Jamie Dimon really doesn't get it

Banks like J.P. Morgan sit at the heart of our dysfunctional economy but make very little contribution to the creation of new wealth

Marco Ponza / Unsplash

So threatened is J.P. Morgan CEO, Jamie Dimon, by the arrival of Britain’s new Prime Minister, he felt obliged to warn Andy Burnham within a day of his appointment of the consequences should the UK government increase taxes on banks.

Mr Dimon earned $43 million last year, up from $34 million just three years ago. His estimated net worth is $3.2 billion. Obviously this is not the result of putting aside a regular amount each month. No, he’s been running J.P. Morgan for so long — since before the 2008 financial crisis, in fact — that through various share option schemes and, I daresay, the odd stock purchase on his own account, he has accumulated a shareholding in the bank he runs of around 6.2 million shares. A small percentage of the 6.28 billion shares in circulation, admittedly, but nonetheless a large and valuable stake.

I’m not going to spend the next 1,200 word bashing Jamie Dimon. He’s no better or worse than any other bank CEO. They all share an extremely partial view when it comes to the role of the banking system in the wider economy. The problem is that that same view is held by many of the politicians responsible for setting tax rates.

Dimon is threatening to cancel plans to build a new London HQ at a cost of £3 billion. That sounds like a substantial investment until you set it against the bank’s profits: in the last two years, J.P. Morgan has cleared nearly $60 billion each year.

The true impact of taxes on business

Historically, banks in the UK were taxed much like other companies. Until 2015, small companies were charged a lower rate of corporation tax than larger ones. Back in 1973, the small profits rate was 42% and the main rate, 52%. Both rates fell steadily until 2015, when they converged at 20%. The new common rate was further reduced to 19% in 2017, but four years later the rates were again split, with the small profits rate staying at 19% and the main rate rising to 25%.

Interestingly, in the 1970s, when corporation tax rates were extremely high by today’s standards, average annual GDP growth in the UK was 2.5%. In the 1980s, with corporation tax rates declining, but still high, average annual growth was down a little at 2.4%. In the 1990s, with the rate of decline in corporation tax rates easing, growth averaged 2.9%.

But from 2000 to 2008, average annual growth was only 2.2% and, in the 16 years to 2025, it was just 1.3%. Interestingly, and contrary to claims regularly made by Jamie Dimon and his friends, while there is certainly a link between corporation tax rates and economic growth, it appears to be an inverse relationship: historically, the UK economy has grown more rapidly when business have been taxed more heavily.

The only possible explanation for this is that governments invest the money raised through taxes on business more productively than companies do when they are allowed to retain more of their profits. And today, as more of those retained profits are distributed to shareholders, or used to fund share buybacks, less is available for investment than previously.

Of course, the UK economy has suffered three huge shocks in the last twenty years: the financial crisis of 2008 and Brexit, which came into effect in January 2020, on the eve of the third: the Covid-19 pandemic. The last two decades have certainly not been typical: both the financial crisis and Brexit had a deep and enduring impact on the capacity of the UK economy to generate wealth. But setting aside the impact of this triple shock, there is still no evidence to suggest that lightening the tax burden on business acts as a spur to economic growth.

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A flicker of recognition?

In 2016, the UK Government (then Conservative) introduced an 8% corporation tax surcharge for banks, over and above the main rate of 20%. But in 2023, it reduced the bank surcharge to 3% to offset an increase in the main rate from 20% to 25%. The banks still paid more: 28% as opposed to the 25% paid by other companies, but previously the differential had been 8 percentage points.

I wonder if, for a seven year period between 2016 and 2023, successive Conservative governments felt they had to be seen to be doing something about excessive bank profits given public anger at the cost of bailing them out after the 2008 financial crisis? Or perhaps someone in the Treasury recognised that the level of bank profits was unsupportable, and needed to be reduced via additional taxation? There has been no further change to corporation tax rates since Labour came to power in July 2024: the main rate remains at 25% with the banks paying a 3% surcharge, while the small profits rate remains at 19%.

What banks actually do

Most people have no idea what banks do to generate their exceptional profits. The truth is that much of it does not come from the provision of retail banking services to consumers. In 2023, only 43% of J.P. Morgan’s profits came from retail banking.

