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Windfall taxes are a blunt policy tool. They may fill government coffers in the short term. But they also hit investor confidence and future business prospects. That is doubly true when levies are big and haphazard.
A surprise windfall tax on Italian banks is a prime example. A draft official text primes them for pain. The populist government led by Giorgia Meloni is seeking to nab 40 per cent of the extra profits lenders are raking in from high interest rates.
The move appears to be a legislative afterthought to appease voters who believe Italy has stinted on support for lower income voters.
The complexity of the tax grab is confirmed by panicky official reworking of its parameters. The starting point is the net interest income (NII) each bank earned in 2021, before policy rates jumped.
Each bank is liable to pay 40 per cent of what remains after deducting 110 per cent of 2021 NII from 2023 NII. The exception is if the government would net more by charging 40 per cent on the remainder of a second sum: 2022 NII minus 105 per cent of 2021 NII.
The clear target is 2023 net income. That is expected to be a bumper €32bn across the sector, says broker Equita, almost 70 per cent more than in 2021.
A rough-and-ready calculation suggests the government might raise about €4.5bn. That would have been about 3 per cent of the sector’s market value before investors marked the sector down by 8 per cent.
Banks may be able to soften the impact. They could, for example, reduce NII in the second half of the year by paying depositors more. That would reduce short-term profits in return for higher market share. But any such wheezes could attract regulatory scrutiny.
Global investors should be more alarmed by the manner of the reform than its fine print. The unexpected announcement was made in the absence of the finance minister. Officials revised figures in an early press release, implying that their modelling of the tax’s consequences had been wrong or non-existent.
Governments that mount tax raids on a whim can expect to forfeit receipts via higher risk premia on their financings. The shareholders who finance the quasi-public utility of commercial banking will wonder whether their pockets will be picked just once, or repeatedly.
European bank stocks are cheap for the reason that these institutions are the playthings of politicians.
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