Tax Analysts Blog

We Should Tax the Banks, But Do it Right

Posted on Dec 10, 2011

Rising populism and the desperate need for revenues have sparked renewed interest in a financial transactions tax. Cash-strapped Italy is adopting one. The leaders of France and Germany support the idea of an FTT on an EU-wide basis. In Congress, Democrats in both the House and the Senate have introduced legislation to implement an FTT in the United States.

The problem with the tax is that transactions take place in cyberspace and their legal location can be moved anywhere on the globe. Unless the whole world adopts the tax, it will be readily avoided.

Furthermore, the FTT is a tax on volatility. Volatility was a symptom, not the cause, of our recent near-death financial experience. Because of the obvious damage it can do to the economy--just as pollution damages the environment--risk in the form of excessive leverage should be subject to tax.

The United Kingdom, France, Germany, and several other European countries already have a bank levy. In general, they impose a low level of tax on debt. The Obama Administration proposed a similar tax but the proposal has gotten nowhere in Congress. This inaction is striking because: (1) banks are unpopular (2) bank have lots of profits; and as already noted: (3) other competing countries have similar levies and (4) there is good economic justification for such a levy.

Clearly, banks' campaign contributions and lobbying fees are their best investments.

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