And even retail banking is not what is most people believe it to be. Banks don’t simply act as brokers between those with savings and those looking to borrow. If they sought to turn a profit by charging a higher rate of interest on loans than they have to pay to attract savers, that would be fine. They do do this, of course, but nobody could make anywhere near $60 billion a year playing the margins like this in a competitive market.

Banks enjoy a privilege that no other commercial enterprise enjoys: their banking licence allows them to create money to lend to their clients. Since 1981, here in the UK there has been no limit on the amount banks can lend. Prior to that they operated under a regime known as Fractional Reserve Banking, which restricted a bank’s ability to lend to a multiple of the cash it attracted in deposits. This arrangement also limited the amount of money in circulation via a mechanism known as the money multiplier.

Today, a bank can create money to lend at interest whenever it judges that a loan is likely to be repaid. If it’s not exactly a license to print money, it is certainly a licence to make excess profits.

And it gets worse: in order to ensure banks have sufficient liquidity to avoid needing to be bailed out, like they were in 2008, they are required to deposit reserves with the Bank of England. But, astoundingly, they receive interest on these reserves. And the money to pay this interest is provided by the Treasury from tax receipts. This is a direct transfer of wealth from taxpayers to the banks. It boosts their profits and they do absolutely nothing to earn it.

Why banks should pay more

This why the TUC this week called for Andy Burnham to tax banks more heavily, following Barclays’ announcement that their half yearly profits were up by 17% on last year, at £6.1 billion. As a result they have increased their bonus pool by 30%. They have also set aside £1 billion to buy back more of their own shares, further concentrating power in the hands of their senior executives, and announced a dividend of £800 million.

The CEO of Barclays, C.S. Venkatakrishnan, who met the new UK Chancellor, John Healey, last week, said he was pleased by the Government’s commitment to growth, and that bank loans would be crucial to supporting that growth. He went on to say: ‘So we very much want to use our capital to lend into the economy and to support investment and to support growth.’

Perhaps Mr Venkatakrishnan doesn’t understand how the banking system works: Barclays, like J.P. Morgan and the rest of them, do not use their capital to make loans to businesses. They create new money for the purpose. Taxing them more would make no difference whatsoever to their ability to lend.

Given all this, it’s right and proper that banks be taxed differently to other businesses. There is no reason why Burnham and Healey should not restore the bank surcharge back to 8% on top of the main rate of 25%. Banks should be treated as a special case when it comes to taxation because their special privileges enable them to make excessive profits.

Another hideous skyscraper?

Jamie Dimon speaks as if the erection of yet another enormous tower in the East End of London is going to make a huge difference to the UK economy. It’s true that GDP will be pushed slightly upwards during the seven years it takes to build. By that time though, I imagine the half of its UK workforce it plans to relocate to the new building will presumably have shrunk from the current 23,000 to a much lower figure, thanks to the deployment of AI.

It took me about five minutes to discover why J.P. Morgan had chosen Canary Wharf for their new HQ in the first place: the Government has promised them discounts of up to 100% on their business rates. Over 25 years, that rates bill should amount to £1.6 billion, roughly equivalent to a month of J.P. Morgan’s profits; a drop in the ocean for them. Imagine, though, what Tower Hamlets Council could do with their 50% of the revenue foregone, or central government with theirs.

I’ve never taken seriously suggestions from the far left that the banking system should come under government control. Until 1995, ‘the common ownership of the means of production, distribution, and exchange’ was Labour Party policy. I don’t think Andy Burnham should reinstate clause 4 of Sidney Webb’s original Labour Party Constitution. But I do think he should tax the banks more, and I’m convinced he could persuade the electorate that it’s the right thing to do.

There are two types of wealth generation: productive, which creates new wealth; and extractive, which simply redirects existing wealth. Much of what J.P. Morgan, Barclays and the other banks do is extractive: in the process of generating their superprofits they make vanishingly little contribution to the creation of new wealth.

Instead, they effect a transfer of existing wealth from people who have less to those who already have plenty. And this process of redistribution upwards is counted as new wealth as far as GDP is concerned. Why on earth do we count such extractive practices as making a contribution to economic growth?

If Andy Burnham were to increase the corporation tax surcharge on banks, not only might we be spared another hideous skyscraper on the Isle of Dogs, but the country might, if the government has its wits about it, benefit from additional, carefully targetted public investment that generates genuine new wealth and ensures the benefits are distributed equitably among the wider population. As they used to shout on Centre Court: C’Mon Andy!

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