I have been surprised at the number of economists in favor of a bank tax, even if the bank tax that Obama has proposed is not necessarily the bank tax they support. The basic argument for the bank tax is that the American public effectively insures large banks with bailouts because large banks are too critical to the economy to go under. Banks should have to pay for that insurance.
Harvard economist Greg Mankiw has posted a few articles from NYT and Forbes that I found particularly interesting, and so below is the economic version of a mashup of some points that I find compelling, at least in principle:
President Obama has proposed a special tax levied on large financial institutions. In general, I am skeptical of narrow-based taxes, as they feed a particularly nasty kind of politics, where the majority gangs up on a minority. Nonetheless, on the economic merits, there may be a case for the bank tax. (Mankiw):
Firms that are deemed too big or too systemic to fail have a safety net. They can take bigger risks and make bigger bets, secure in the belief that the government (or taxpayers) will guarantee their liabilities if they fail. (Forbes)
Now we must figure out how to undo the damage. In a more perfect world we would do three things: 1. modify the bankruptcy code and create mechanisms to allow for the orderly failure of these institutions; 2. impose a tax on them that is proportional to the risk to the system that they create; and 3. treat that tax as an insurance premium to cover the cost of future problems, just as the FDIC charges banks for deposit insurance. (Forbes)
We suggest taxing banks based on the difference between their assets at the end of August 2008 and their current level of capital. After all, the support these firms received was based on the size of assets before the financial panic began, not the size of those assets today... Because our version of the tax would require each firm to pay a tax proportionate to the size of its bailout, it would fall hardest on the former investment banks whose very survival was in doubt before the government stepped in. These firms are now making eye-popping profits and are on a path to pay record bonuses, but more importantly they had the most borrowed money that wound up being unexpectedly insured. This is why they ought to pay more. (NYT)
Commercial banks might complain that they already pay a fee to the Federal Deposit Insurance Corporation, making the new fee a double tax. That is partly correct, but the deposit insurance they paid for was underpriced. As a compromise, however, we suggest that the current year’s deposit insurance payments be deducted from the new tax payments. (NYT)
At the end of the day what we need are mechanisms to deter excessive risk-taking at the expense of the taxpayer. The proposed tax is a very imperfect step in that direction. (Forbes)I am sure the devil is in the details, but the principle of a bank tax as insurance seems to make sense.
Posts
