A Good Argument for the Bank Tax

Obama is now contemplating a bank tax to recoup some bailout money -- and some populist approval, one expects. I think Megan makes an interesting point: If the bank bailout was actually profitable and the real TARP losses were all in AIG and General Motors, why are we taxing all the other banks?

I guess I see the bank tax ideally as something more than the UK's one-off bonus tax, which is designed to fill state coffers in 2010 and disappear forever. If the ideal Bank Tax is something designed to last, something designed to change bankers' incentives, then I guess it doesn't really matter to me that the tax will, in the short term, have the visible effect of helping to pay down our bailout bill.

This argument from Ryan Avent strikes me as extremely reasonable, especially since I don't think the government's implicit backing of large banks is going to disappear any time soon, or ever:

The larger a bank gets, the less likely the government is to allow it to fail, and the more shielded it is from potential losses. Size therefore generates some significant social costs, particularly since the negative externality encourages firms to take on too much risk. A tax on bank size would get firms to internalise the social cost.

And if banks were to pass the cost of the tax on to customers, that might not be such a bad thing, given that it would give a relative price boost to smaller banks. Consumers are notoriously reluctant to change banks, a fact which reduces the beneficial effect of competition. But as with a carbon tax, the effect of the levy would be to reduce bank size, regardless of who bears the cost of the tax. Even though size and connectedness aren't the be all and end all of systemic risk--leverage is key, as well--this kind of measure would be a positive step toward limiting systemic risk and moral hazard in the American banking system. And it would be another step toward a balanced budget. That's a lot to like.