Tax Analysts Blog

A Windfall Profits Tax on Banks

Posted on Nov 20, 2009

The Financial Times' Martin Wolf is one of the world's best and most influential economic columnists. He is no liberal. I would label him a cautious pragmatist. So today when he argues for a windfall profits tax on banks we cannot dismiss his idea as the product of knee-jerk populism or partisan politics.

Wolf begins by describing windfall taxes in general as a "ghastly idea." But current circumstances provide an exception to the rule. He provides no less than five reasons: (1) banks get nearly unlimited insurance from governments; (2) banks get extremely cheap finance because of the government; (3) bankers should not personally benefit from the bailout ;(4) while the economy and taxpayers suffer, any rewards for bankers who caused the crisis damages the legitimacy of the market economy; and (5) windfall taxes are just the mirror image of the windfall subsidies banks received during the crisis.

The only remaining question for Wolf is how to impose the new tax. Because he does not want to disturb bank capital he would not tax profits. (And previously he rejected the idea of a stock transfer tax.) His preferred approach is a one-time windfall profit tax on bank bonuses.

In a previous post I also a made the case for a new tax on banks. Like any tax, Wolf's idea is not perfect. But from an economic perspective it is very strong proposal -- that is, it ties costs to benefits and it does not severely affect incentives. What I cannot understand is why an idea like this does not get more attention from a Democratic Congress.

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