Taxing the Banks

Apparently, the Obama administration wants to make up for losses in the TARP program by taxing banks.  This seemed eminently fair until I read about where the losses were actually taking place:

U.S. taxpayer profits from bank bailout investments are being offset by estimated losses from American International Group and automakers and mortgage payment cuts for struggling homeowners, a U.S. Treasury report showed on Monday.

The Treasury estimated net losses on its $700 billion bailout program at $68.5 billion for the fiscal year ended September 30, 2009.

The December report for the Troubled Asset Relief Program, or TARP, showed that the fiscal 2009 net loss included estimated losses of $30.4 billion for AIG and $30.4 billion for automakers, with $27.1 billion in losses from the Home Affordable Modification Program.

These were much larger than a $15 billion profit registered from the Capital Purchase Program for banks and $4.4 billion in profits from other bank investments, asset guarantee and lending programs.

So we ought to tax bank profits because . . . GM is losing money just like everyone said it would.

I am all for regulation which prevents banks from taking on too much leverage--or encouraging others to do so by offering stupid loans. I would very much like to find a system of financial regulation which results in a financial structure that isn't so utterly dominant (and bloated) as it has been for the last two decades.  But I'm failing to see why the banks in particular--or rather the customers of the banks who will enjoy higher fees and lower interest rates--ought to bear the financial cost of the administration's ill-advised bailout of the UAW.

One argument is that a financial transactions tax would actually shrink the sector.  But it would actually shrink one very small piece of it, the high frequency traders, and that's not the part that's problematic.  Indeed, most economists think that this sort of micro-arbitrage enhances price discovery, helping the market to more rapidly incorporate new information.  It would do nothing to impact the part where banks spend increasing amounts of time dreaming up methods of regulatory arbitrage or ways to game the ratings agencies.  Plus it doesn't look like a financial transactions tax is really on the table, presumably because ordinary Americans do a surprising number of financial transactions.

If we want to shrink the banking sector, we should be looking for a regulatory regime which doesn't offer quite so many rewards for financial innovation (this might mean a regulatory regime that did less in some ways, giving fewer bankers outsized incentives to game the system).  But if we want to bail out GM, we should pony up out of the income tax, not cast about for the least popular group we can find.  That's no way to run a tax code, or an economy.