Reaction: Trudeau proposes surtax on big bankS, insurance profits

It has been a relatively low key federal election campaign so far, with a surprising amount of convergence on some key issues by the major parties. As a bit of blip, Liberal Leader Justin Trudeau pledged on August 25 that a returning Liberal government would raise the corporate tax rate on the profits on all banks and life insurance companies, profits in excess of $1 billion. Further, these fin institution would pay a fee over a four-year period, a “Canada recovery dividend”.

The announcement is not surprising as some, including myself, see it as inevitable, for reasons discussed below. It will also likely be one of those campaign announcements that will face an up-hill battle in implementation, much like a proposed wealth tax. Despite a electoral mandate to carry it out, I expect that “interior” opposition and technical challenges will have this proposal barely get off the campaign platform or suffer a death of a thousand cuts in the political-bureaucratic process.

This is not to say if should not be considered.

Globe and Mail columnist Andrew Willis, who seems now to be trotted out to give op-eds in defence of the entrenched interests of Canadian finance, was wringing his hands in Friday’s paper that the election campaign “has become an attack on big business” , that bank executives feel “betrayed by the Liberals’ move” and are wondering when banks and lifecos “stopped being part of the economic solution”.

Not sure is Willis is someone who savours irony, but to the left (!) of his front page op-ed in the Report on Business is a report that “all six major banks surpassed analysts’ predictions – several of them by wide margins – as they earned a combined $15.2-billion in profit in the quarter ended July 31”.

Focusing just on banks here, the Canadian bank industry, dominated by the Big Six, is the most consistent profit centre in Canadian economic history. While other sectors, (manufacturing, oil and gas, retail distribution) have risen and fallen (and risen and fallen again, or just hollowed out and died), Canadians banks tend to post positive net income, quarter after quarter. Dividends are distributed and senior bank executives receive bonuses on top of a already high base salaries. Bonuses, or performance pay, of CEOs is often tied to meeting profitability targets.

Willis rightly notes that “bank executives (..) worked hand-in-glove with the government to provide COVID-19 relief – granting $5.5 billion in mortgage flexibility, waiving $112-million in personal banking fees”. This wasn’t an act of altuism, but of self-interest, or survival by the banks. A wave of debt default by thousands of households in the first wave of the pandemic would not only have wiped out quarterly profits but would have threatened bank stability. And with it, the stability of the Canadian economy. No more bonuses.

The banks and the federal government have been working hand-in-glove since the mid-1980s with the forging of a new bank regulatory regime, the policy response to the collapse of two Western Canada banks in 1985. This new regulatory relationship seeks to ensure continued stability of Canadian banks. We saw this when the Big Six emerged relatively unscathed from the 2008 financial crisis. But also, except for few episodes of quarterly losses experienced by some banks, the Big Six have been consistently profitable since at least the mid-80s, through the 2008 financial crisis and again through the 2020-2021 COVID crisis. The bank bargain with the Canadian state is one of “stability with profitability”. Or in the words of the Canadian Bankers Association, “when banks are profitable, they are stable. When banks succeed, the economy and communities prosper.”

It should not be missed that some of the revenues earned by the Canadian banks come from fees earned by book running the large debt issuances by the federal and provincial governments to support the large Canadian economy during the pandemic.

That a federal party is looking for the banks to pay more to play the great game of Canadian finance, a game that makes them profitable, is hardly surprising, especially given that the government sector has largely picked up the tab in this latest crisis.