Does the White House Want a Permanent Bank Tax?

Treasury Secretary Timothy Geithner made the case at the Senate Finance Committee today for new tax on large banks to recoup bailout funds. As stated, it's a weird idea for a couple reasons. First, the reason we still have TARP funds to recoup in the first place is because of the non-bank bailouts (Detroit, Fannie, Freddie and AIG). Second, if you think it's a good idea to tax the negative externality of bank size, why limit the tax amount to the TARP shortfall, as Geithner proposes? Why not just make it a permanent "ex-ante fee" to reduce the deficit or create an insurance fund for future catastrophes, whether by bank or by Gulf Cost?

So asked Democratic Sen. Jeff Bingaman. Sec. Geithner repeatedly explained to him that he's trying to meet "the narrow requirement of the law" that TARP money be paid back. How scrupulous. This a sneaky but understandable response. The Obama administration might want a permanent bank tax, but it's easier for now to call it a ten-year TARP-related provision and then hope a later administration extends and revises the tax. It's notable that when pressed, Geithner never outright rejects the principle of a tax on bank size. Instead, like a Supreme Court Justice issuing a narrow opinion, he hugs TARP law and refuses to let go.

But let's spin the bank tax debate forward a bit. Two recent developments give Geithner's testimony a bit of tailwind: the IMF's request for a global bank tax and building suspicion that the Senate bill's "resolution authority" fund (in some ways, the bank tax's ex-ante cousin) will die in debate so that other regulation provisions might live. It might be time to start thinking seriously about the implications of a bank tax that some progressives might see as a strategic or political replacement for the death of resolution authority.

Dan Indiviglio writes that a bank tax would squeeze private lending, just as the economy is healing and small businesses are looking for capital in response to higher consumer demand. A fine point, but eventually the recession's impact will dissipate, whereas the threat of bank failures will not. The New York Times' David Leonhardt makes the case for a permanent bank tax:

"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 ...

The federal government, remember, is facing a huge deficit. To pay it off, Washington will need to make spending cuts and raise taxes. Can you think of a better candidate for taxation than an industry that made huge profits during the boom and then helped cause the bust that has sent the deficit soaring?
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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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