Tax Analysts Blog

Tax Big Banks: Two Birds With One Stone

Posted on Sep 14, 2009

The President is pushing financial reform to prevent another market meltdown. The President needs new revenue sources to put federal finances back on a sustainable path. Maybe one day the tax people at Treasury can get together with the financial stability people in the same building and develop a proposal to help solve both of these presidential problems.

The Wall Street Journal today reported on a recent paper from the Bank of International Settlements ("the central bankers' bank") that suggests a new tax on big banks. The BIS calls the tax a "systemic capital charge." The charge would be calibrated according to the bank's risk. BIS research indicates that risk grows more than proportionately with bank size.

Every first year econ student knows a pollution from a factory is an "externality" that should be taxed so that the private economy takes into account the social costs of its activities. The financial meltdown has made it abundantly clear that financial institutions engage in excessively risky activities that can damage the whole economy. This is financial pollution. The Obama Treasury has in fact justified its regulatory program with reference to "negative externalities associated with financial distress." Financial pollution, like any negative externality, can be controlled by regulation. But the Obama administration should also not forget in these lean-budget times that it can also be controlled with taxes.

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