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The case for a bank tax

Thumbnail image for finwage.jpg

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.

By Ezra Klein  |  April 28, 2010; 3:35 PM ET
Categories:  Financial Regulation  
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Next: Gross: 'Ignore what Wall Street has to say about financial regulation'

Comments

Ezra, you're wrong about one thing.

You wouldn't want your insurance company to use use your premiums for pizza parties--then when your house burns down, they wouldn't have any money for you.

If the bank tax is to fund the inevitable future liquidation, it should be saved for that purpose. Or at the very least, used to re-fund the FDIC.

Posted by: stevie314 | April 28, 2010 3:46 PM | Report abuse

"I'd go further than David Leonhardt does in my support for a bank tax."

Don't you think that those who spun financial regulation as perpetual bail-out for banks will spin a bank tax as something equally noxious? Like a bank tax would make working at banks unattractive and force management to pay even more lavish bonuses to attract the best talent.

Posted by: pneogy | April 28, 2010 3:56 PM | Report abuse

I'd like to thank Mr Klein for once again proving Thatcher's point about socialism.

And that point is "sooner or later you run out of other people's money"

In this case the other people's money that Mr Klein wants to spend was generated by successful banks.

Which bring up the next point about socialism: Socialism, by its very nature, punishes success and rewards failure.

Look at the graph Mr Klein. What it shows is that banks have been successful. Well we can't have that now, can we?

This is advocating theft, pure and simple.

Posted by: skipsailing28 | April 28, 2010 4:14 PM | Report abuse

Pre-funding also has the advantage of being counter-cyclical. You raise money in good times that will be used to dismantle failing banks in bad times. The problem with post-funding is that it would require taking capital out of the economy at the very time that you need it most to pump up lending. It is difficult to see how post-funding could ever work, since you would need to raise the capital at the very moment the banks are at their weakest point.

Posted by: kjacobs9 | April 28, 2010 4:54 PM | Report abuse

@ skipsailing28: How's trolling today?

Posted by: srw3 | April 28, 2010 5:32 PM | Report abuse

Don't just tax banks. Tax ALL securitioes trandactions. In fact, tax them twice. Tax all securities transactions themselves, perhaps 1% of the value of the deal, who pays is negotiated in the deal.

THEN tax the transaction FEES at say ten percent, paid by the broker(s), but the brokers are free to subordinate the costs if they can negotiate the transfer. ALL securities traders of whatever kind, Big Board, AMEX, OTC, Mutual Funds, Derivatives, upside down fruitcake trades. Once we get the process started, if it looks good tax undesirable securities trading at higher rates.

The majority of America won't shed a tear for those taxes.

Posted by: ceflynline | April 28, 2010 10:23 PM | Report abuse

Adding complexity to the tax code has been a proven mechanism to encourage bizarre tax avoidance behaviors that support the inefficient allocation of capital- money goes to the wrong thing.

The banks already pay into the FDIC, and those payments already serve to reduce the amount of interest we get on our savings accounts. It's a generally good thing though, as I think I would pay for deposit insurance if the bank didn't.

The much much simpler answer is to not bail them out with taxpayer dollars. Requiring that banks only raise money with equity convertible securities seems much more practical. Just get the taxpayer off of the hook.

Posted by: staticvars | April 29, 2010 1:49 AM | Report abuse

Beware the law of unintended consequences - taxing transactions will discourage low-risk, low-profit transactions.

Posted by: albamus | April 29, 2010 3:57 AM | Report abuse

The case against the bank tax:

Yes, it's a bailout bill.

http://www.american.com/archive/2010/april/yes-its-a-bailout-bill

Posted by: marteen | April 29, 2010 10:57 AM | Report abuse

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