A Bank Tax as Insurance for Us All

[JohnWxy]

http://www.nytimes.com/2010/04/28/business/economy/28leonhardt.html

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The beauty of a bank tax is that it acknowledges as much. Financial firms play a vital role in a market economy. But they also have a long record of causing crises, be it the South Sea bubble of 1720, the Panic of 1873, the Great Depression or our own Great Recession. A bank tax is akin to an insurance policy that taxpayers would require Wall Street to hold. The premiums on that policy would keep Wall Street from making big profits in good times while foisting its losses on society in bad.

The current Senate bill includes a kind of bank tax, but it has all kinds of problems. It would initially collect only $50 billion from firms and then set the money aside to pay the costs of future bailouts. Other crises have cost far more than $50 billion.

For this reason, the Obama administration prefers a postcrisis tax. The White House has proposed a so-called TARP tax, to raise at least $90 billion over the next decade and cover the costs of the 2008 bailout fund (the Troubled Asset Relief Program). But this idea has its own flaws. It does not leave any money for future busts. It assumes Washington will always be able to recoup those costs later, which doesn’t sound like a great bet.

The I.M.F. prefers a permanent tax, for the good reason that the risk of crises is permanent. “The challenge is to ensure that financial institutions bear the direct financial costs that any future failures or crises will impose — and maybe somewhat more, given all the other costs that bank failure can impose on the economy,” Carlo Cottarelli, the head of the I.M.F.’s fiscal affairs unit, wrote last weekend. The tax wouldn’t go into a dedicated bailout fund. Its purpose instead would be to discourage too much risk-taking and, over the long term, help offset any bailout costs.

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[econoclast]

1. A thing of beauty is a joy forever

So said Keats

The beautiful thing about the Bank Tax is how easily it has bamboozled the NY Times into believing that the Banks are actually going to pay the tax.

The government can levy the tax against the banks .... but who is actually going to pay? The cost of the tax will be passed on to consumers through lower interest rates on savings and CDs, higher fees, and higher interest rates on loans and mortgages.

The Bank Tax may well be "insurance for us all" .... it had better be .... because we are sure as hell going to pay the premiums.

[JohnWxy]

2. Depends on the balance sheet of the bank.....

"Because the tax would be calculated based on a firm’s holdings, a small local bank or a larger bank with billions of dollars in safe consumer deposits might pay nothing. A leveraged investment bank would surely be taxed."


I view it like insurance. The banks that use more leverage or are trading in CDSs would pay a premium commensurate with the risks they are assuming. MOre leverage, greater risk - higher premiums (because of greater likelihood that they will get into trouble).

Typical commercial bank would not be assuming so much risk and have lower premiums. It's not unusual for the consumers of a commodity or service to assume the burden of maintaining the service or of providing the commodity. THose who use the service, commodity more pay for it's maintainance. For example when you fly on a commercial airline part of the cost of the ticket goes to cover insurance costs incurred by the airlines.

Because of competitive pressures some of the tax (I prefer to call it their premium) would come out of the banks profits. It wouldn't all be passed on to the consumer.