Investors mounted a £6.4 billion backlash on Friday against the logic of a new windfall tax on banks, rejecting the idea in the most emphatic way possible. The proposal, which argued that bank profits from quantitative easing are unfair, was met with a brutal market judgment that deemed the solution worse than the problem.
The logic for the tax, as presented by the IPPR thinktank, is simple: the public is losing £22 billion a year on the QE program, while banks are gaining. A tax, they argue, would simply correct this imbalance.
However, investors responded with their own logic. Their backlash, in the form of a massive sell-off of banking stocks, was based on the premise that such a tax would be punitive, arbitrary, and ultimately damaging to the economy. They argued through their actions that it would constrain lending, deter investment, and create uncertainty.
This £6.4 billion rejection of the IPPR’s logic presents a powerful counter-argument to the government. It demonstrates that there is a significant financial and economic cost to pursuing a policy based on a simplistic notion of fairness. The market has made it clear that it believes the logic of a windfall tax is deeply flawed.