The case for a bank tax
I'd go further than David Leonhardt does in my support for a bank tax: He sees it as an insurance policy for taxpayers. There will be financial crises, our money will be on the line, so the tax acts as premiums that the banks are paying in good times. That money can go to pay down the deficit, fund social programs, throw pizza parties for high-performing regulators, whatever. This is particularly compelling right now because we need new revenue to begin closing our deficits and it would make more sense to tax Wall Street than to tax work.
But taxes serve another purpose, as well: They discourage certain activities. You could force banks to pay a higher tax as they became more systemically risky. That would dissuade them from becoming too big. You could force banks to pay higher taxes when their leverage got too high. That would dissuade them from leveraging up. And you could put a tax on transactions, or on profits, such that there was less potential profit encouraging firms to take the massive, massive risks.
That last interests me most. A less profitable banking sector is probably a safer banking sector (not to mention a politically weaker banking sector, and a banking sector that takes less talent from the rest of the economy). As the graph atop this post suggests, Wall Streets' crashes tend to happen after wages and profits have far outpaced those in the rest of the economy. The money spurs risk. And one way to push in the opposite direction is with something like a financial transactions tax that would both slow down the market and bring the industry's profits back down to earth.
April 28, 2010; 3:35 PM ET
Categories: Financial Regulation
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