Bailout

The legal and necessary bank tax

By Felix Salmon

John Carney has a post up today saying that the bank tax is unconstitutional; it’s incredibly unconvincing, not least because he ignores the fact that the tax is required by law. Far from being an ex post facto appropriation, it was entirely foreseeable — and necessary — from the day the TARP bill was passed.

His other criteria for the tax being unconstitutional don’t pass much muster either. It’s severe, he says, just on the grounds that it’s a tax which raises revenues. Well yes, that’s the whole point. But it’s not confiscatory: if the banks are paying $145 billion in bonuses this year, they can pretty obviously afford a tax designed to raise $90 billion over ten years.

Is it targeted with punitive intent? Maybe — but no more than any other Pigovian tax which seeks to tax what you want less of. Are taxes on cigarettes targeted and punitive? Does that make them unconstitutional?

And no, the tax is not unavoidable: if the banks decided to fund themselves entirely through deposits and equity, as many smaller banks have done through the ages, then they would have to pay no tax. It’s only when they lever up with wholesale funds that the tax becomes payable.

The tax will not, in and of itself, solve the problem of banks being too big to fail. For that reason, some have attacked it as being inadequate. But it’s a key step in the right direction, and not only constitutional but a very good idea.

Full post as published by Macroprudential on January 20, 2010 (boomark / email).