22
Jan
10

Obama’s bank tax

It’s too early to tell what sort of form Obama’s proposed bank tax will take, but I confess that I don’t really know what’s going on.

First, the idea was that the banks needed subsidies because if they were forced to accept the consequences of their risky actions, then we would all lose due to the freeze of credit markets. So we gave the banks a bunch of money.

But having done that, Obama’s new idea is to tax banks based on the assets that they have. In a recent speech, Obama said “we want our money back, and we’re going to get it,” which is fine, but I thought we loaned money to the banks (actually, I’m not really sure how TARP works), so won’t we get it back? In this same speech though, Obama also says that his economic team has gotten most of the money back, but if that’s true, why get so heavy-handed about getting it back? Is it just a political maneuver that is supposed to play on a supposedly innate prejudice against wall street?

I don’t mean for this to be a whiny ad hominem attack on Obama’s policies though, so I’ll try to get to a substantive point. Here it is: how will taxing assets make banks take less risky decisions. Sure, a tax will reduce the payoff to gambling by making the “winnings” less, but if the tax is on current assets as well, then it also makes banks poorer if they don’t gamble at all. To dissuade a certain type of behavior, one has to tax that behavior and not just the wealth of the banks in general, which will just leave them poorer. Now, as I understand, traditional capital that is raised from savings accounts (like mine and yours) is immune to this tax, and so in that sense, some amount of risk taking will be averted since banks who raise capital the old fashioned way — by holding it for people — will gain under this regime.

Maybe there is something here about bonuses, and Obama seems to get pretty worked up when talking about them (and I don’t blame him), but surely there is a better way to get at large bonuses other than taxing the entire asset bases of large banks.

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