs leave, as they already left New York. The jobs, like the capital, are the part of the machine that can move. What cannot move, the borrowers and savers, is exactly the part that pays.
The evidence: the Laffer lesson, applied to a whole sector
This site has already worked through the Laffer curve for Scotland’s 48 pence top rate, in The Laffer Curve, Alive and Well in Scotland, and for the North Sea. The lesson is the same in both: revenue rises with the rate only up to a point, and past that point higher rates collect less, because the taxed activity shrinks. The extreme case makes the logic plain. A 100 percent rate collects nothing at all, because the activity disappears. Somewhere between the current rate and the confiscatory rate sits the point where the tax starts eating its own base.
A bank windfall tax is the Laffer experiment applied to an entire sector at once. The activity does not vanish overnight. Banks are licensed, sticky, hard to move. But the marginal decisions change: which loans get made, which desks get funded, where new capital is booked. The tax harvests the visible nine billion pounds. The rest is invisible: the lending that did not happen, the rates that rose, the capital that left.
Bastiat’s question, the subject of The Seen and the Unseen, applies in full. The good economist asks what is not seen. The nine billion raised is seen, arriving at the Treasury in neat quarterly installments. The small business that did not get the loan is not seen. The saver who did not get the deposit rate is not seen. The trading desk that opened in Dublin instead of London is not seen. Every pound of the tax is visible at the point of collection and invisible at the point of payment.
And the “compared to what?” move: the TUC wants the proceeds to subsidize energy bills. Follow the money. A windfall tax on banks is a transfer from borrowers and savers to bill-payers, routed through the Treasury, minus the cost of the machinery in between. The state takes from one set of people through lending spreads and deposit rates and gives to another, keeping a share for the transfer itself. The direct route to cheaper bills is to make bills cheaper: cut the taxes and levies that sit on them. The indirect route is to tax the banks and hope the money arrives, minus the machinery. The two routes differ by exactly the amount the machinery eats.
Who actually pays? The same answer as every tax: the people who can least easily move. Borrowers and savers are not mobile. Banks are. When the tax is levied, the bank’s customers are the captive audience in the room.
Why they don’t do the simple thing
The simple thing would be to ask who pays before proposing the tax. Nobody does. That is not an accident. It is the incentive structure, and it has a name: public choice. This site has covered it in Public Choice Theory: Why Government Fails, and the lens applies to bank taxes as cleanly as to anything in the catalog.
Consider the chorus. The unions want the tax and the spending it funds. The Treasury wants the revenue, because 25 billion pounds fixes part of the hole in the Budget. The politicians on every side want to be seen to soak the bank. The campaign groups want the headlines. The one question that would dissolve the consensus, who pays, is the one question nobody asks.
Public choice explains why. The costs of a tax are diffuse and invisible; the benefits of demanding it are concentrated and visible. A politician who says “tax the banks” collects the applause today and is gone before the lending spreads rise. The borrower who pays more never connects the two events, because the connection is unseen. Each member of the chorus benefits from the machine running, and none benefits from it stopping. That is not a conspiracy. It is an incentive structure with four members.
This site has made the same argument about the pension raid, in The Pension Tax Raid: Your Pension Is Next. Take from a large, diffuse, politically weak group and spend visibly: that is the design. The pension raid and the bank windfall tax are the same design with different victims. The hole in the Budget is what makes every such raid tempting, and the hole is why the simple question stays unasked: the revenue is needed before the incidence is examined.
There is also the Cantillon effect, which this site has covered in The Cantillon Effect. New money enters the economy where it is created, at the banks, and its first recipients benefit before prices adjust. Taxation runs the same channels in reverse. The bank is the choke point of the money system, and a tax at the choke point lands on everyone downstream of the bank, which is to say everyone. The first payer of a bank tax is never the final payer.
Nobody in the chorus is accountable for the unseen. That is why the demand survives every refutation. It is not an argument. It is a coalition.
The lens
The question of who pays is the oldest question in taxation, and this site has asked it about the taxes that are actually paid by the people who nominally owe them, in Taxes - Who Actually Pays. The bank windfall tax is the same question wearing a populist costume. The incidence does not change because the slogan is loud. Banks, like every other business, are a pass-through for the taxes levied on them, and the pass-through ends where the immobile people sit.
So next time someone says “tax the banks,” ask: which pot, whose money, and who pays when the bank needs capital back?